Selected Cases from the Supreme People’s Court of the People’s Republic of China: Volume 2 (Library of Selected Cases from the Chinese Court) 9811591350, 9789811591358

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Library of Selected Cases from the Chinese Court

China Institute of  Applied Jurisprudence Editor

Selected Cases from the Supreme People’s Court of the People’s Republic of China Volume 2

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 http://www.springer.com/series/16437

China Institute of Applied Jurisprudence Editor

Selected Cases from the Supreme People’s Court of the People’s Republic of China Volume 2

Editor China Institute of Applied Jurisprudence Beijing, China Translated by Daxuan Zheng School of Foreign Languages, Southwest University of Political Science & Law

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

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

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

Yujiao Shi School of Foreign Languages, Southwest University of Political Science & Law

Xia Dai School of Foreign Languages, Southwest University of Political Science & Law

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

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

Yanni Wang School of Foreign Languages, Southwest Petroleum University

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

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

Xia Liu City College of Science and Technology, Chongqing University

ISSN 2662-5261 ISSN 2662-527X (electronic) Library of Selected Cases from the Chinese Court ISBN 978-981-15-9135-8 ISBN 978-981-15-9136-5 (eBook) https://doi.org/10.1007/978-981-15-9136-5 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. © Law Press China 2021 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

Acknowledgments

本书内容仅供学习和研究使用, 不作为证据和证明使用。所有裁判文书以中华 人民共和国最高人民法院公布的裁判文书中文原文为准。 The contents of this volume are intended for study and research only, and shall not be used as evidence or proof. Any judgment opinions shall be subject to their original Chinese versions issued by the Supreme People’s Court of the People’s Republic of China.

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Panel of Senior Editors

(In Order by Stroke Numbers of Chinese Characters) Chuang Wang Xuguang Wang Shumei Wang Ling Kong Biao Wu Zhumei Liu Zhihua Sun Liang Li Yong Li Chengyu Li Li He Liang Shen Wenxue Lin Zhonglin He Xuelin Zheng Xiang Meng Shihao Hu Qibo Jiang Xiaochen Qian Wenjun Huang Yongwei Huang Shibing Cao Weizhong Han Wei Teng Maokun Yan Wenchao Wei

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Panel of Editors

Editor-in-Chief Shibing Cao

Associate Editors Yuping Li Mingzhi Fan Baosen Wang Kai Niu Xuechun Zhang

Managing Editor Wenyan Ding

Editors Xianrong Bao (criminal cases) Ming Li Yi Yang Li Zhong Jing Pan Xu Han (civil and commercial cases & performance) Wenyan Ding (intellectual property cases) Zaiyu Guo (admiralty cases) Deqiang Han (administrative cases)

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Assistant Editors Xiaoyu Chen Manqi Li

Panel of Editors

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 greatly exerted enormous influence on the rule of law in China and have contributed Chinese judicial wisdom to the world. In order 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 the trial practices, serving economic and social development, serving legal education and legal scholarship, serving international legal exchanges among Chinese and foreign legal communities, and serving the rule of law in China, the China Institute of Applied Jurisprudence, 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 selected cases in the series are strictly sifted by the trial departments of the Supreme People’s Court from their adjudicated cases, which are of significance in revealing or clarifying the application of legal rules, establishing new methods of adjudication, 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 the law has enabled them to convey to the readers the legal processes, legal methodology, and ideology in a most intuitive, clearest, and most accurate manner. Selected Cases from the Supreme People’s Court of the People’s Republic of China is subdivided into the following sections: (a) Cases by Justices, which have exerted profound influence throughout the country and the world; (b) Cases by the Adjudication Committee of the Supreme People’s Court, which are focal, frontier, and hard cases, contemplated at the Adjudication Committee of the Supreme People’s Court and exerting great influence on the judicial process in China so that the role can be fully played of cases in predicting and alarming the uniform application of laws and legal issues in related fields; and (c) Characteristic Cases, which involve criminal, civil and commercial, admiralty, intellectual property and administrative xi

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Foreword

cases, reflecting the latest endeavor and judicial attainments by the Supreme People’s Court in various fields. By modeling upon the layout and design of the 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 identify the core legal issues of those cases. The case layout comprises 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 the 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 the classic cases adjudicated by the Supreme People’s Court each 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 and confidence among the public of the people’s courts, 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 the 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, especially in the critical period of comprehensively deepening reform and opening up and building a human community with a shared future, has far-reaching implications for China’s rule of law to go global, to promote international cooperation in rule of law under the Belt and Road Initiative, to demonstrate to the international community the superiority of the socialist judicial system with Chinese characteristics, to contribute China’s judicial wisdom and experience to global governance, and to disseminate Chinese judicial culture and attainments. December 2019

Editorial Board

Cited Laws, Regulations, Judicial Interpretations, and Other Normative Documents

Administrative Enactments The Law of the People’s Republic of China on Mineral Resources (Rev. 2009) Referred to as the Mineral Resources Law; adopted at the 15th Session of the Standing Committee of the Sixth National People’s Congress on March 19, 1986; publicized by No. 36 Order of the President of the People’s Republic of China on March 19, 1986; revised for the first time in accordance with the Decision of the Standing Committee of the National People’s Congress on Revising the Mineral Resources Law adopted at the 21st Session of the Standing Committee of the Eighth National People’s Congress on August 29, 1996; and revised for the second time in accordance with the Decision on Revising Certain Laws adopted at the Tenth Session of the Standing Committee of the Eleventh National People’s Congress on August 27, 2009. The Urban Real Estate Administration Law of the People’s Republic of China (Rev. 2019) Referred to as the Urban Real Estate Administration Law; adopted at the Eighth Session of the Standing Committee of the Eighth National People’s Congress on July 5, 1994; publicized by No. 29 Order of the President of the People’s Republic of China on July 5, 1994; revised for the first time in accordance with the Decision on Revising the Urban Real Estate Administration Law of the People’s Republic of China adopted at the 29th Session of the Standing Committee of the Tenth National People’s Congress on August 30, 2007; revised for the second time in accordance with the Decision on Revising Certain Laws adopted at the Tenth Session of the Eleventh Standing Committee of the National People’s Congress on August 27, 2009; and revised for the third time in accordance with the Decision of the Standing Committee of the National People’s Congress 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 adopted at the 12th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on August 26, 2019.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

The Law of the People’s Republic of China on Public Security Administration Penalties (Rev. 2012) Referred to as the Public Security Administration Penalties Law; adopted at the 17th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2005; revised in accordance with the Decision on Revising the Law of the People’s Republic of China on Public Security Administration Penalties adopted at the 29th Session of the Standing Committee of the 11th National People’s Congress on October 26, 2012. The Law of the People’s Republic of China on State Compensation (Rev. 2012) Referred to as the State Compensation Law; adopted at the Seventh Session of the Standing Committee of the Eighth National People’s Congress on May 12, 1994; revised for the first time in accordance with the Decision on Revising the Law of the People’s Republic of China on State Compensation adopted at the 14th Session of the Standing Committee of the Eleventh National People’s Congress on April 29, 2010; and revised for the second time in accordance with the Decision on Revising the Law of the People’s Republic of China on State Compensation on adopted at the 29th Session of the Standing Committee of the Eleventh National Congress on October 26, 2012; publicized by No. 68 Order of the President of the People’s Republic of China on October 26, 2012, implemented on January 1, 2013. The Administrative Penalty Law of the People’s Republic of China (Rev. 2017) Referred to as the Administrative Penalty Law; adopted at the Fourth Session of the Eighth National People’s Congress on March 17, 1996; revised for the first time in accordance with the Decision on Revising Certain Laws adopted at the Tenth Session of the Standing Committee of the Eleventh National People’s Congress on August 27, 2009; and revised for the second time in accordance with the Decision on Revising Eight Laws including the Law of the People’s Republic of China on Judges adopted at the 29th Session of the Standing Committee of the Twelfth National People’s Congress on September 1, 2017; publicized by No. 76 Order of the President of the People’s Republic of China on September 1, 2017, implemented on January 1, 2018. The Organic Law of the Villagers’ Committees of the People’s Republic of China (Rev. 2018) Referred to as the Organic Law of the Villagers’ Committees; adopted at the Fifth Session of the Standing Committee of the Ninth National People’s Congress on November 4, 1998; revised at the 17th Session of the Standing Committee of the Eleventh National People’s Congress on October 28, 2010; and revised in accordance with the Decision on Revising the Organic Law of the Villagers’ Committees of the People’s Republic of China and the Organic Law of the Urban Residents’ Committees of the People’s Republic of China at the Seventh Session of the Standing Committee of the Thirteenth National People’s Congress on December 29, 2018; publicized by No. 21 Order of the President of the People’s Republic of China on December 29, 2018, implemented on December 29, 2018.

Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

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Civil and Commercial Enactments The Maritime Law of the People’s Republic of China Referred to as the Maritime Law; adopted at the 28th Session of the Standing Committee of the Seventh National People’s Congress on November 7, 1992; publicized by No. 64 Order of the President of the People’s Republic of China on November 7, 1992, implemented on July 1, 1993. The Guarantee Law of the People’s Republic of China Referred to as the Guarantee Law; adopted at the 14th Session of the Standing Committee of the Eighth National People’s Congress on June 30, 1995; publicized by No. 50 Order of the President of the People’s Republic of China on June 30, 1995, implemented on October 1, 1995. The Adoption Law of the People’s Republic of China (Rev. 1998) Referred to as the Adoption Law; adopted at the 23rd Session of the Standing Committee of the Seventh National People’s Congress on December 29, 1991; revised in accordance with the Decision on Revising the Adoption Law of the People’s Republic of China adopted at the Fifth Session of the Standing Committee of the Ninth National People’s Congress on November 4, 1998; publicized by No. 10 Order of the President of the People’s Republic of China on November 4, 1998. The Contract Law of the People’s Republic of China Referred to as the Contract Law; adopted at the Second Session of the Ninth National People’s Congress on March 15, 1999; publicized by No. 15 Order of the President of the People’s Republic of China on March 15, 1999, implemented on October 1, 1999. The Property Law of the People’s Republic of China Referred to as the Property Law; adopted at the Fifth Session of the Tenth National People’s Congress on March 16, 2007; publicized by No. 62 Order of the President of the People’s Republic of China on March 16, 2007, implemented on October 1, 2007. The Patent Law of the People’s Republic of China (Rev. 2008) Referred to as the Patent Law; adopted at the Fourth Session of the Standing Committee of the Sixth National People’s Congress on March 12, 1984; publicized by No. 11 Order of the President of the People’s Republic of China on March 12, 1984, implemented on April 1, 1985; revised for the first time in accordance with the Decision on Revising the Patent Law of the People’s Republic of China adopted at the 27th Session of the Standing Committee of the Seventh National People’s Congress on September 4, 1992; revised for the second time in accordance with the Decision on Revising the Patent Law of the People’s Republic of China at the 17th Session of the Standing Committee of the Ninth National People’s Congress on August 25, 2000; revised for the third time in accordance with the Decision on Revising the Patent Law of the People’s Republic of China adopted at the Sixth Session of the Standing Committee of the Eleventh National People’s Congress on December 27, 2008.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

General Principles of the Civil Law of the People’s Republic of China (Rev. 2009) Referred to as the General Principles of the Civil Law; adopted at the Fourth Session of the Sixth National People’s Congress on April 12, 1986; publicized by No. 37 Order of the President of the People’s Republic of China on April 12, 1986, implemented on January 1, 1987; revised in accordance with the Decision on Revising Certain Laws adopted at the Tenth Session of the Standing Committee of the Eleventh National People’s Congress on August 27, 2009. The Tort Law of the People’s Republic of China Referred to as the Tort Law; adopted at the 12th Session of the Standing Committee of the Eleventh National People’s Congress on December 26, 2009; publicized by No. 21 Order of the President of the People’s Republic of China on December 26, 2009, implemented on July 1, 2010. The Trademark Law of the People’s Republic of China (Rev. 2013) Referred to as the Trademark Law; adopted at the 24th Session of the Standing Committee of the Fifth National People’s Congress on August 23, 1982; publicized by No. 10 Order of the Standing Committee of the Fifth National People’s Congress, implemented on March 1, 1983; revised for the first time in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China adopted at the 30th Session of the Standing Committee of the Seventh National People’s Congress on February 22, 1993; revised for the second time in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China adopted at the 24th Session of the Standing Committee of the Ninth National People’s Congress on October 27, 2001; revised for the third time in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China adopted at the Fourth Session of the Standing Committee of the Twelfth National People’s Congress on August 30, 2013. The Insurance Law of the People’s Republic of China (Rev. 2015) Referred to as the Insurance Law; adopted at the 14th Session of the Standing Committee of the Eighth National People’s Congress on June 30, 1995; revised for the first time in accordance with the Decision on Revising the Insurance Law of the People’s Republic of China of the 30th Session of the Standing Committee of the Ninth National People’s Congress on October 28, 2002; revised at the Seventh Session of the Standing Committee of the Eleventh National People’s Congress on February 28, 2009; revised for the second time in accordance with the Decision on Revising Five Laws Including the Insurance Law of the People’s Republic of China of the Tenth Session of the Standing Committee of the Twelfth National People’s Congress on August 31, 2014; and revised for the third time in accordance with the Decision on Revising Five Laws Including the Metrology Law of the People’s Republic of China of the 14th Session of the Standing Committee of the Twelfth National People’s Congress on April 24, 2015.

Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

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The Seed Law of the People’s Republic of China (Rev. 2015) Referred to as the Seed Law; adopted at the 16th Session of the Standing Committee of the Ninth National People’s Congress on July 8, 2000; revised for the first time in accordance with the Decision on Revising the Seed Law of the People’s Republic of China of the 11th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2004; revised for the second time in accordance with the Decision on Revising Twelve Laws Including the Law of the People’s Republic of China on Protecting Cultural Relics of the Third Session of the Standing Committee of the Twelfth National People’s Congress on June 29, 2013; and revised at the 17th Session of the Standing Committee of the Twelfth National People’s Congress on November 4, 2015, implemented on January 1, 2016. General Rules of the Civil Law of the People’s Republic of China Referred to as the General Rules of the Civil Law; adopted at the Fifth Session of the Twelfth National People’s Congress on March 15, 2017; publicized by No. 66 Order of the President of the People’s Republic of China on March 15, 2017, implemented on October 1, 2017. The Law of the People’s Republic of China on Protecting Women’s Rights and Interests (Rev. 2018) Referred to as the Law on Protecting Women’s Rights and Interests; adopted at the Fifth Session of the Seventh National People’s Congress on April 3, 1992; revised for the first time in accordance with the Decision on Revising the Law of the People’s Republic of China on Protecting Women’s Rights and Interests at the 17th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2005; revised for the second time in accordance with the Decision on Revising Fifteen Laws Including the Law of the People’s Republic of China on Protecting Wild Animals of the Sixth Session of the Standing Committee of the Thirteenth National People’s Congress on October 26, 2018. The Company Law of the People’s Republic of China (Rev. 2018) Referred to as the Company Law; adopted at the Fifth Session of the Standing Committee of the Eighth National People’s Congress on December 29, 1993; publicized by No. 16 Order of the President of the People’s Republic of China, implemented on July 1, 1994; revised for the first time in accordance with the Decision on Revising the Company Law of the People’s Republic of China of the 13th Session of the Standing Committee of the Ninth National People’s Congress on December 25, 1999; revised for the second time in accordance with the Decision on Revising the Company Law of the People’s Republic of China of the 11th Session of the Standing Committee of the Tenth National People’s Congress on August 28, 2004; revised at the 18th Session of the Standing Committee of the Tenth National People’s Congress on October 27, 2005; revised for the third time in accordance with the Decision on Revising Seven Laws Including the Law of the People’s Republic of China on Protecting the Marine Environment of the Sixth Session of the Standing Committee of the Twelfth National People’s Congress on December 28, 2013; and revised for the fourth time in accordance with the Decision on Revising the Company Law of the People’s Republic of China adopted at the Sixth Session of the Standing Committee of the Thirteenth National People’s Congress on October 26, 2018.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

The Enterprise Bankruptcy Law of the People’s Republic of China Referred to as the 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, implemented on June 1, 2007.

Economic Enactments The Law of the People’s Republic of China against Unfair Competition (Rev. 2017) Referred to as the Law against Unfair Competition; adopted at the Third Session of the Standing Committee of the Eighth National People’s Congress on September 2, 1993; publicized by No. 10 Order of the President of the People’s Republic of China, implemented on December 1, 1993; and revised at the 13th Session of the Standing Committee of the Twelfth National People’s Congress on November 4, 2017.

Criminal Enactments The Criminal Law of the People’s Republic of China (Rev. 2017) Referred to as the Criminal Law; adopted at the Second Session of the Fifth National People’s Congress on July 1, 1979; publicized by No. 5 Chairman Decree of the Standing Committee of the National People’s Congress on July 6, 1979, implemented on January 1, 1980; revised at the Fifth Session of the Eighth National People’s Congress on March 14, 1997; and revised by Amendment to the Criminal Law of the People’s Republic of China on December 25, 1999, Amendment II to the Criminal Law of the People’s Republic of China on August 31, 2001, Amendment III to the Criminal Law of the People’s Republic of China on December 29, 2001, Amendment IV to the Criminal Law of the People’s Republic of China on December 28, 2002, Amendment V to the Criminal Law of the People’s Republic of China on February 28, 2005, Amendment VI to the Criminal Law of the People’s Republic of China on June 29, 2006, Amendment VII to the Criminal Law of the People’s Republic of China on February 28, 2009; Amendment VIII to the Criminal Law of the People’s Republic of China on February 25, 2011, Amendment IX to the Criminal Law of the People’s Republic of China on August 29, 2015, and Amendment X to the Criminal Law of the People’s Republic of China on November 4, 2017.

Procedural Enactments The Administrative Procedure Law of the People’s Republic of China (Rev. 2017) Referred to as the Administrative Procedure Law; adopted at the Second Session of the Seventh National People’s Congress on April 4, 1989; publicized by No. 16 Order

Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

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of the President of the People’s Republic of China on April 4, 1989, implemented on October 1, 1990; revised for the first time in accordance with the Decision on Revising the Administrative Procedure Law of the People’s Republic of China adopted at the 11th Session of the Standing Committee of the Twelfth National People’s Congress on November 1, 2014; and revised for the second time 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 adopted at the 28th Session of the Standing Committee of the Twelfth National People’s Congress on June 27, 2017. The Civil Procedure Law of the People’s Republic of China (Rev. 2017) Referred to as the Civil Procedure Law; adopted at the Fourth Session of the Seventh National People’s Congress; publicized by No. 44 Order of the President of the People’s Republic of China, implemented on April 9, 1991; revised for the first time in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China as adopted at the 30th Session of the Standing Committee of the Tenth National People’s Congress on October 28, 2007; revised for the second time in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China of the 28th Session of the Standing Committee of the Eleventh National People’s Congress on August 31, 2012; and revised for the third time 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 adopted at the 28th Session of the Standing Committee of the Twelfth National People’s Congress on June 27, 2017. The Arbitration Law of the People’s Republic of China (Rev. 2017) Referred to as the Arbitration Law; adopted at the Ninth Session of the Standing Committee of the Eighth National People’s Congress on August 31, 1994; revised for the first time in accordance with the Decision on Revising Certain Laws as adopted at the Tenth Session of the Standing Committee of the Eleventh National People’s Congress on August 27, 2009; and revised for the second time in accordance with the Decision on Revising Eight Laws Including the Law of the People’s Republic of China on Judges adopted at the 29th Session of the Standing Committee of the Twelfth National People’s Congress on September 1, 2017; publicized by No.76 Order of the President of the People’s Republic of China on September 1, 2017, implemented on January 1, 2018. The Criminal Procedure Law of the People’s Republic of China (Rev. 2018) Referred to as the Criminal Procedure Law; adopted at the Second Session of the Fifth National People’s Congress on July 1, 1979; publicized by the No. 6 Chairman Decree of the Standing Committee of the National People’s Congress on July 7, 1979, implemented on January 1, 1980; revised for the first time in accordance with the Decision on Revising the Criminal Procedure Law of the People’s Republic of China adopted at the Fourth Session of the Eighth National People’s Congress on March 17, 1996; revised for the second time in accordance with the Decision on Revising the Criminal Procedure Law of the People’s Republic of China adopted at

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

the Fifth Session of the Eleventh National People’s Congress on March 14, 2012; and revised for the third time in accordance with the Decision on Revising the Criminal Procedure Law of the People’s Republic of China adopted at the Sixth Session of the Standing Committee of the Thirteenth National People’s Congress on October 26, 2018.

Regulations Interim Regulations of the People’s Republic of China on the Assignment and Transfer of the Right to the Use of the State-owned Land in Urban Areas Referred to as the Interim Regulations on the Assignment and Transfer of the Right to the Use of the State-owned Land in Urban Areas; publicized by No. 55 Decree of the State Council of the People’s Republic of China on May 19, 1990, implemented on May 19, 1990. Rules for the Implementation of the Mineral Resources Law of the People’s Republic of China Referred to as the Rules for the Implementation of the Mineral Resources Law; publicized by No. 152 Decree of the State Council of the People’s Republic of China on March 26, 1994, implemented on March 26, 1994. Regulations of the People’s Republic of China on the Disclosure of Government Information (Rev. 2019) Referred to as the 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 Decree of the State Council of the People’s Republic of China; revised by Decree No. 711 of the State Council of the People’s Republic of China on April 3, 2019, implemented on May 15, 2019. Rules for the Implementation of the Patent Law of the People’s Republic of China (Rev. 2010) Referred to as the Rules for the Implementation of the Patent Law; publicized by No. 306 Decree of the State Council of the People’s Republic of China on June 15, 2001; revised for the first time in accordance with the Decision of the State Council on Revising the Rules for the Implementation of the Patent Law of the People’s Republic of China on December 28, 2002; revised for the second time in accordance with the Decision of the State Council on Revising the Rules for the Implementation of the Patent Law of the People’s Republic of China on January 9, 2010; publicized by No. 569 Decree of the State Council of the People’s Republic of China on January 9, 2010, implemented on February 1, 2010. Regulations on the Expropriation of Buildings and Compensation on Stateowned Land Referred to as the Regulations on the Expropriation of Buildings and Compensation on State-owned Land; adopted at the 141st Executive Meeting of the State Council on

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January 19, 2011; publicized by No. 590 Decree of the State Council of the People’s Republic of China on January 21, 2011, implemented on January 21, 2011. Regulations on Implementing the Copyright Law of the People’s Republic of China (Rev. 2013) Referred to as the Regulations on Implementing the Copyright Law; publicized by No. 359 Decree of the State Council of the People’s Republic of China on August 2, 2002, implemented on September 15, 2002; revised for the first time in accordance with the Decision of the State Council on Repealing and Revising Certain Administrative Regulations on January 8, 2011; revised for the second time in accordance with the Decision of the State Council on Revising the Regulations on Implementing the Copyright Law of the People’s Republic of China on January 30, 2013. Regulations on Implementing the Trademark Law of the People’s Republic of China (Rev. 2014) Referred to as the Regulations on Implementing the Trademark Law; publicized by No. 358 Decree of the State Council of the People’s Republic of China on August 3, 2002; revised by No. 651 Decree of the State Council of the People’s Republic of China on April 29, 2014, implemented on May 1, 2014. Regulations of the People’s Republic of China on Protecting New Varieties of Plants (Rev. 2014) Referred to as the Regulations on Protecting New Varieties of Plants; publicized by No. 213 Decree of the State Council of the People’s Republic of China on March 20, 1997; revised for the first time in accordance with the Decision of the State Council on Revising the Regulations of the People’s Republic of China on Protecting New Varieties of Plants on January 31, 2013; and revised for the second time in accordance with the Decision of the State Council on Revising Certain Administrative Regulations on July 29, 2014; publicized by No. 653 Decree of the State Council of the People’s Republic of China on July 29, 2014, implemented on July 29, 2014. Regulations of the People’s Republic of China on the Administration of the Registration of Enterprise Legal Persons (Rev. 2019) Referred to as the Regulations on the Administration of the Registration of Enterprise Legal Persons; publicized by No. 1 Decree of the State Council of the People’s Republic of China on June 3, 1988; revised for the first time in accordance with the Decision of the State Council on Repealing and Revising Certain Administrative Regulations on January 8, 2011; revised for the second time in accordance with the Decision of the State Council on Repealing and Revising Certain Administrative Regulations on February 19, 2014; revised for the third time in accordance with the Decision of the State Council on Revising Certain Administrative Regulations on February 6, 2016; and revised in accordance with the Decision of the State Council on Revising Certain Administrative Regulations on March 2, 2019; publicized on March 2, 2019, implemented on March 2, 2019.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

Judicial Interpretations and Other Normative Documents about Administrative Enactments Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Law of the People’s Republic of China on State Compensation (I) (SPC JI NO. 4 [2011]) Referred to as the Judicial Interpretation of Several Issues about the Application of the State Compensation Law (I); adopted at the 1511st Meeting of the Adjudication Committee of the Supreme People’s Court on February 14, 2011; publicized on February 28, 2011, implemented on March 18, 2011. The Rules of the Supreme People’s Court on Several Issues about the Trial of Administrative Cases of Government Information Disclosure (SPC JI No. 17 [2011]) Referred to as the Rules on Trying Administrative Cases of 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, implemented on August 13, 2011. The Opinions of the Supreme People’s Court on Several Issues about the Trial of Administrative Cases Involving the Authorization and Determination of Trademark Rights (SPC JI No. 12 [2010]) Referred to as the Opinions on Trying the Administrative Cases Involving the Authorization and Determination of Trademark Rights; adopted by the Adjudication Committee of the Supreme People’s Court; publicized on April 20, 2010, implemented on the date of publication. The Rules of the Supreme People’s Court on Several Issues about the Trial of Administrative Cases Involving the Authorization and Determination of Trademark Rights (SPC JI No. 2 [2017]) Referred to as the Rules on Several Issues about the Trial of Administrative Cases Involing the 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, implemented on March 1, 2017. The Rules of the Supreme People’s Court on the Trial Procedure for State Compensation Cases of the State Compensation Committees of the People’s Courts (SPC JI No. 6 [2011]) Referred to as the Rules on the Trial Procedure for State Compensation Cases of the Committees of the People’s Courts; adopted at the 1513rd Meeting of the Adjudication Committee of the Supreme People’s Court on February 28, 2011; publicized on March 17, 2011, implemented on March 22, 2011. The Rules of the Supreme People’s Court on Several Issues about the Trial of Housing Registration Cases (SPC JI No. 15 [2010]) Referred to as the Rules on Several Issues about the Trial of Housing Registration Cases; adopted at the 1491st Meeting of the Adjudication Committee of the Supreme

Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

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People’s Court on August 2, 2010; publicized on November 5, 2010, implemented on November 18, 2010. The Rules of the Supreme People’s Court on Several Issues about the State Compensation Supervision Procedures (SPC JI No. 9 [2017]) Referred to as the Rules on Several Issues about State Compensation Supervision Procedures; adopted at the 1711st Meeting of the Adjudication Committee of the Supreme People’s Court on February 27, 2017, implemented on May 1, 2017.

Judicial Interpretations and Other Normative Documents about Civil and Commercial Enactments The Notice of the Ministry of Public Security on Several Issues about the Application of Law in the Handling of Gambling Cases (MPS Notice No. 30 [2005]) Referred to as the Notice on Several Issues about the Application of Law in the Handling of Gambling Cases; publicized by the Ministry of Public Security of the People’s Republic of China on May 25, 2005, implemented on May 25, 2005. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Guarantee Law of the People’s Republic of China (SPC JI No. 44 [2000]) Referred to as the Judicial Interpretation on Several Issues about the Application of the Guarantee 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, implemented on December 13, 2000. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of Law to the Copyright Civil Dispute Cases (SPC JI No. 31 [2002]) Referred to as the Judicial Interpretation on Several Issues about the Application of Law to the Copyright Civil Dispute Cases; adopted at the 1246th Meeting of the Adjudication Committee of the Supreme People’s Court on October 12, 2002; publicized on October 12, 2002, implemented on October 15, 2002. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of Law to Trademark Civil Dispute Cases (SPC JI No. 32 [2002]) Referred to as the Judicial Interpretation on Several Issues about the Application of Law to Trademark Civil Dispute Cases; adopted at the 1246th Meeting of the Adjudication Committee of the Supreme People’s Court on October 12, 2001; publicized on October 12, 2002, implemented on October 16, 2002. Official Reply of the Supreme People’s Court on the Priority of Claim for the Construction Project Price (SPC JI No. 16 [2002]) Referred to as the Official Reply on the Priority of Claim for the Construction Project Price; adopted at the 1225th Meeting of the Adjudication Committee of the Supreme

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

People’s Court on June 11, 2002; publicized on June 20, 2002, implemented on June 27, 2002. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of Law to Construction Contract Cases (SPC JI No. 14 [2004]) Referred to as the Judicial Interpretation of Several Issues about the Application of Law to Construction Contract Cases; adopted at the 1327th Meeting of the Adjudication Committee of the Supreme People’s Court on September 29, 2004; publicized on October 25, 2004, implemented on January 1, 2005. The Notice of the People’s Bank of China on Adjusting the Deposit and Loan Interest Rate of Financial Institutions (PBC Notice No. 251 [2004]) Referred to as the Notice on Adjusting the Deposit and Loan Interest Rate of Financial Institutions; publicized by the People’s Bank of China on October 28, 2004, implemented on October 28, 2004. The Notice of the General Office of the State Council on Regulating the Management of Incomes from and Expenses for the Assignment of the Right to Use State-owned Lands (GOSC Notice No. 100 [2006]) Referred to as the Notice on Regulating the Management of Incomes from and Expenses for the Assignment of the Right to Use State-owned Lands; publicized by the General Office of the State Council on December 17, 2006, implemented on December 17, 2006. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Contract Law of the People’s Republic of China (II) (SPC JI No. 5 [2009]) Referred to as the Judicial Interpretation on Several Issues about 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, implemented on May 13, 2009. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of Law to Patent Infringement Cases (SPC JI No. 21 [2009]) Referred to as the Judicial Interpretation on Several Issues about the Application of Law to Patent Infringement Cases; adopted at the 1480th Meeting of the Adjudication Committee of the Supreme People’s Court on December 21, 2009; publicized on December 28, 2009, implemented on January 1, 2010. Judicial Interpretation of the Supreme People’s Court on Issues about the Application of Law to Sales Contract Cases (SPC JI No. 8 [2012]) Referred to as the Judicial Interpretation on Issues about the Application of Law to Sales Contract Cases; adopted at the 1545th Meeting of the Adjudication Committee of the Supreme People’s Court on March 31, 2012; publicized on May 10, 2012, implemented on July 1, 2012.

Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

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Rules of the Supreme People’s Court on Several Issues about the Application of Laws to Private Lending Cases (SPC JI No. 18 [2015]) Referred to as the Rules on Several Issues about the Application of Law to 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, implemented on September 1, 2015. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Insurance Law of the People’s Republic of China (III) (SPC JI No. 21 [2015]) Referred to as the Judicial Interpretation on Several Issues about the Application of the Insurance Law (III); adopted at the 1661st Meeting of the Adjudication Committee of Supreme People’s Court on September 21, 2015;publicized on November 25, 2015, implemented on December 1, 2015. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of Law to Patent Infringement Cases (II) (SPC JI No. 1 [2016]) Referred to as the Judicial Interpretation on Several Issues about the Application of Law to Patent Infringement Cases (II); adopted at the 1676th Meeting of the Adjudication Committee of the Supreme People’s Court on January 25, 2016; publicized on March 21, 2016, implemented on April 1, 2016. Opinions of the CPC Central Committee and the State Council on Improving the Property Rights Protection System and Lawfully Protecting Property Rights (CPC Notice No. 28 [2016]) Referred to as the Opinions on Improving the Property Rights Protection System and Lawfully Protecting Property Rights; publicized by the CPC Central Committee and the State Council on November 4, 2016, implemented on November 4, 2016. Several Opinions of the Supreme People’s Court on Further Strengthening Financial Trials (SPC JI No. 22 [2017]) Referred to as the Several Opinions on Further Strengthening Financial Trials; publicized by the Supreme People’s Court on August 4, 2017, implemented on August 4, 2017.

Judicial Interpretations and Other Normative Documents about Criminal Enactments Judicial Interpretation of the Supreme People’s Court on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds (SPC JI No. 9 [1998]) Referred to as the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of 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, implemented on May 9, 1998.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

The Rules of the Supreme People’s Court on the Court Trial Procedures for the Criminal Reopening Cases (Trial) (SPC JI No. 31 [2001]) Referred to as the Rules on the Court Trial Procedures for the Criminal Reopening Cases (Trial); adopted at the 1196th Meeting of the Adjudication Committee of the Supreme People’s Court on October 18, 2001; publicized on December 26, 2001, implemented on January 1, 2002. Supplementary Rules of the Supreme People’s Court and the Supreme People’s Procuratorate on the Determination of Counts of Crimes in the Enforcement of the Criminal Law of the People’s Republic of China (III) (SPC JI No. 16 [2007]) Referred to as the Supplementary Rules on the Determination of Counts of Crimes in the Enforcement of the Criminal Law (III); adopted respectively at the 1436th Meeting of the Adjudication Committee of Supreme People’s Court on August 27, 2007 and the 82nd Meeting of the Tenth Procuratorial Committee of the Supreme People’s Procuratorate on September 7, 2007; publicized on October 25, 2007, implemented on November 6, 2007. Judicial Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues about the Application of Law in Handling Criminal Cases Involving Obstructing the Legal Enforcement by Way of Establishing and Making Use of Cult Organizations (SPC JI No. 3 [2017]) Referred to as the Judicial Interpretation on Several Issues about the Application of Laws in Handling Criminal Cases Involving Obstructing the Legal Enforcement by Way of Establishing and Making Use of Cult Organizations; adopted respectively at the 1706th Meeting of the Adjudication Committee of the Supreme People’s Court on January 4, 2017 and the 58th Meeting of the Twelfth Procuratorial Committee of the Supreme People’s Procuratorate on December 8, 2016; publicized on January 25, 2017, implemented on February 1, 2017.

Judicial Interpretations and Other Normative Documents about Procedural Enactments The Rules of the Supreme People’s Court on Evidence in Civil Procedures (SPC JI No. 33 [2001]) Referred to as the Rules onEvidence in Civil Procedures; adopted at the 1201st Meeting of the Adjudication Committee of the Supreme People’s Court on December 6, 2001;publicized on December 21, 2001, implemented on April 1, 2002. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Enforcement Procedures in the Civil Procedure Law of the People’s Republic of China (SPC JI No. 13 [2008]) Referred to as the Judicial Interpretation on Several Issues about the Application of the Enforcement Procedures in 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, implemented on January 1, 2009.

Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

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The Rules of the Supreme People’s Court on Several Issues about People’s Courts’ Enforcement Work (Trial) (SPC JI No. 15 [1998]) Referred to as the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial); adopted at the 992nd Meeting of the Adjudication Committee of the Supreme People’s Court on June 11, 1998; publicized on July 8, 1998, implemented on July 8, 1998; revised in accordance with the Decision of the Supreme People’s Court on Adjusting the Sequential Number of the Articles of the Civil Procedure Law of the People’s Republic of China Cited in Judicial Interpretations and Other Documents on December 16, 2008. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Arbitration Law of the People’s Republic of China (SPC JI No. 7 [2006]) Referred to as the Judicial Interpretation of Several Issues about the Application of 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 with the serial number of “SPC JI No. 7 [2006]” , implemented on September 8, 2006; revised in accordance with the Decision of the Supreme People’s Court on Adjusting the Sequential Number of the Articles of the Civil Procedure Law of the People’s Republic of China Cited in Judicial Interpretations and Other Documents on December 16, 2008, implemented on December 31, 2008. The Rules of the Supreme People’s Court on Several Issues about the Trial of Arbitration-Related Judicial Review Cases (SPC JI No. 22 [2017]) Referred to as the Rules on Several Issues about the Trial of Arbitration-Related Judicial Review Cases; adopted at the 1728th Meeting of the Adjudication Committee of the Supreme People’s Court on December 4, 2017; publicized on December 26, 2017, implemented on January 1, 2018. The Rules of the Supreme People’s Court for the People’s Courts to Seal up, Distrain and Freeze Properties in Civil Enforcement (SPC JI No. 15 [2004]) (Rev. 2008) Referred to as the Rules for the People’s Courts to Seal up, Distrain and Freeze Properties in Civil Enforcement; adopted at the 1330th Meeting of the Adjudication Committee of the Supreme People’s Court on October 26, 2004; publicized on November 4, 2004; revised in accordance with the Decision of the Supreme People’s Court on Adjusting the Sequential Number of the Articles of the Civil Procedure Law of the People’s Republic of China Cited in Judicial Interpretations and Other Documents on December 16, 2008, implemented on December 31, 2008. The Guidance of the Supreme People’s Court on Several Issues about the Trial of Civil and Commercial Contract Cases under the Current Situation (SPC JI No. 40 [2009]) Referred to as the Guidance on Several Issues about the Trial of Civil and Commercial Contract Cases under the Current Situation; publicized by the Supreme People’s Court on July 7, 2009, implemented on July 7, 2009.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

Judicial Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China (SPC JI No. 21 [2012]) Referred to as the Judicial Interpretation on the Application of 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, implemented on January 1, 2013. The Opinions of the Supreme People’s Court on Several Issues about Filing and Concluding the Enforcement Cases (SPC JI No. 26 [2014]) Referred to as the Opinions on Several Issues about Filing and Concluding the Enforcement Cases; publicized by the Supreme People’s Court on December 17, 2014, implemented on January 1, 2015. Judicial Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (SPC JI No. 5 [2015]) Referred to as the Judicial Interpretation on the Application of 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, implemented on February 4, 2015. The Rules of the Supreme People’s Court on Several Issues about Strictly and Legally Applying Instructed Case-reopening and Case-remanding in the Civil Judicial Supervision Procedure (SPC JI No. 7 [2015]) Referred to as the Rules on Several Issues about Strictly and Legally Applying Instructed Case-reopening and Case-remanding in the Civil Judicial Supervision Procedure; adopted at the 1643rd Meeting of the Adjudication Committee of the Supreme People’s Court on February 2, 2015; publicized on February 16, 2015, implemented on March 15, 2015. The Rules of the Supreme People’s Court on Several Issues about Objection to Enforcement and Review Cases (SPC JI No. 10 [2015]) Referred to as the Rules on Several Issues about Objection to Enforcement and Review Cases; adopted at the 1638th Meeting of the Adjudication Committee of the Supreme People’s Court on December 29, 2014; publicized on May 5, 2015, implemented on May 5, 2015. The Official Reply of the Supreme People’s Court on Issues about the Time Limit for Filing an Objection to the Termination of Enforcement by the People’s Courts (SPC JI No. 3 [2016]) Referred to as the Official Reply on Issues about the Time Limit for Filing an Objection to the Termination of Enforcement by the People’s Courts; adopted at the 1668th Meeting of the Adjudication Committee of the Supreme People’s Court on November 30, 2015; publicized on February 14, 2016, implemented on February 15, 2016.

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The Opinions of the Supreme People’s Court on Giving Full Play to the Functions of Trials and Effectively Strengthening the Judicial Protection of Property Rights (SPC JI No. 27 [2016]) Referred to as the Opinions on Giving Full Play to the Functions of Trials and Effectively Strengthening the Judicial Protection of Property Rights; publicized by the Supreme People’s Court on November 28, 2016, implemented on November 28, 2016. The Opinions of the Supreme People’s Court on Legally and Properly Handling Cases Regarding Historical Property Rights (SPC JI No. 28 [2016]) Referred to as the Opinions on Legally and Properly Handling Cases Regarding Historical Property Rights; publicized by the Supreme People’s Court on November 28, 2016, implemented on November 28, 2016. Judicial Interpretation of the Supreme People’s Court on Several Issues about Judicial Compensation in Civil and Administrative Procedures (SPC JI No. 27 [2000]) Referred to as the Judicial Interpretation of Several Issues about Judicial Compensation in Civil and Administrative Procedures; adopted at the 1130th Meeting of the Adjudication Committee of the Supreme People’s Court on September 14, 2000;publicized on September 16, 2000, implemented on September 21, 2000. Judicial Interpretation of the Supreme People’s Court on the Application of the Administrative Procedure Law of the People’s Republic of China (SPC JI No. 1 [2018]) Referred to as the Judicial Interpretation on the Application of 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, implemented on February 8, 2018. The Rules of the Supreme People’s Court on Several Issues about the Enforcement of Notarized Debt Instruments (SPC JI No. 18 [2018]) Referred to as the Rules on Several Issues about the Enforcement of 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, implemented on October 1, 2018. Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Judicial Supervision Procedure of the Civil Procedure Law of the People’s Republic of China (SPC JI No. 14 [2008]) Referred to as the Judicial Interpretation on Several Issues about the Application of the Judicial Supervision Procedure of the Civil Procedure Law; adopted at the 1453rd Meeting of the Adjudication Committee of the Supreme People’s Court on November 10, 2008; publicized on November 25, 2008, implemented on December 1, 2008.

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Cited Laws, Regulations, Judicial Interpretations, and Other Normative …

The Guidance of Supreme People’s Court for the Prevention and Sanction of Sham Litigation (SPC JI [2016] No. 13) Referred to as the Guidance for Prevention and Sanction of Sham Litigation; publicized by the Supreme People’s Court on June 20, 2016.

Other Document The Decision of the Standing Committee of the National People’s Congress of the People’s Republic of China on Banning Cult Organizations, Guarding against and Punishing Cult Activities Referred to as the Decision on Banning Cult Organizations, Guarding against and Punishing Cult Activities; adopted at the 12th Session of the Standing Committee of the Ninth National People’s Congress on October 30, 1999, implemented on October 30, 1999.

Contents

Cases by Justices The People v. Gu X, Jiang X et al. (The Crime of Misreporting the Registered Capital; the Crime of Illegal and Non-disclosure of Important Corporate Information; the Crime of Misappropriating Funds): Application of Laws in Criminal Cases Involving Protection of Property Rights . . . . . . . . . . . . . . . . . . . . . . . . Xianding Pei and Can Luo The People v. Sun X (A), Sun X (B) et al. (The Crime against Organizing, Leading and Participating in Organizations of a Triad Nature; the Crime against Intentional Homicide and the Crime against Extortion, etc.): The Applicable Laws for Non-incremental Penalty in Retrial and Withdrawal of Indictment, and Adjudication Method in Case Reopening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yunteng Hu and Su Qi Parfums Christian Dior v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce (SAIC) (Administrative Disputes over Reviewing the Rejection of Trademark Applications): Review Procedure and Applicable Legal Standards for International Trademark Applications for Entry into China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kaiyuan Tao and Shu Tong Valeo Systemes d’Essuyage v. Xiamen Lucas Auto Parts Co. Ltd. and Xiamen Fuke Auto Parts Co. Ltd. (Dispute over Infringement of Invention Patent): Identification of Functional Characteristics and Processing of the Application for the Preliminary Injunction in Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dongchuan Luo and Li Zhu

3

21

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Yiyang Investment Company Ltd. (Dandong City) v. The Intermediate People’s Court of Dandong City, Liaoning Province (Application to the Intermediate People’s Court of Dandong City for State Compensation Resulting from Wrongful Enforcement of the Judgment): Elements and Liability for Wrongful Enforcement of Court Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kaiyuan Tao and Erjun Zhu

67

Cases by the Adjudication Committee Shanxi Yicheng Chengdong Renhe Iron & Steel Co., Ltd. v. Luoyang Pengfei Refractory and Wear-resistant Material Co. Ltd. et al. (Dispute over Sales Contract): The Debt Assumption Agreement is Revoked by the Court and the Creditor Can Only Request the Fulfillment of Debt Repayment by the Debtor . . . . . . . . . . . . . Mingyi Li Agricultural Bank of China Co., Ltd. Bortala Branch v. Xinjiang Xinchengji Catering Service Training, LLC (Dispute over Loan Contract): Determination of the Guarantor Liability in the Case of “Repayment of the Prior Loan with the New Loan” . . . . . . . . . . . . . . . . Fubo Wang Hainan Huaqi Industrial Development Company v. The People’s Government of Haikou City, and the Third Party: Hainan Xinming Real Estate Co., Ltd. (Dispute over Issuance of State-owned Land Use Certificate): The Determination and Adjudication on the Third-party Bona Fide Acquisitions in Administrative Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Yu

79

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Characteristic Cases The People v. Zhang X, and Zhang X (A) (Intentional Homicide and Using a Cult to Undermine Law Enforcement): Principles of Punishment against Cult-related Crimes and Application of the Death Penalty on Cult Members Committing Serious Crimes . . . . 113 Qiquan Wang The People v. Wang X (Obstruction of Testimony): Identifying Standards for the Constitution of the Crime of Obstruction of Testimony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Jinya Wang and Jianfang Yun The People v. Yang X and Shi X (Misappropriation of Public Funds): Assessment and Application of the “Special Circumstances” Warranting a Sentence Lesser than the Statutory Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Xiaoyang Shang

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Qin X v. Sun X and Zhang X (Dispute over a Sales Contract): A Dispute over the Expropriation Indemnity for Real Estate without an Ownership Certificate is a Civil Dispute . . . . . . . . . . . . . . . . . . . 145 Yanchen Li Lhasa Makye Ame Catering Chain Co., Ltd. v. Land and Resources Bureau of Lhasa City (Dispute over the Contract for the Assignment of Construction Land Use Right): A Judicial Determination of Liquidated Damages for Overdue Payment at a per diem Rate of 1‰ Stipulated in a Contract for the Assignment of Construction Land Use Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Xiaoyun Li Dongguan Licheng Electronic Industrial Co., Ltd. and Baoyuan Real Estate Development Co., Ltd. in Yuancheng District of Heyuan City v. Dongguan Jinglong Industrial Development Co., Ltd. and Jinghe Industrial Group Co., Ltd. (Dispute over Project Transfer Contract): A Judicial Determination that for a Foreseeable Failure of Contract Performance, No Claims Shall be Made for the Loss of Expected Benefits . . . . . . . . . . . . . . . . . . . . . . 167 Xiaohong Qian and Zhifeng Wang Hainan Zhonghe Group Co., Ltd. v. Hainan Meihao Real Estate Development Co., Ltd. (Dispute over Project Transfer Contract): Commitment Could be Found as a Modification of the Original Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Gang Cao Jinshang Bank Co., Ltd. East Street Sub-branch, Yingze District, Taiyuan City v. Jiexiu City Mianshan Mountain Scenic Area Development Co., Ltd., Shanxi Sanjia New Energy Group Co., Ltd., et al. (Dispute over Loan Contract): Whether the Mortgage Created on the Original Mining Right Continues to be Valid If the Mining Permit Has Not been Renewed upon Its Expiry . . . . . . . . . . . . 183 Fang Mei and Yiqian Fan Meizhou Mediterranean Hotel Co., Ltd. v. Shanghai Pudong Development Bank Co., Ltd. Shenzhen Branch, Shenzhen Zirui Real Estate Development Co., Ltd. (Dispute over Loan Contract): Definitive Analysis of the Nature of the Entrusted Loan Contract . . . . . . 191 Hongyu Chen and Suheng Xie Bank of Communications Co., Ltd. Guizhou Branch v. Guizhou Jinchi Hongye Trading Co., Ltd., Guizhou Yinyuan Financing Guarantee Co., Ltd., Guizhou Zhiyi Real Estate Development Co., Ltd., and Lin X (Dispute over Financial Loan Contract): The Creditor Not Entitled to Claim Guarantee Liability Directly against the Sub-guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Zaiyu Guo

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Zhejiang Kunlun Construction Group Co., Ltd. v. Anhui Wenyue Investment & Real Estate Co., Ltd. and Department of Culture and Tourism of Anhui Province, et al. (Dispute over Contract on Undertaking Construction Project): Determination of Whether Government Agency and the Enterprise Established Thereby Shall Jointly Assume Civil Liability and Allocation of the Burden of Proof . . . 211 Huizhuo Liu Zhang X v. Haili Holding Group Co., Ltd., and Gan X (Dispute over Contract on Undertaking Construction Project): Probative Value of Decided Facts Ascertained by Judgment in Subsequent Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 Xiaoyun Li Heilongjiang Province Qingda Water Conservancy and Hydroelectric Engineering Co., Ltd. v. Daqing Oilfield Mudanjiang New Energy Co., Ltd. (Dispute over Contract on Undertaking Construction Project): Applicable Rules for the Interest on Construction Payment in Arrears and Liquidated Damages in Cases of Dispute over Contract on Undertaking Construction Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Jianhua Wu and Hening Ma Liu X v. Zhangye Jinxin Pawnshop Co., Ltd. (Supervision on Enforcement of Ruling on Pawn Contract Dispute): Determination of the Nature of a Pawn Contract with No Registration of the Things Pawned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Changmao Shao and Shenghai Xue Nanchang Municipal Construction Co., Ltd. v. Liu X and Jiangxi Fuzhen Road and Bridge Construction Co., Ltd. (Unjust Enrichment): No Liability for Restitution Where the Bona Fide Recipient of Ill-gotten Gains Has No Existing Interest . . . . . . . . . . . . . . . . . 249 Zhanfei Wang and Muhan Liu Jilin Jinhe Real Estate Development Co., Ltd. v. Sichuan Longhai Huifeng Industry Co., Ltd. (Dispute over Pooling Contract): Judicial Determination of the Establishment of Apparent Agency . . . . . . 255 Xiangzhuang Sun Guangdong Overseas Chinese Trust & Investment Corp. v. Guotai Junan Securities Co., Ltd. (Dispute over Securities Repurchase Agreement): Judicial Determination of Legal Personality . . . . . . . . . . . . . 265 Xiangzhuang Sun Meng X, Changchun Shengxiang Construction Engineering Co., Ltd. v. Li X (A), Changchun Tengan Real Estate Development Co., Ltd. (Execution Objection by Outsiders): Findings of the Legal Liability of the Illegal Profiteer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Ge Su

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Hu X (A), Hu X (B), et al. v. Deqing Jinhengkun Real Estate Development Co., Ltd., Chen X, et al. (Dispute over the Third-party Revocation): Determination of the Subject of the Third-party Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Xuefeng Ren Zhang X v. Tianjin Hengzeng Real Estate Company, Zhejiang Huanyu Construction Company (Dispute over the Third-party Revocation): Identification Criteria of the Third-party without Independent Right to Claim in a Third-party Revocation Lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 Shaojun Fu Henan Shenquanzhiyuan Industrial Development Co., Ltd., and Zhao X v. Ruzhou Boyi Sightseeing and Medical Theme Park Development Co., Ltd., Yan X, etc. (Supervision on Enforcement of the Decision on Private Lending Dispute): Balance and Protection of Parties’ Interests in Paying-a-debt-in-kind-assets Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 Guohui Xiang Beijing Avic Zhicheng Technology Co., Ltd. v. Shenzhen Feipengda Refined Manufacturing Co., Ltd. (Dispute over Copyright Infringement): Miniature Works in the Original Proportion Do Not Constitute Model Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 Rong Li Michael Jeffrey Jordan v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China and Qiaodan Sports Products Co., Ltd. [Administrative Dispute over (Graphics) Trademark Infringement]: Requirements for Protecting the Prior Right of Image in Trademark Administrative Cases . . . . . . . . . . . . . . . . . . . . . . . . 315 Weike Du and Xian Tang Hebei Farun Forestry Technology Co., Ltd. v. Hebei Expressway Hengda Management Office (Dispute over Infringement of Right to New Varieties of Plant): Understanding and Identification of “Production” and “Reproduction” in Article 28 of the Seed Law . . . . . 323 Lihua Mao Wuxi Guowei Ceramic Electric Appliances Co., Ltd. and Jiang X v. Changshu Linzhi Electric Heating Device Co., Ltd. and Suning Holdings Group Co., Ltd. (Dispute over Infringement of Patent Right to Utility Models): The Calculation of Patent Infringement Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 Li Zhu and Bo Zhang

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Xixia Longcheng Special Materials Co., Ltd. v. Yulin Intellectual Property Bureau, Shenmu Tianyuan Chemical Co., Ltd. of Shaanxi Coal and Chemical Industry (Dispute over Administrative Resolution of Patent Rights): Identification and Resolution on Procedure Violations in Administrative Enforcement of Patent Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337 Yunpeng Ma Zhejiang Longda Stainless Steel Co., Ltd. v. A. P. Moller-Maersk A / S (Dispute over the Contract of Carriage of Goods by Sea): Application of Law Concerning the Consignor’s Right to Modify the Contract for Goods in Transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Ke Zhao Qu X v. Weihai Central Branch of China Continent Property & Casualty Insurance Co., Ltd., Shidao Branch of China Continent Property & Casualty Insurance Co., Ltd. (Dispute over Marine Insurance Contracts): The Liability of Insurance Compensation and the Determination of the Amount and Interest of Insurance Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Xiaohan Yu Shipping Insurance Operation Center of PICC v. Shipbuilding Plant of Taizhou Sanfu Ship Engineering Co., Ltd. (Dispute over Shipbuilding Insurance Contract): Clarification of the Meaning of Seagoing Vessels and Interpretation of Insurance Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Xiaohan Yu Liu X v. Wenjiang District Public Security Bureau of Chengdu Public Security Bureau of Sichuan Province (An Administrative Penalty Case): On Proportionating Punishment to Crime . . . . . . . . . . . . . 367 Xiaobin Wang Liu X v. The People’s Government of Yicheng District, Zhumadian City, Henan Province and Renmin Sub-district Office, Yicheng District, Zhumadian City, Henan Province (Administrative Compulsory Demolition): The Lessee of a Directly Administered Publicly-owned Housing Has an Interest in Compulsory Demolition of the Leased Publicly-owned Housing . . . . . . . . . . . . . . . . . . . . 379 Lei Tong

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Liang X v. The People’s Government of Napo County and the Collective of Nahuaitun, Dekang Village, Dulong Township, Napo County (Third Party) (Dispute over Administrative Forestry Registration): Restrictions on Self-rectification of Administrative Agencies by Cancellation or Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 Junyong Xiong Fu X (A) and Fu X (B) v. Yangpu Economic Development Zone Management Committee (Administrative Order of Housing Demolition and Relocation and Resettlement): Recognition by the Competent Administrative Agency of the De Facto Adoptive Relationship between the Persons Who Receive Housing Relocation and Resettlement Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 Yingxin Zhang Joint-equity Economic Cooperative Union of Zhangxi Village and the Eighth Joint-equity Economic Cooperative of Zhangxi Village v. The People’s Government of Zhongshan City and Yang X (Third Party) (Dismissal of an Administrative Reconsideration Application): Divorce is Not a Legal Premise for Loss of Membership in a Rural Collective Economic Organization . . . . . . . . . . 403 Xiujiang Guo Hong Kong Stoll Industrial (Group) Co., Ltd. v. The People’s Government of Taizhou City, the People’s Government of Hailing District, Taizhou City (Dispute over the Investment Attraction Agreement): The Determination of Administrative Agreements and the Concept of Trying Administrative Disputes Involving Consensual Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 Baojian Geng and Qin Yin Zhou X (A) v. The Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province (Dispute over Administrative Compensation for Housing Demolition and Resettlement): Understanding of the “Direct Loss” in Subparagraph 8 of Article 36 of the State Compensation Law . . . . . . . . 429 Xiaobin Wang Zhang X v. The People’s Government of Jianxi District, Luoyang City (Dispute over Government Information Disclosure): The “Transiency” and “Actual Accessibility” of Government Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 Guangyu Li and Fangfei Luo

Cases by Justices

The People v. Gu X, Jiang X et al. (The Crime of Misreporting the Registered Capital; the Crime of Illegal and Non-disclosure of Important Corporate Information; the Crime of Misappropriating Funds): Application of Laws in Criminal Cases Involving Protection of Property Rights Xianding Pei and Can Luo

Rule 1. The constitution of the crime against misreported registered capital requires compliance with the provisions of the Company Law. As major changes in the revised Company Law of 2005 have modified the restrictive provisions on the proportion of intangible assets in the registered capital, the assessment of misrepresentation of the registered capital regulated by the Criminal Law should be adjusted accordingly. 2. The temporal validity of the Criminal Law and its subsequent revisions is based on the principle of “following the old with the lighter punishment”(lex prospect non respect), and any perpetrator’s act of providing a false financial accounting report shall be subject to the crime of providing a false financial accounting report, which cannot be deemed to constitute a crime if the evidence is insufficient to prove “serious harm to the interests of shareholders or others”. 3. The control and use of corporate funds must be carried out in accordance with laws and regulations, any corporate manager(s) cannot transfer funds among its affiliated companies or subsidiaries without authorization, let alone diverting the corporate funds for personal use. The diversion of the corporate funds for Collegiate Panel: Xianding Pei, Yongjian Zhang, Zhiyong Luo, Mingdeng Si and Aitao Liu (Edited by Xianrong Bao; translated by Daxuan Zheng) X. Pei · C. Luo (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_1

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personal use does not constitute a loan of funds in due course, and shall constitute the crime of misappropriation of funds. 4. Following the promulgation of the Legal Interpretation by the Standing Committee of the National People’s Congress of Article 384 (1) of the Criminal Law of the People’s Republic of China in 2002, the misappropriation of funds for personal use should be construed in accordance herewith, that any one of three circumstances which satisfies the legal provisions can constitute a crime of misappropriation of funds.

Case Information 1. Parties Prosecution Agency in the First Instance: The People’s Procuratorate of Foshan City, Guangdong Province The Accused in the First Instance: Gu X The Accused in the First Instance: Jiang X The Accused in the First Instance: Zhang X The Accused in the First Instance: Liu X (A) The Accused in the First Instance: Zhang X (A) The Accused in the First Instance: Yan X (A) The Accused in the First Instance: Yan X (B) The Accused in the First Instance: Liu A 2. Procedural History First Instance: No.65 [2006] Trial, Crim. Division, the Intermediate People’s Court of Foshan City, Guangdong Province (dated Jan. 30 of 2008) Second Instance: No. 101 [2008] Final, Crim. Division, the Higher People’s Court of Guangdong Province (dated Mar. 25 of 2009) Case Reopening: No.4 [2018] Reopening, Crim. Division, the Supreme People’s Court (dated Apr. 8 of 2019) 3. Cause of Action Misreported registered capital; illegal and non-disclosure of important corporate information; misappropriation of funds

The People v. Gu X, Jiang X et al. …

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Essential Facts After hearing the case, the Intermediate People’s Court of Foshan City, Guangdong Province held: 1. The Crime against Misreported Registered Capital From October to November 2001, the accused Gu X and others registered with the government and incorporated Shunde Greencool Co., Ltd. (hereinafter referred to as Shunde Greencool), via an official letter issued by the People’s Government of former Ronggui Town (now Street), Shunde City (now District), Guangdong Province, with 75% of the registered capital being intangible assets (amounting to RMB 900 million yuan) and 25% of the registered capital being monetary funds (amounting to RMB 300 million yuan). In accordance with those then legal provisions, the proportion of intangible assets in the registered capital of a limited liability company should not exceed 20%. Therefore, from May to December 2002, the accused Gu X, Liu X (A), Jiang X, Zhang X (A) and others had tried possible means to improve the registration procedures for Shunde Greencool and reduce the proportion of intangible assets by rewinding the corporate funds, signing false or forged supply contracts and other arrangements. The falsely reported registered capital had amounted to RMB 660 million yuan. 2. The Crime against Illegal and Non-disclosure of Important Corporate Information From 2002 to 2004, in order to exaggerate the business achievements of the listed company, Kelong Electrical Appliances, the accused Gu X instructed the accused Jiang X, Yan X (A), Zhang X, Yan X (B), Liu A and others to inflate the profits by way of increasing the yearly losses of 2001, overstock sales, the deferred accounting of the current year’s expenses, and fake scrap sales, and then to publicize false financial accounting reports containing inflated profits, violating the right of the public and shareholders of the listed company to know the true financial situations, and misleading the society in a result of serious losses to the shareholders and the society at large. 3. The Crime against Misappropriation of Funds In 2003, the accused Gu X, in order to takeover Yangzhou Asiastar Bus Co., Ltd. (hereinafter referred to as Asiastar), instructed the accused Zhang X and others to incorporate Yangzhou Greencool Company (with registered capital being RMB one billion yuan) in the name of Gu X and Gu X’s son. Aiming to raise RMB 800 million yuan of monetary registered capital, from June 17 to 20 at the same year, Gu X instructed Jiang X and others to transfer RMB 250 million yuan from Kelong Electrical Appliances, instructed Zhang X to transfer RMB 40 million yuan from

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Kelong Electrical Appliances (Jiangxi Branch), and together with funds raised from other sources, totaling RMB 800 million yuan. Under the manipulation of Gu X and Zhang X, the said RMB 800 million yuan was transferred from the account of Tianjin Greencool Company to Yangzhou Greencool Company’s capital verification account, whereupon the amount of money was used as personal contribution of Gu X and Gu X’s son to incorporate the aforementioned Yangzhou Greencool Company. From March to April in 2005, the accused Gu X instructed the accused Jiang X to loan from Yangzhou Industry Asset Operation Management Co. Ltd. (hereinafter referred to as Yangzhou Industry Co.), whereas it was refused by Wang X, the legal representative of Yangzhou Industry Co. Thereafter, without the consent of the board of directors of Asiastar, Gu X and Jiang X, in the name of Asiastar, issued and delivered the notice of payment to Wang X, requesting that Yangzhou Industry Co. should pay Yangzhou Greencool Company the equity transfer funds and some investment dividends which should have been transferred to Asiastar, totalling RMB 63 million yuan. On April 25, 2005, Yangzhou Industry Co. transferred the amount of RMB 63 million yuan into the bank account of Yangzhou Greencool Company. The facts found by the Intermediate People’s Court of Foshan City were supported by the following evidence: the incorporation and registration information of Shunde Greencool Company, information as to the change of registration by the industrial and commercial administration, financial accounting reports of Kelong Electrical Appliances, bank receipt statements and receipt vouchers, testimonies made by witnesses Liu X (B), Fang X, and Gao X, as well as the confession made by the accused Gu X and other people. It was found by the Intermediate People’s Court of Foshan City that the accused Gu X, Liu X (A), Jiang X, Zhang X (A) had committed the crime of misreporting the registered capital in the course of completing the registration process of Shunde Greencool by way of lowering the proportion of intangible assets, misreporting the monetary registered capital of RMB 660 million yuan, which presented a huge amount. In order to exaggerate the corporate performance of Kelong Electrical Appliances, Gu X instructed the accused Jiang X, Yan X(A), Zhang X, Yan X(B), Liu A to inflate the corporate profits and publicize false financial accounting reports on the listed company, Kelong Electrical Appliances, resulting in serious losses to shareholders and the society at large. Their conduct had constituted a crime against illegal disclosure and non-disclosure of the important corporate information; Gu X, Zhang X had misappropriated RMB 250 million yuan of Kelong Electrical Appliances, and RMB 40 million yuan of Kelong Electrical Appliances (Jiangxi Branch) for Gu X’s personal incorporation of Yangzhou Greencool Company. Together with Zhang X, Gu X had also misappropriated RMB 63 million yuan of Asiastar for personal interest. Their conduct had constituted the crime against misappropriation of funds. The above-mentioned alleged facts and counts of charges brought by the public prosecution authorities were established and shall be supported. The other facts and counts of charges alleged by the public prosecution authorities were not established, and shall be rejected. Therefore, the aforementioned first instance judgment should be rendered.

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After the judgment was pronounced, the accused Gu X, Jiang X, Liu X (A), Zhang X (A) and Yan X (A) appealed, arguing that their conduct should not constitute any crime. The Higher People’s Court of Guangdong Province held that the facts found in the court of the first instance were clear, the evidence was reliable and sufficient, the charges were accurate and the sentencing was appropriate, and the trial proceedings were lawful. Thus, the grounds of appeal raised by the accused Gu X and others cannot be established and shall be inadmissible. It was therefore decided by the Higher People’s Court of Guangdong Province that the appeal shall be dismissed and the first instance judgment shall be affirmed. The accused Gu X filed a petition to the Supreme People’s Court after he had served his sentence and was set free. On December 27, 2017, the Supreme People’s Court decided to reopen this case via certiorari.

Issues 1. In those cases of fighting against crimes in the economic activities, whether revisions in the pre-existing Company Law will entail the changes in the assessment of the conduct or activities from the criminal law perspectives; 2. How to select the applicable counts of charges and relevant provisions after the Criminal Law (Amendment VI) was promulgated; 3. How to identify the claims and liabilities between the Kelong Group and the Greencool Group; 4. If the funds are always transferred between business organizations, can it be deemed as misappropriation of funds for personal use?

Holding On April 10, 2019, the Supreme People’s Court made an announcement of the decision after reopening this case, in which the crime of misreporting the registered capital, the crime of illegal and non-disclosure of important corporate information and the crime of misappropriating the corporate funds committed by Gu X and others were reconsidered. The conviction and sentencing parts in the first instance judgment that Gu X has committed the crime of misreporting the registered capital and the crime of illegal and non-disclosure of important corporate information were reversed, whereas a five-year imprisonment was imposed on Gu X for the crime of misappropriating funds; the conviction and sentencing parts in the first instance judgment against the accused Zhang X for the crime of illegal and non-disclosure of important corporate information were reversed, whereas the first instance judgment that Zhang X shall serve a two-year imprisonment with a two-year reprieve for

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the crime of misappropriating funds was affirmed; the accused Jiang X, Liu X (A), Yan X (A), Yan X (B), and Liu A were all found no guilty. The Supreme People’s Court held in the reopening of this case that in the first instance, in the process of application for changes of registration of Shunde Greencool, the fact that Gu X, Liu X (A), Jiang X and Zhang X(A) had utilized false documents to make a contribution through replacing the intangible assets with the misreported money of RMB 660 million yuan was found true, whereas the said fact is a continuation of the local government’s support for the incorporation registration of Shunde Greencool in violation of regulations, no serious consequences have been entailed; in addition, relevant laws in force then were revised when the first instance was brought to the court, whereupon the proportion of intangible assets replaced by the misreported money of RMB 660 million yuan, in excess of the statutory limit, was reduced from 55% to 5%. Therefore, the circumstances of the conduct by Gu X and others were adjudged to be clearly minor with less harm, which should not constitute a crime. The fact found by the first instance judgment that Kelong Electrical Appliances made a disclosure of financial statements including inflated profits from 2002 to 2004 was found true, and an administrative penalty should be imposed upon the violation of laws, but the evidence on file was insufficient to prove that the making of false financial statements by Kelong Electrical Appliances had entailed the consequence of “serious harm to the interests of shareholders or other people” provided in the Criminal Law, therefore the accused concerned should not be held for criminal liability. The fact found by the first instance judgment that Gu X and Jiang X had misappropriated RMB 63 million yuan of Asiastar and remitted to Yangzhou Greencool Company was unclear, the evidence was insufficient, and relevant law was improperly applied, therefore the conduct of Gu X and Jiang X should not constitute a crime. However, the fact that Gu X and Zhang X had misappropriated RMB 250 million yuan of Kelong Electrical Appliances and RMB 40 million yuan of Kelong Electrical Appliances (Jiangxi Branch) for personal profit-making activities was factually clear, and the evidence was sufficient and reliable. The opinion of Gu X and his defenders that Kelong Electrical Appliances owed a huge sum of money to the Greencool Company was inconsistent with the facts and should not be justified. The conduct by Gu X and Zhang X has constituted the crime of misappropriating funds with a huge amount of misappropriation. In respect of the relatively short period of misappropriating funds, and no severe economic losses caused to the Company, Gu X and Zhang X should suffer a lenient punishment in accordance with the law.

Comment on Rule Reopening the case of Gu X for new trial by the Supreme People’s Court typically reflects the Court’s endeavor to protect the property rights, which attracts great concern and has greatly affected the society. It is also of great significance that the Supreme People’s Court, after reopening a case in accordance with the law, partially reversed the sentence and altered the penalty.

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1. Insistence on Comprehensive Review and Impartial Justice After the Supreme People’s Court reopened the case of Gu X and others for crimes concerning misreporting the registered capital, illegal disclosure, non-disclosure of important corporate information and misappropriation of funds, it conducted an indepth and comprehensive review, and on the basis of the facts and the law, the Supreme People’s Court made a final and fair decision. (1) As Circumstances in the Case Involving Misreporting the Registered Capital are Significantly Less Serious, Thus Significantly Less Harmful, It is Decided that Misreporting the Registered Capital May Not Constitute a Crime The collegiate panel held that, in the first instance, Gu X, Liu X (A), Jiang X, Zhang X (A), in the process of applying for changing the registration of Shunde Greencool Company, had made use of false or forged documents to falsify money or assets in exchange for intangible assets, the fact is found objectively true, but judging from the entire case, the conduct by the accused Gu X and others is significantly less harmful and may not be deemed to constitute a crime. Firstly, the changes in the Company Law have entailed changes in the constitutive elements of the said crime. The crime of falsely reporting registered capital is a typically administrative crime, and the Criminal Law is relatively blank in this regard. In accordance with Article 158 of the Criminal Law, where applicant for company registration, by using false documents or other fraudulent means to misrepresent the registered capital, defrauding the company registration authorities, has obtained company registration, if misrepresented amount of the registered capital is huge, and the consequences are serious or have other serious circumstances, that constitutes the crime of misrepresentation of registered capital. Therefore, changes in the preexisting Company Law and other related laws will inevitably lead to changes in the constitution of the crime of falsely reporting the registered capital. The principle of “following the old with the lighter punishment” is not only applicable to the change of the Criminal Law, but also to the change of the pre-existing law. The Company Law revised in 2005 increased the upper limit of the proportion of intangible assets in the registered capital from 20% to 70%, so that the proportion of intangible assets exceeding the legal limit replaced by falsified money or assets in this case was reduced from 55% to 5%. In the first instance of the case, the illegality and social harmfulness of falsely reporting the registered capital by Gu X and others have been significantly reduced. Correspondingly, the way the Criminal Law handles Gu X and others with respect to falsely reporting the registered capital should also change. Secondly, false reporting of the registered capital by Gu X and others has a great deal to do with the local government’s support for the incorporation and registration of Shunde Greencool Company in violation of rules. Due to the improper support of the local government, Shunde Greencool Company completed the incorporation and registration and annual inspection under imperfect procedures. Thereafter, in order to improve incorporation and registration procedures, Gu X and others had adjusted the proportion of intangible assets, and had falsely reported the registered capital in

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the process of applying for the company’s change of registration. In other words, the local government had to bear certain responsibilities for the misreporting of registered capital by Gu X and others. The collegiate panel in the case reopening has paid special attention to this specific historical factor and made a rational evaluation on the social harmfulness of the conduct. Thirdly, though Gu X and others have falsely reported the registered capital, they have not reduced the total capital of Shunde Greencool Company. After completing the change of registration by falsely reporting the registered capital, Gu X, as a shareholder of Shunde Greencool Company, had converted the RMB 660 million yuan of intangible assets which were obtained in improper ways into capital provident funds and had the money remained in the Company without reducing its total capital. In other words, the conduct by Gu X and others only changed the structure of the Company’s registered capital, there is huge difference between no actual capital in the Company but claimed falsely to have the required registered capital and the registered capital less than the declared capital. (2) Where the Evidence is Insufficient to Prove the Dangerous Consequences Provided in the Law, No Crime of Providing False Financial Statements Can be Adjudicated After reopening the case, the collegiate panel held that, the fact that in the first instance trial Kelong Electrical Appliances had the inflated profits from 2002 to 2004 included in its financial accounting report was existent, but the existing evidence was insufficient to prove that the harmful consequences had reached a level that seriously harmed the interests of shareholders or other people. Therefore, as facts are unclear and the evidence is insufficient, Gu X and others shall not be criminally responsible in accordance with rules of evidence. Article 161 of the Criminal Law of 1997 provided for the crime of providing false accounting reports. In June 2006, the Criminal Law Amendment VI revised this article to expand the scope of disclosure, from the original financial accounting report to all legally important information that should be disclosed; the scope of cracking down on the said crime has also been expanded. The expression of “other serious circumstances” has been added, and the expression of “a consequential offender” has been revised as “a circumstantial offender”. In August 2007, the Supplementary Rules for Implementing the Criminal Law to Determine the Crime Charges (III) has revised the “crime of providing false financial reports” into “crime of illegal disclosure and non-disclosure of important information”. According to the principle of “following the old with the lighter punishment”, the conduct of providing false accounting reports by Gu X and others took place before the promulgation of the Criminal Law Amendment VI, and the principle of following the old law temporally should be applied, including the application of legal provisions and the application of criminal charges. Therefore, the criminal responsibility of Gu X and others should be limited to the crime of providing false accounting reports provided in Article 161 of the Criminal Law of 1997, in other words, the legally harmful consequence of “seriously harming the interests of shareholders or other people” must be achieved.

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This is the logical starting point and prerequisite for characterizing the behavior of Gu X and others. In the same vein, with regard to the standard of “seriously harming the interests of shareholders or other people”, Article 5 of the Regulations of the Supreme People’s Procuratorate and the Ministry of Public Security on Prosecution Standards for Economic Crimes of 2001 (abolished) should be applied, under which, “seriously harmful to the interests of shareholders or other people” refers to the situation that has “caused shareholders or other people’s direct economic losses in the amount of more than RMB 500,000 yuan”, or has “caused stocks to be disqualified from listing or trading of stocks is forced to suspend in the stock exchanges”. Firstly, the evidence is insufficient to prove the existence of “direct economic losses caused to shareholders or other people in the amount of more than RMB 500,000 yuan”. In the first instance, the forensic accounting opinion and the testimonies made by four stockholders were inadmissible because of the illegality of the procedures for collecting such opinion and testimonies during the investigation. It was also inappropriate for the second instance to admit the testimonies by three of the four stockholders without a hearing and without giving reasons. In the process of case reopening, the public prosecution authority submitted a civil conciliation statement, which was issued after the first instance judgment came into effect, failing to reflect the true intention of Gu X and others, and the actual losses of investors. Thus the evidence justifying having “caused direct economic losses to the shareholders or other people in the amount exceeding RMB 500,000 yuan” is insufficient. Secondly, there is no such thing as “causing the stock to be disqualified from being listed or trading of stocks to be suspended in the stock exchanges”. After being investigated by the China Securities Regulatory Commission, Kelong Electrical Appliances applied to the Shenzhen Stock Exchange for a one-hour suspension of stock trading. The Shenzhen Stock Exchange confirmed that stock trading of Kelong Electrical Appliances resumed one hour after the suspension of trading, and it did not fall within the situation where trading was forced to be suspended and no disqualification of the shares from being listed occurred. Thirdly, the first instance judgment that “serious harm to the interests of shareholders or others” had been caused by the share price falling for three consecutive days was short of factual and legal basis. According to the stock market trading data at Shenzhen Stock Exchange in May 2005, the share price of Kelong Electrical Appliances has fallen for three consecutive days since the day of suspension of trading. The margin of the fall was not significantly different from that of three days earlier, and it began to rise again on the fourth day and by the eighth day had risen higher than what is required for a Suspension Day. (3) Based on the Positive and Negative Aspects, It is Determined that Misappropriation of RMB 290 Million Yuan of Funds Constitutes the Crime of Misappropriating the Corporate Funds The collegiate panel held that the facts found in the first instance that Gu X and Zhang X had misappropriated RMB 290 million yuan of Kelong Electrical Appliances and Kelong Electrical Appliances (Jiangxi Branch) were clear and the evidence was

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reliable and conclusive, thus the conduct of Gu X and Zhang X constituted the crime of misappropriating funds. Firstly, Gu X, then president of Kelong Electrical Appliances, instructed his subordinates to have misappropriated RMB 290 million yuan of funds of Kelong Electrical Appliances and Kelong Electrical Appliances (Jiangxi Branch); Zhang X, the president of Kelong Electrical Appliances (Jiangxi Branch), took Gu X’s instructions and had RMB 290 million yuan transferred, which conforms to the legal provision of “making use of the convenience of one’s social position to misappropriate the funds of the institution or organization” in the Criminal Law. Secondly, after RMB 290 million yuan was transferred in violation of rules or regulations, the said sum of money was continuously transferred between the temporary bank accounts opened by Gu X and Zhang X. The flow of funds was clear, and no other funds were intermingled. Finally the aforesaid sum of money was transferred to the capital verification account of Yangzhou Greencool Company, used as Gu X’s personal contribution. The actual user of the funds was Gu X, who was, under the Criminal Law, “to misappropriate the funds of the institution or organization for personal use”. Thirdly, by reference to the Minutes of the National Courts Symposium on Trying Economic Crimes in November 2003, “the declaration of registered capital is to prepare for production and business activities, and is a part of incorporation of companies and enterprises for profit-making activities. Therefore, misappropriation of corporate funds as personal contribution to registering and incorporating a company or enterprise, shall be deemed to be misappropriating public funds for profit-making activities”. Gu X instructed Zhang X to have misappropriated RMB 290 million yuan of funds for personal use, which prepared for Gu X’s acquisition of a listed company Asiastar, conforming to the misappropriation of funds for profitmaking activities. This is in conformity with the provisions of the Criminal Law that the misappropriated public fund lasted “not more than three months, but the amount is relatively huge for profit-making activities”, thus, the crime of misappropriating the corporate funds has been justified and the amount is extraordinarily huge. The collegiate panel also held that the available evidence not only failed to conclude that the Kelong Group owed huge sum of money to Shunde Greencool Group, but on the contrary, the Kelong Group had suffered huge losses of at least RMB 592 million yuan. Firstly, the available evidence does not confirm that the Kelong Group still owes huge sum of money to the Greencool Group. After re-examination in the reopening of the case, it is clear that on December 1, 2005, Kelong Electrical Appliances appointed KPMG Huazhen Audit Firm to have made an investigation into the unusual and significant cash flows of Kelong Electrical Appliances and some important subsidiaries from October 1, 2001 to July 31, 2005. On January 23, 2006, the Announcement on the Investigation Results of Kelong Electrical Appliances by KPMG Huazhen Audit Firm was issued. In the Announcement, it is indicated that “according to the KPMG report, the abnormal cash flows that occurred between the Kelong Group and the companies related to the Greencool Group during the investigation period involved cash outflows of RMB 2.169 billion yuan and cash inflows of RMB 2.462

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billion yuan; the abnormal cash flows that occurred with the companies suspected of being related to the Greencool Group involved cash outflows of RMB1.902 billion yuan and cash inflows of RMB1.107 billion yuan”. The findings of KPMG Huazhen Audit Firm are: “the amount of abnormal net cash outflows between the Kelong Group and companies related to or suspected of being related to the Greencool Group during the investigation period is approximately RMB 592 million yuan, and the amount of such net cash outflows may represent the minimum loss to the Kelong Group.” Thus, it can be seen that during the investigation, the abnormal cash outflows totaling RMB 4.071 (2.169 + 1.902) billion yuan and the abnormal cash inflows totaling RMB 3.479 (2.462 + 1.017) billion yuan that occurred between the Kelong Group and companies related to the Greencool Group or companies suspected of being related to the Greencool Group, and the abnormal net cash outflows of the Kelong Group amounted to RMB 592 million [(4.071–3.479) billion] yuan, which may represent the minimum loss to the Kelong Group. Accordingly, on the basis of the findings set out in the Announcement, it cannot be concluded that the Kelong Group owes a substantial amount of money to the Greencool Company. Secondly, from the aforesaid Announcement, the cash inflow and outflow between the Kelong Group and the Greencool Company do not concern the cash flow between Kelong Group and Gu X personally. The facts found in this case are that Gu X has misappropriated huge sum of money from Kelong Electrical Appliances and Kelong Electrical Appliances (Jiangxi Branch) for his personal use, which is different from the transfer of funds between Kelong Group and Greencool Company, for they are two acts of completely different nature. Regardless of how many money exchanges between enterprises there are, no management will be allowed to misappropriate the funds of the company for personal use. Judging from judicial practice, it is such misconception of public–private distinction that leads some company or enterprise managers to commit the crime of misappropriating funds. Thirdly, after Gu X was detained, 16 cases involving the claims and liabilities between Greencool Group and Kelong Electrical Appliances and its subsidiaries were brought before the people’s courts, and none of them was won by Greencool Group. According to the effective judgment, none was found that Kelong Group owed huge amount of money to Greencool Group. On the contrary, according to the judgment in force, the Greencool Group should pay the principal amount of RMB 710 million yuan to Kelong Group. Without the board decision of the Company’s board of directors, Gu X has arbitrarily misappropriated huge amount of funds of the listed company, Kelong Electrical Appliances, for personal use, and has registered and incorporated a privately owned company; before or after the incorporation of the company, he has acquired such listed companies as Asiastar, Xiangyang Bearing Company, etc., which has not only infringed on the corporate property rights of Kelong Electrical Appliances, and harmed the vital interests of shareholders, but has also severely disrupted the order of the capital market and caused significantly adverse effects on a fair and orderly business environment. In the joint crime of misappropriating the funds, Gu X was the principal offender. In view of the short period of misappropriating the corporate funds and no significant economic losses have been incurred to the Company, Gu X

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can be given a lighter penalty as appropriate to the circumstances; and Zhang X is an accessory, and as the first instance has already reduced his punishment and granted probation, the punishment is proportional to the crime, which should be affirmed in accordance with the law. (4) Based on Some Inconclusive Facts and Insufficient Evidence, It is Not to be Determined that Misappropriation of RMB 63 Million Yuan of Funds Constitutes the Crime of Misappropriating Funds The collegiate panel held that, the fact that Jiang X has misappropriated RMB 63 million yuan of Asiastar without any discussion or decision by the board of directors of Asiastar and transferred the said amount of money to Yangzhou Greencool Company is justified. However, in the first instance, the facts that Gu X has instructed Jiang X to misappropriate the funds are inconclusive, the evidence is insufficient, and there is no evidence to prove that Jiang X has sought any personal gains in the process of misappropriating the funds. Firstly, Yangzhou Greencool Company was incorporated in accordance with the law and obtained the qualification of “independent legal person”. Although it is a privately owned company, wholly controlled by one person, it should no longer be regarded as an “individual” investor. Furthermore, even if it is a one-person company, there is only one person who actually has equity interests, it still has the qualification of an “independent legal person”. The first instance judgment, by reference only to the provisions of Article 1 (2) of the Judicial Interpretation of the Specific Application of Laws in the Trial of Misappropriating Public Funds that came into effect on May 9, 1998, but not to the provisions of the Statutory Interpretation of Article 384 (1) of the Criminal Law of the People’s Republic of China by the Standing Committee of the National People’s Congress on April 28, 2002, on the misappropriation of public funds “for personal use”, is found to be an error in the application of the law. Secondly, there is insufficient evidence to prove that Jiang X’s act of issuing a payment notice was carried out upon Gu X’s consent. Jiang X only confessed that the payment notice was issued after requesting Gu X’s consent during the supplementary investigation, and Jiang X has always confessed that he issued payment notice during the early stages of the investigation, the first instance trial, the second instance and the case reopening stage. The issuance of payment notice was a personal act and did not ask for Gu’s consent. Gu X has always argued that he only asked Jiang X to borrow money from Asiastar, and had no knowledge of Jiang X’s issuing a payment notice to Asiastar, and there is no other evidence in the case that Jiang X issued a payment notice upon the request of others. The evidence that Gu X made a “personal decision” to transfer the funds in the name of Asiastar to Yangzhou Greencool Company is insufficient and does not comply with the first type of circumstance in the legislative interpretation that “using public funds for oneself, relatives, friends, or other natural persons”. Thirdly, the funds involved in the case are always circulating between the accounts of institutions or organizations, and there is no evidence to prove that Jiang X “sought any personal interests” in the process of misappropriating the public funds.

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According to the existing evidence, Jiang X never confessed that he had misappropriated RMB 63 million yuan for personal gain, but based on objective judgments, RMB 63 million yuan was transferred to Yangzhou Greencool Company between institutional accounts in the name of Asiastar, which does not conform to the second type of circumstance in the legislative interpretation that “using public funds in the name of an individual for other institutions”. The institution or organization involved in the case is also not directly related to Jiang X, so there is no evidence to prove that Jiang X has obtained personal interests in the process of misappropriating the public funds, which does not conform to the third type of circumstance in the legislative interpretation that “individuals choose to use public funds for other units or institutions in the name of the institution for personal benefit”. 2. The Effective Protection of Human Rights to Implement the Trial-centered Justice The reopening of this case for new trial has become a public lecture on what rule of law is, conveying to the society at large the positive energy of a state governed by rule of law. From a procedural point of view, from the decision on reopening the case via certiorari to re-sentencing, the trial was conducted in strict accordance with legal procedures. On December 27, 2017, the Supreme People’s Court made a reopening decision, then requested reopening via certiorari and constituted a fivemember collegiate panel (composed of a presiding justice, Pei Xianding, a full-time member of the Supreme People’s Court Adjudication Committee and president of the First Circuit Court, together with Zhang Yongjian, vice-president of the First Circuit Court, and three other presiding judges: Luo Zhiyong, Si Mingdeng, Liu Aitao; Shi Bing and Luo Can serving as the assistant judges, Zhang Yanqing as the court clerk). The collegiate panel have interviewed the accused and their defenders respectively from January 28 to February 5, 2018, then on May 18, 2018, held a pretrial conference. On June 13 to 14, 2018, the collegiate panel held a public hearing, then pronounced a decision in curia on April 10, 2019. The reopening collegiate panel attached great importance to the harmonization of substantive and procedural justice, and the case reopening was conducted in strict accordance with legal procedures from the outset, fully demonstrating various aspects of the trial-centred reform of the criminal procedure system. The first is that the right of defense by the accused and of their defenders is fully guaranteed. In this case, seven members of the accused and seven of their defenders participated in the proceedings. Each of them was given the opportunity to fully expound their views during interviews, pre-trial conference or in the course of the trial. Over the two consecutive days of the trial, the accused and their defenders made a total of 419 speeches, 30 speeches per person. During the nine-hour court debate, the majority of the time was spent by the accused and their defenders in expressing their arguments and defense opinions, and the first round of defense speeches lasted six hours, with one of the defenders spending nearly an hour and a half for his first round of the opinion.

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The second is that the role of the pre-trial conference is effectively played. The pretrial conference in this case has three main functions: to deal with relevant procedural matters, to sort out the evidence adduced in the first instance, and to listen to the views of both the prosecution and the defense on the new evidence. For example, according to the report of the pre-trial conference produced by the collegiate panel, as many as 179 items of evidence in the first instance were adduced, the defense raised objections respectively to Item 24 of Evidence 59 concerning the first count of crime charges, to Item 66 of Evidence 71 concerning the second count of crime charges, to Item 34 of Evidence 49 concerning the third count of crime charges, and the prosecution objected to only 2 of the listed evidence. According to the different charges, the collegiate panel grouped the evidence and gave the parties opportunities to confront and cross-examine these controversies. In the criminal accusation of misreporting the registered capital, five groups of controversial evidence are classified as to Item 24 of Evidence 59, in the criminal charges of illegal as well as non-disclosure of important corporate information, six groups of controversial evidence were classified as to the Item 66 of Evidence 71, seven groups of controversial evidence were classified as to Item 34 of Evidence 49 in the criminal charges of misappropriating funds. This way of burden of proof has not only clarified the scope of the evidence and the manner of parties’ questioning or cross-examination, but also summarized the issue(s) of the dispute, which has laid a solid foundation for improving the quality and efficiency of the trial. The third is to obtain new evidence in accordance with the law and the actual needs of the case. In the process of reopening the case, the Supreme People’s Court, based on the application of the accused and on the actual needs, obtained the following information so as to comprehensively review the evidence and accurately determine the facts: the High-and New-Tech Enterprise Certificate issued by Guangdong Provincial Administration of Science and Technology to Shunde Greencool Company from 2002 to 2004, the investigation of Kelong Electrical Appliances by the China Securities Regulatory Commission in May 2005, the investigation into the cash flow of Kelong Electrical Appliances by KPMG Huazhen Audit Firm. The fourth is that the burden of proof and cross-examination of the evidence submitted by both parties concerned are carefully conducted during the case reopening. In the pre-trial conference, the two parties agreed to include into the court investigation Evidence Information 1 submitted by Gu X, two pieces of evidence information submitted by Zhang X, and seven pieces of evidence submitted by the public prosecution agency as new evidence. After the pre-trial conference, Gu X submitted the Announcement of the Investigation Results of Kelong Electrical Appliances by KPMG Huazhen Audit Firm, which was notarized by the Beijing Chang’an Notary Public Office, and this was also included in the court investigation with the consent of the public prosecutors. Such evidence has played a vital role in the trial of this case. For example, in the first half of the Announcement, the defense believed that Kelong Electrical Appliances owed RMB 293 million yuan to the Greencool Company; the prosecutors believed that the Announcement could not confirm that Kelong Group had owed money to the Greencool Company. The statement as to an abnormal cash flow between Kelong Group and Greencool Company

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during the investigation period must not be ignored. Then the Supreme People’s Court explained the process of cash flow between Kelong Group and Greencool Company by displaying the mathematical calculation, during which Kelong Group suffered a huge loss of at least RMB 592 million yuan. For another example, the stock market charts submitted by the public prosecution and the defense have also confirmed that in May 2005, the stock price of Kelong Electrical Appliances fell first and then rose within a few days. Therefore, it cannot be concluded that the interests of shareholders and the society at large has been seriously harmed. The fifth is to notify relevant witnesses and persons with specialized knowledge to appear in court in accordance with the law. Upon the request of applications of the public prosecution and the defense combined with the actual needs, the Court notified Wei X, then a marketing staff of Kelong Electrical Appliances, and Xie X, then vice chairman of the All-China Federation of Industry and Commerce, to appear in court as witnesses to tell what they knew about the relevant matters, and take the inquiries from the prosecution, the defense and the collegiate panel; Liu X (B), an expert from the Forensic Science Center of the Supreme People’s Procuratorate was also requested to provide the Court with expert opinion on the authenticity of the Technical Review Opinions. All these can be regarded as concrete actions to implement the requirements of encouraging witnesses to testify in court in the criminal lawsuits. The sixth is to exclude the illegally obtained evidence in accordance with the law. Regarding the second charge, the forensic accounting expert opinion issued by the accounting firm during the investigation stage has found out a problem that the invited expert was unqualified for making forensic science identification, and the selection of the forensic science identification did not meet the legal requirements. The testimonies given by four stockholders Chen X (A), Chen X (B), Zhang X (B), and Chen X (C), have found out a shortcoming that the same investigators had been collecting evidence from different witnesses at the same time and the same place, and the inquiries and questioning lasted for more than 24 hours. All these were found procedurally defective, and the evidence should be excluded according to the law. The seventh is that the reasoning of the Decision has been enhanced. The Decision in this case is not only responsive to the major point of views by the public prosecution and the defense, but also evaluative to the reasoning of the first and second instance judgments. In the part “It is ascertained by the Court that…”, there is a section called “Comprehensive Judgment” for the part “Facts about misreporting the registered capital”, “Facts for the illegal and non-disclosure of important information”, “Facts for misappropriating the public funds”, covering separate reasoning for the issues raised by the public prosecution and the defense. In the section “this Court holds … ”, in addition to a generalized reasoning about the opinions brought forth by the public prosecution and the defense, what is right or wrong in the first instance has been commented and errors made in the first instance were itemized into errors of fact and errors of applicable law. In all, the reasoning of Decision made in the case reopening for new trial focused on correcting errors and safeguarding the authority of judicial decisions, and were highly praised for its “profound perspective, high expectation, high level, new ideas, novel styling arrangement and new content”.

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The eighth is to insist on judicial openness in the process of reopening the case. “Justice must not only be achieved, but also be achieved in a visible way.” For the first time, the Supreme People’s Court adopted the “audio-visual + multimedia” approach to achieve openness in a criminal case trial. The reopening and pronouncement of the Decision are all broadcast live through www.chinacourt.org, the China Court Trial Online, the Supreme People’s Court Website and Weibo, which objectively, comprehensively and vividly display the reality of the courtroom trial and the announcement of the Decision, under which justice shines under the sun, therefore the public’s right to know and to supervise are greatly satisfied and this has even been praised as “the rubberneckers have seen the truth”. 3. Strengthening the Protection of Property Rights and Properly Correcting Wrongly Decided Cases in Accordance with the Law Since the 18th National Congress of the Communist Party of China (CPC), the CPC Central Committee, with Comrade Xi Jinping at the core, has attached great importance to the protection of property rights. On November 4, 2016, the CPC Central Committee and the State Council issued the Opinions on Improving the Property Rights Protection System to Protect Property Rights in Accordance with the Law , in which insistence is to be directed at “correcting errors, screening, identifying and correcting a number of property rights disputant cases which have earned strong washbacks, and analyzing a number of property rights infringement cases”. On November 1, 2018, General Secretary Xi Jinping emphasized at a symposium on private enterprises that “we should identify and correct a batch of wrongful cases that violate the property rights”. Thus strengthening the judicial protection of property rights, the rights and interests of entrepreneurs is an important task of the people’s courts at present and in the future. On November 28, 2016, the Supreme People’s Court issued the Opinions on Giving Full Play to the Role of Trial Functions and Effectively Strengthening the Judicial Protection of Property Rights and the Opinions on Properly Handling Historical Property Rights Cases in Accordance with the Law. The former Opinions has specified the “resolute requirements for correcting any mistakes about some property right appeal cases historically suspended for settlement” and the latter made comprehensive provisions on “properly handling historical property rights cases in accordance with the law”. In 2018, the Supreme People’s Court successively issued two batches of 13 characteristic cases in which people’s courts protect property rights and the legitimate rights and interests of entrepreneurs. In this case, the collegiate panel for reopening the case for new trial correctly grasped the working principles of properly handling historical property rights cases in accordance with the law, which are mainly manifested in the following three aspects: Firstly, the Supreme People’s Court has adhered to the principle of truthfulness (the principle of seeking truth from facts). From the perspective of the time of conduct, Gu X and others falsely reported the registered capital in 2002, provided false accounting reports from 2002 to 2004, and misappropriated corporate funds in 2003 and 2005; from the perspective of the time of court trials, the first instance trial was concluded

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in January 2008, the second instance trial was concluded in March 2009, and the reopening was completed in April 2019. The time span for this case lasts about 20 years. In 2004, the economist Lang X accused Gu X, then president of Shunde Greencool Company, of misappropriating the funds of Kelong Electrical Appliances and swiping state-owned assets in the acquisition activities, resulting in a nationally sensational “Lang X–Gu X Debate”; in 2012, after Gu X was released after serving his sentence, he wore a special hat written “I humbly claim that I am completely innocent” and held a press conference, which again aroused the attention of the society; among three cases of property rights against Zhang X (B), Gu X, and Li X brought forth to be tried by the Supreme People’s Court, this case is the most complicated. In the face of dynamic changes in national policies and legal rules, it is necessary to deal with historically, developmentally and objectively the irregularities and their haphazards arising from the operation of private enterprises, and handle them properly in accordance with the law so that fairness and justice can be achieved. For example, the reopening collegiate panel has fully considered the historical background and objective factors for the misreporting of registered capital by Gu X and others during the process of the company’s change of registration and finally did not treat that as a crime. Secondly, the principle of correcting errors in accordance with the law has been upheld. As the basic principle of justice is fact-based and legalistic (on the basis of facts and the law), when the Supreme People’s Court determined the facts on the basis of the principle of evidence, providing false financial reports and misappropriating funds amounting to RMB 63 million yuan were acquitted, as insufficient evidence was provided. In terms of application of the law, the basic principle of “following the old with the lighter punishment” was observed in dealing with the misrepresentation of the registered capital and the provision of false accounting reports; for the misappropriation of corporate funds of RMB 63 million yuan, the legislative interpretation of “misappropriation of public funds for personal use” was applied with reference. And for the misappropriating of the corporate funds of RMB 290 million yuan, the facts and the applicable law were not wrong, only minor adjustment of the sentencing was made. That is to say, in determining whether Gu X and others have misrepresented registered capital, provided false accounting reports, and misappropriated funds of RMB 63 million yuan, Gu X and others were acquitted according to the law, but the first instance sentence that Gu X and Zhang X have misappropriated funds of RMB 290 million yuan were affirmed, and Gu X and Zhang X were found guilty and sentenced in accordance with the law. The final outcome is not as some have expected that case reopening via certiorari means a full reversal. There is only a minor revision in the sentencing part instead of a full reversal. Those to be reversed are reversed and those to be affirmed are affirmed, as the Supreme People’s Court has not dodged the controversy, and has not engaged in “a wind blowing” (one size fits all solution to a problem) so that the authority of the law, fairness and justice are protected to the maximum possible extent. Thirdly, the Supreme People’s Court has adhered to the principle of combining correction and prevention. In this case, the Supreme People’s Court reopened the case via certiorari and instructed the First Circuit Court to form a collegiate panel

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to hear the case, demonstrating the spirit of shouldering responsibility on the side of the Supreme People’s Court in correcting the mistakes in property rights cases in accordance with the law and strengthening its supervision and guidance of the lower courts in handling property rights cases. This correction of errors set an example for the future reopening cases, to wit, if a case can be brought to trial by a higher court, the higher court should take the initiative and bring it to trial in accordance with the law. The reopening of this case has not only corrected the mistakes in an individual case, strengthened the functions of judicial supervision, judicial remedy and unified application of laws, but has also effectively alerted entrepreneurs, guided the whole society, and played the function of judicial supervision to force the prevention of mistakes. The Decision after reopening the case solemnly pointed out in the part concerning the ascertainment of facts that “any corporate manager, including the legal representative or president of the board of directors, without the consent of the board of directors, without any transaction background or business contacts, cannot transfer funds among the affiliated companies, let alone diverting the corporate funds for personal gain”. In the section entitled “the Court holds”, it is solemnly declared that “the socialist market economy is an economy governed by rule of law” and that “the securities system is an important component of the socialist market economy”. “The system of property rights is the cornerstone of the socialist market economy”, “companies and enterprises should observe the law in their business activities, improve their competitiveness through compliance with laws and regulations, and company and enterprise managers should observe the rules, follow the right path and develop their businesses in good faith and in compliance with the law”. The abovementioned expressions indicate a firm stand, a clear orientation, which can be used to set up rules or guidelines for the business, can guide the entrepreneurs to enhance their awareness of adhereing to the laws and regulations, and can guide the privateowned enterprises to operate lawfully and strengthen the enterprise compliance so as to promote the sound development of the market economy. In short, the case reopening and re-sentencing have achieved a profound balance between the legal effect and the social effect through judgment of a case, which has been highly appreciated by all sectors in the society, setting an example for comprehensively promoting the rule of law.

Xianding Pei the Honorable Justice, the full-time member of the Adjudication Committee of the Supreme People’s Court of the People’s Republic of China, the president of the Second Criminal Division and the First Circuit Court of the Supreme People’s Court of the People’s Republic of China. Can Luo Doctor of Laws, assistant judge, the First Circuit Court of the Supreme People’s Court of the People’s Republic of China.

The People v. Sun X (A), Sun X (B) et al. (The Crime against Organizing, Leading and Participating in Organizations of a Triad Nature; the Crime against Intentional Homicide and the Crime against Extortion, etc.): The Applicable Laws for Non-incremental Penalty in Retrial and Withdrawal of Indictment, and Adjudication Method in Case Reopening Yunteng Hu and Su Qi

Rule 1. In cases where a case reopening or retrial is not initiated because of a protest by the people’s procuratorate, the judgment generally shall not increase the punishment of the accused in the original trial. The principle is not to increase the penalty in the case reopening or retrial, and the additional penalty in the case reopening or retrial is the exception and specific reasons should be explained. 2. If the people’s procuratorate violates the statutory conditions for withdrawing the prosecution and withdraws the prosecution in a case that has already been prosecuted, the people’s court shall not allow it to be unfavorable to the protection of the rights of the parties concerned. 3. Where the people’s procuratorate withdrew the prosecution, the prosecution may not be initiated if no new facts or evidence is adduced; if the people’s procuratorate insists on filing a prosecution with the people’s court, the people’s court shall reject the prosecution or acquit the accused. Collegiate Panel: Yunteng Hu, Zhengping Yu and Su Qi (Edited by Xianrong Bao; translated by Daxuan Zheng) Y. Hu (B) · S. Qi The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_2

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4. Where no error in the legally effective judgment was perceived, the people’s court shall not revoke the sentence on its own initiative regardless of whether the sentence has been executed or not; if the sentence is transferred to the people’s procuratorate for another prosecution or retrial after the revocation, the sentence shall not be increased. 5. If a criminal act has not been prosecuted by the judiciary within the statutory time limit, and if the perpetrator has not performed the act of evading the prosecution and has not performed the act that caused the interruption of the prosecution period, the prosecution shall not be performed; if the people’s procuratorate should bring the action that has passed the statute of limitations to the people’s court, the people’s court shall reject the case or decide to terminate the trial after accepting the case; if the conduct that has exceeded the statute of limitations has been punished by an effective judgment and the conviction for a crime has been determined, it shall be retried via certiorari in accordance with the judicial supervision procedure and the accused shall be found not guilty.

Case Information 1. Parties Prosecution Agency in the First Instance: the People’s Procuratorate of Jilin City, Jilin Province The Accused in the First Instance: Sun X (A) The Accused in the First Instance: Sun X (B) The Accused in the First Instance: Sun X (C) The Accused in the First Instance: Qu X (A) The Accused in the First Instance: Zhou X (A) The Accused in the First Instance: Zhou X (B) The Accused in the First Instance: Sun X (D) The Accused in the First Instance: Gao X The Accused in the First Instance: Zou X The Accused in the First Instance: Liang X The Accused in the First Instance: Li X (A) The Accused in the First Instance: Sun X (E) The Accused in the First Instance: Sun X (F) The Accused in the First Instance: Li X (B)

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The Accused in the First Instance: Tao X The Accused in the First Instance: Sun X (G) 2. Procedural History First Instance: No. 56 [2011] Trial, Crim. Division, the Intermediate People’s Court of Jilin City, Jilin Province (dated Nov. 11 of 2011) Second Instance (Death Penalty Review): No. 48 [2012] Final, Crim. Division, the Higher People’s Court of Jilin Province (dated Sept. 4 of 2013) Case Reopening: No. 2 [2016] Reopening, Crim. Division, the Supreme People’s Court (dated Jan. 20 of 2017) 3. Cause of Action The crime against organizing, leading and participating in organizations of a triad nature; the crime against intentional homicide; the crime of deliberate assault; the crime of unlawful detention; the crime against provocation; the crime against extortion; the crime of obstructing official duties; the crime of interfering with making testimony; the crime of unlawful disposal of seized property, etc.

Essential Facts 1. On August 27, 1997, the People’s Court of Tiedong District, Anshan City, Liaoning Province, handled a case prosecuted by the People’s Procuratorate of Tiedong District, Anshan City in which the accused Sun X (A) and Sun X (B) were charged with the crime of intentional injury [hereinafter referred to as the case of Sun X (A) et al in Anshan City], a criminal judgment numbered No. 94 [1997] Trial, Crim. Division, the People’s Court of Tiedong District, Anshan City, was handed down, finding Sun X (A) guilty of the crime against intentional injury, sentenced to three years’ imprisonment with three years’ probation; finding Sun X (B) guilty of crime against intentional injury, sentenced to one year’s imprisonment with one year’s probation. More than 10 years after the judgment became legally valid and the probationary period had expired, the Intermediate People’s Court of Anshan City, Liaoning Province reviewed the case and, on May 14, 2010, issued a review decision numbered No. 5 [2010] Filing, Judicial Supervision Division,the Intermediate People’s Court of Anshan City, and on June 17, 2010, a criminal ruling was made, numbered No. 5 [2010] Final (Retrial), Crim. Division, the Intermediate People’s Court of Anshan City, in which the case numbered No. 94 [1997] Trial, Crim. Division, the People’s Court of Tiedong District, Anshan City was vacated and remanded to the People’s Court of Tiedong District, Anshan City for a new trial. During the time, the case was assigned by

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consultation to the People’s Court of Changyi District, Jilin City, Jilin Province, for retrial, but the People’s Procuratorate of Tiedong District, Liaoning Province refused to withdraw the prosecution. 2. The People’s Court of Kuancheng District, Changchun City, Jilin Province handled a case prosecuted by the People’s Procuratorate of Kuancheng District, in which the accused Sun X (A), Zhou X (A), Gao X, Zou X, Sun X (D), Zhou X (B) et al were charged with the crime of extortion and blackmailing, the crime of illegal detention, the crime of intentional injury, the crime of willful destruction of property (vandalism) etc. [hereinafter referred to as the case of Sun X (A) et al in Kuancheng District]. On March 24, 2004, a criminal judgment numbered No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District was handed down, in which Sun X (A) was found guilty of the crime against illegal detention and sentenced to two years’ imprisonment; Zhou X (A) was found guilty of the crime against illegal detention and sentenced to one and a half years’ imprisonment, and was also found guilty of the crime against intentional injury, sentenced to one year and five months’ imprisonment, totaling two years and six months’ imprisonment; Gao X was found guilty of the crime against illegal detention and sentenced to one year imprisonment, and was also found guilty of the crime of willful destruction of property (vandalism) and sentenced to one year imprisonment, totaling one year and six months’ imprisonment; Zou X was found guilty of the crime against illegal detention, sentenced to one year and five months’ imprisonment, and was also found guilty of the crime against intentional injury and sentenced to one year and five months’ imprisonment, totaling two years’ imprisonment; Sun X (D) was found guilty of the crime against illegal detention, sentenced to one year and five months’ imprisonment; and Zhou X (B) was found guilty of the crime against intentional injury and sentenced to one year and five months’ imprisonment. Many years after the judgment went into effect and the enforcement of the judgment, on March 3, 2009, the Intermediate People’s Court of Changchun City, Jilin Province made a review decision numbered No. 8 [2009] Retrial via Certiorari, Judicial Supervision Division, the Intermediate People’s Court of Changchun City to make a retrial via certiorari of the case. On March 4 2009, the Court made a criminal ruling numbered No. 2 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City to reverse the judgment numbered No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District and remanded the case to the People’s Court of Kuancheng District for a new trial. During the new trial period, the People’s Procuratorate of Kuancheng District, Changchun City applied to withdraw the prosecution. On March 5, 2009, the People’s Court of Kuancheng District issued a criminal ruling numbered No. 80 [2009] Retrial, Crim. Division, the People’s Court of Kuancheng District, Changchun City, allowing the withdrawal of the prosecution. 3. The People’s Court of Kuancheng District, Changchun City, Jilin Province handled a case prosecuted by the People’s Procuratorate of Kuancheng District in which the accused Qu X (A) was charged with the crime against illegal detention [hereinafter referred to as the case of Qu X (A) in Kuancheng District].

The People v. Sun X (A), Sun X (B) et al. …

25

On August 2, 2005, a criminal judgment numbered No. 236 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, Changchun City was handed down, in which Qu X (A) was found guilty of the crime against illegal detention and sentenced to one year’s imprisonment, with one year’s probation. Several years after the judgment went into effect and the enforcement of the judgment, on March 3, 2009, the Intermediate People’s Court of Changchun City, Jilin Province made a review decision numbered No. 7 [2009] Retrial, Judicial Supervision Division, the Intermediate People’s Court of Changchun City to make a retrial via certiorari of the case. On March 4 2009, the Court made a criminal ruling numbered No. 1 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City to reverse the judgment numbered No. 236 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, Changchun City and remanded the case to the People’s Court of Kuancheng District for a new trial. During the new trial period, the People’s Procuratorate of Kuancheng District, Changchun City applied to withdraw the prosecution. On March 5, 2009, the People’s Court of Kuancheng District issued a criminal ruling numbered No. 79 [2009] Retrial, Crim. Division, the People’s Court of Kuancheng District, Changchun City, allowing the withdrawal of the prosecution. 4. The People’s Court of Luyuan District, Changchun City, Jilin Province handled a case prosecuted by the People’s Procuratorate of Luyuan District, Changchun City, Jilin Province, in which the accused Sun X (C) was charged with the crime against illegal detention [hereinafter referred to as the case of Sun X (C) in Luyuan District]. On September 6, 2007, a criminal judgment, numbered No. 186 [2007] Trial, Crim. Division, the People’s Court of Luyuan District, Changchun City, was handed down, in which Sun X (C) was found guilty of the crime against illegal detention and sentenced to two years’ imprisonment. Shortly after the judgment went into effect and the enforcement of the judgment, on March 12, 2009, the Intermediate People’s Court of Changchun City, Jilin Province made a review decision numbered No. 10 [2009] Decision, Judicial Supervision Division, the Intermediate People’s Court of Changchun City to make a retrial via certiorari of the case. On March 13 2009, the Court made a criminal ruling numbered No.3 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City to reverse the judgment numbered No. 186 [2007] Trial, Crim. Division, the People’s Court of Luyuan District, Changchun City, and remanded the case to the People’s Court of Luyuan District for a new trial. During the new trial period, the People’s Procuratorate of Luyuan District, Changchun City applied to withdraw the prosecution. On April 1, 2009, the People’s Court of Luyuan District issued a criminal ruling numbered No. 3 [2009] Retrial, Crim. Division, the People’s Court of Luyuan District, Changchun City, allowing the withdrawal of the prosecution. 5. On April 29, 2008, the Criminal Investigation Bureau of the Jilin Provincial Public Security Administration informed the Criminal Police Detachment of the Public Security Bureau of Jilin City to investigate and handle the mafia-style criminal case involving Sun X (A) and others. On March 19, 2009, the Higher People’s Court of Jilin Province designated the People’s Court of Changyi District

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to hear the case. On November 30 of the same year, the Public Security Bureau of Jilin City merged the aforementioned “the case of Sun X (A) et al in Kuancheng District”, “the case of Qu X (A) in Kuancheng District” and “the case of Sun X (C) in Luyuan District” and had them transferred to the Public Security Bureau of Jilin City for further investigation and prosecuted by the People’s Procuratorate of Jilin City. The People’s Procuratorate of Jilin City then transferred the case to the People’s Procuratorate of Changyi District for prosecution. On May 4, 2010, the People’s Procuratorate of Changyi District prosecuted the case to the People’s Court of Changyi District. On July 26 of the same year, the People’s Court of Tiedong District transferred the “case of Sun X (A) et al in Anshan City” to the People’s Court of Changyi District for trial. On the same day, the People’s Court of Changyi District issued a case referral letter No. 1 [2010] Filing, Crim. Division, the People’s Court of Changyi District. The case was transferred to the People’s Procuratorate of Changyi District. After review, the People’s Procuratorate of Changyi District found that the factual evidence of Sun X (A) and others involved in the mafia-style criminal cases had undergone significant changes, so it applied for a withdrawal of the prosecution, which was approved by the People’s Court of Changyi District. After withdrawing the prosecution, the People’s Procuratorate of Changyi District merged the “case of Sun X (A) et al in Anshan City” into other cases for further review. On October 22 of the same year, the People’s Procuratorate of Changyi District recommended that the case be moved to the People’s Procuratorate of Jilin City to exercise the jurisdiction, and the People’s Procuratorate of Jilin City requested instructions from the People’s Procuratorate of Jilin Province. On November 7 of the same year, the People’s Procuratorate of Jilin Province issued a notice numbered No. 46 [2010] Jurisdiction, Public Prosecution, the People’s Procuratorate of Jilin Province, titled Notice of the People’s Procuratorate of Jilin Province on the Designated Jurisdiction of the Cases Involving Sun X (A) and other 18 Suspects for Organizing, Leading and Participating in the Mafia-style (Triad) Organizations and other Crimes and requested the Higher People’s Court of Jilin Province to designate the Intermediate People’s Court of Jilin City as trial court to hear the case. On the same day, the Higher People’s Court of Jilin Province issued a letter numbered No. 46 [2010] Designated Jurisdiction, Crim. Division, the Higher People’s Court of Jilin Province, appointing the Intermediate People’s Court of Jilin City to hear the case. During the review period by the People’s Procuratorate of Jilin City, the case was twice returned to the Public Security Bureau of Jilin City for supplementing investigation information. On May 16, 2011, the Public Security Bureau of Jilin City ended its investigation and transferred the needed information to the People’s Procuratorate of Jilin City for prosecution. On June 30 of the same year, the People’s Procuratorate of Jilin City filed an indictment, numbered No. 45 [2011] Indictment, Public Prosecution, the People’s Procuratorate of Jilin City, with the Intermediate People’s Court of Jilin City. On November 11, 2011, the Intermediate People’s Court of Jilin City issued a criminal judgment numbered No. 56 [2011] Trial, Crim. Division, the Intermediate

The People v. Sun X (A), Sun X (B) et al. …

27

People’s Court of Jilin City, in which the accused brothers Sun X (A), Sun X (B), Sun X (C) had been renting out stores to sell steel and steel products since the early 1990s in the steel market near Kaixuan Road, Changchun City. On March 12, 1996, Sun X (A), Sun X (B) et al stabbed others with the knives carried with them, resulting in one death, two serious injuries and two minor injuries at Anshan Railway Station, causing serious consequences. However, they were wrongly sentenced for the crime of intentional injury on probation with a finite sentence. After the expiration of the probation period, the accused Sun X (A) never thought about repenting the past, but continued to publicize such remarks as “It’s okay to kill, and there is someone in the judiciary exculpating me from criminal charges”, making a name for himself, and constantly expanding his social influence. In the early 2000s, Sun X (A) began to present himself as gangsters’ Big Brother, and used his steel market as a base, under the disguise of employing people, to have cajoled the accused Qu X (A), Zhou X (A), Zhou X (B), Gao X, Sun X (D), Zou X and other social idlers to serve as thugs, doing evil, dominating certain sector, wantonly carrying out illegal and criminal activities, bullying and mutilating the people, and gradually formed a rather stable organization of a triad nature (mafia-style organization), with Sun X (A) as the leader, Qu X (A), Zhou X (A), Zhou X (B), Gao X, Sun X (D), Zou X as backbone members. In the process of selling steel and steel products, Sun X (A) and Sun X (C) deliberately used large loans and sold building materials on credit as bait to have lured a large number of victims into economic contacts with them. After lending on a usury basis and selling building materials on credit to victims at high prices, they relied on the power of their mafia-style organization by way of illegal detention, extortion, forced trading and other illegal and criminal methods, to solicit or seize money from the victims with abnormally higher prices than the debt owed. By doing so, they grabbed huge economic benefit, amassed huge amounts of money, and used part of the money to support the illegal and criminal activities. The members of this organization obeyed SunX (A)’s words and were quite organizational and disciplined. Sun X (A) used such means as providing financial security and arranging for the members to win over his members to “do bad things” for him. The Sun X (A), Sun X (B) brothers also used bribery to lure some state functionaries or officials to provide protection for their criminal organization. Not only had the illegal and criminal activities of the said organization not received due crackdown, they felt even more reassured and emboldened, and swollen with arrogance. The organization’s criminal arrogance and rampant illegal activities had severely disrupted the social and economic order and public security order of the community, severely violated the victims’ personal and property rights, and the general public began to lose their basic sense of security. In addition, the said organization carried out intentional killings, gathering people to fight, provoking troubles, practiced loan fraud, deliberately destroying property, obstructing official duties, obstructing testimony taking, helping to destroy evidence, and concealing or harboring the criminal proceeds, illegally disposing of seized property, etc. There were one occurrance of illegally disposing of seized property and one occurrance of harboring the criminal

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proceeds, three occurrances of intentional injury, five occurrances of illegal detention, four occurrances of extortion, two occurrances of forced business transactions, two occurrances of fraud, totaling 26 items of criminal facts and 12 occurrances of illegal facts. It was hereby adjudicated that: (1) the accused Sun X (A) was guilty of intentional homicide, sentenced to death, and deprived of political rights for life; he was also found guilty of the crimes of organizing or leading a triad organization, of intentional injury, of illegal detention, of assembling people for fighting, of creating and provoking disturbances, and of extortion, of forced transactions, of loan fraud, of obstructing official duties, and of illegally disposing of seized property, with each to be sentenced to two to twelve years of fixed-term imprisonment, deprived of political rights for two years, and at the same time, RMB 2 million yuan was confiscated together with a fine penalty of RMB 4 million yuan. In all, Sun X (A) was to be executed with death penalty, deprived of political rights for life, together with RMB 2 million yuan in property confiscated and a fine penalty of RMB 4 million yuan; (2) the accused Sun X (B) was sentenced to life imprisonment for the crime of intentional homicide and deprived of political rights for life; was also sentenced to two to six years’ imprisonment separately for the crimes of participating in a triad organization, of illegal detention, of creating and provoking disturbances, of obstructing testimony taking. In all, Sun X (B) was sentenced to life imprisonment and deprived of political rights for life; (3) the accused Sun X (C) was sentenced to three years in prison for the crime of participating in a triad organization; was sentenced to two years in prison for the crime of illegal detention, sentenced to nine years in prison for the crime of extortion, sentenced to three years’ imprisonment for the crime of forced business trading. In all, Sun X (C) was sentenced to 16 years’ imprisonment and a fine of RMB 10 million yuan. The 13 other accused were separately or respectively sentenced to such penalties as fixed-term imprisonment, placed under surveillance, or placed under criminal detention. Sun X (A), Sun X (B) and Sun X (C) respectively appealed against the judgment of the first instance. The Higher People’s Court of Jilin Province held after hearing the case that: the trial proceedings in the first instance were lawful, but the findings that Sun X (A) and Qu X had committed the crime of gathering people for fighting or public brawling and Sun X (C) and Li X (A) had committed the crime of forced business trading should be changed to the crimes of creating and provoking disturbances and the crime of extortion; there was improper sentencing of Sun X (A)’s and Sun X (C)’s conviction of intentional homicide; the facts convicting Sun X (A)’s loan fraud, defrauding, participation in the crime of intentional injury organized by Ge X and the facts convicting Sun X (C)’s participation in mafia-style gang or organization were unclear, and the evidence was insufficient and unreliable; the facts that Sun X (A) had been found to have defrauded Zhang X (B) constituted a contract fraud, but the amount of fraud did not meet the standard of being prosecuted; the facts that Sun X (B)’s red Audi car was to be recovered and RMB 1 million yuan was confiscated from Wang X (C) who was not a party to the case were short of factual and legal basis, which should be vacated. It is hereby adjudged as follows:

The People v. Sun X (A), Sun X (B) et al. …

29

(1) The conviction and sentencing of the accused Sun X (A) for the crimes of organizing and leading a triad organization(mafia-style gang), of illegal detention, of creating and provoking disturbances, of forced business transactions, of obstructing official duties, and of illegally disposing of seized property, as well as the characterization of the crimes of intentional homicide and intentional injury are affirmed; the conviction and sentencing of the accused Sun X (B) for the crimes of participating in a triad organization (mafia-style gang), illegal detention, of creating and provoking disturbances, and obstructing testimony taking, as well as the characterization of the crime of intentional homicide are affirmed; the conviction and sentencing of accused Sun X (C) for the crimes of extortion and blackmail, and illegal detention are affirmed. (2) The sentencing of the accused Sun X (A) and Sun X (B) for the crime of intentional homicide and the sentencing of the accused Sun X (A) for the crime of gathering people for fighting or public brawling (mobbing), loan fraud, defrauding and the sentencing portion of the crime of intentional injury, and the sentencing of accused Sun X (C) for the crimes of participation in a triad organization and the crime of forced business transactions are reversed. (3) The appellant, Sun X (A), was convicted of intentional homicide and sentenced to death, with a two-year suspension of sentence and deprivation of political rights for life; he was also convicted of organizing and leading an organization of a triad nature (mafia-style gang), of intentional injury, of illegal detention, of creating and provoking disturbances, of extortion and blackmail, of forced business transactions, of obstructing official duties, and of illegally disposing of seized property and was respectively and separately sentenced to fixed-term imprisonment ranging from one year to ten years, with deprivation of political rights for two years. A fine of RMB 3 million yuan was also imposed. It is hereby decided that the death sentence with a two-year reprieve shall be executed, political rights for life shall be deprived, and RMB 3 million yuan penalty shall be imposed. (4) The appellant, Sun X (B), was convicted of intentional homicide and sentenced to fifteen years’ imprisonment and two years’ deprivation of political rights; of participating in a triad organization (mafia-style gang) and sentenced to six years’ imprisonment; of unlawful detention and sentenced to two years’ and six months’ imprisonment; of creating provoking disturbances and sentenced to three years’ and six months’ imprisonment; and of obstructing testimony taking and sentenced to four years’ imprisonment. As multiple crimes are concurrently punished, Sun X (B) shall be sentenced to nineteen years’ imprisonment and two years’ deprivation of political rights. (5) The appellant, Sun X (C), was convicted of extortion and blackmail and sentenced to nine years’ imprisonment and also sentenced to two years’ imprisonment for the crime of unlawful detention. As multiple crimes are concurrently punished, the appellant shall be sentenced to ten years and six months’ imprisonment.

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The sentences for the remaining accused in the first instance have also been revised to varying degrees. After the judgment became legally effective, the accused Sun X (A),Sun X (B), Sun X (C) appealed respectively to the Higher People’s Court of Jilin Province and were rejected. The relatives of Sun X (A) and Sun X (B), and Sun X (C) were still dissatisfied, and appealed to the Supreme People’s Court respectively. On December 16, 2015 and December 17, 2015, the Supreme People’s Court made decisions numbered No. 142 [2015] Decision, Judicial Supervision Division, the Supreme People’s Court, No. 143 [2015] Decision, Judicial Supervision Division, the Supreme People’s Court and No. 144 [2015] Decision, Judicial Supervision Division, the Supreme People’s Court to reopen the case for new trial.

Issues 1. Whether a retrial that is not protested by the people’s procuratorate can increase the punishment of the accused in the first instance; 2. Without statutory reasons, can the people’s procuratorate request withdrawal of the prosecution, and whether the people’s court can rule to approve the withdrawal of the prosecution; 3. For public prosecution cases that exceed the time limit for prosecution, if the people’s court of first instance accepts and makes a guilty judgment, how should the retrial or reopening be handled; 4. If no error in the effective first instance judgment has been reversed and the penalty has been fully executed, how to deal with that situation in the retrial or reopening?

Holding On January 20, 2017, the Supreme People’s Court issued a criminal decision numbered No. 2 [2016] Reopening, Crim. Division, the Supreme People’s Court and it was held that: the accused Sun X (A) has intentionally injured the victim Ren X (C), which constituted the crime of intentional injury; Sun X (A)’s use of force or threat of use of force to hinder the state functionaries to perform their official duties in accordance with the law constituted a crime of obstructing official duties; his arbitrary beatings, insults, and intimidation of others were of atrocious circumstances, which constituted the crime of creating and provoking disturbances; the selling-off of the property that had been seized by the judiciary constituted illegal disposal of the seized property. The accused Sun X (B) has illegally detained Jiang X and Sui X in order to obtain debts, which constituted the crime of illegal detention; the willful beating of others constituted the crime of creating and provoking disturbances, and the instigating of others to make false or forged testimonies constituted the crime

The People v. Sun X (A), Sun X (B) et al. …

31

of obstructing testimony taking. The accused Qu X (A) has intentionally injured the victim Ren X (C) and causing minor injuries to the victim Ren X (C), which constituted the crime of intentional injury; the act of illegally detaining Qu X (B) and Jin X constituted the crime of illegal detention; the act of insulting and intimidating others was of atrocious circumstances, which constituted the crime of creating and provoking disturbances; the accused Zhou X (A)’s act of willful assaulting and beating of others constituted the crime of creating and provoking disturbances; the act of extorting a large amount of property from others constituted the crime of extortion; the accused Zhou X (B) has extorted a large amount of property from others, which constituted the crime of extortion; the accused Liang X, which has intentionally hurt the victim Tang X, which constituted the crime of intentional injury; the accused Sun X has illegally detained Jiang X and Sui X, which constituted the crime of illegal detention. For the above-mentioned criminal conduct, criminal liabilities shall be imposed in accordance with the law; as Sun X (A), Sun X (B), Qu X (A), Zhou X (A) and others have committed multiple crimes, they shall be punished in accordance with the law. The trial judgment found that the accused Sun X (A), Sun X (B) committed the crime of intentional homicide, Sun X (A) organized and led a triad organization (mafia-style gang); the accused, Qu X (A), Sun X (B), Zhou X (A), Zhou X (B), Sun X (D), Gao X, and Zou X, participated in a triad organization (mafia-style gang); Sun X (A) extorted and blackmailed Qu X (B); Sun X (A), Qu X (A), Zhou X (A), and Gao X extorted and blackmailed Jin X; the accused Sun X (C) and Li X (A) extorted Zhang X (D); Sun X (C) extorted Zhao X (A); Sun X (A), Qu X (A), Zhou X (A), Zhou X (B), Sun X (D) were found guilty of forced business transactions; the accused Sun X (G) helped destroy evidence; the accused Tao X covered up and concealed the proceeds. For the above findings, the facts were unclear, the evidence was not sufficient, they were to be excluded. The accused Sun X (D) involved himself in the crime of intentionally injuring Ren X (C) on April 28, 2002, and the time limit for prosecution is five years, and he should be prosecuted from April 28, 2002 to April 27, 2007. During this period, Sun X (D) has not committed any act of evading investigation or trial, nor did he commit any new crime that caused the interruption of the prosecution period. The term of limitation for the prosecution of the accused Liang X who involved himself in the crime of intentionally injuring Ge X (A) on July 1, 2002, is five years, and he should be prosecuted from July 1, 2002 to June 30, 2007. In the meantime, Liang X has not committed any act to evade investigation or trial. Although Liang X committed the crime of intentionally injuring Tang X on April 6, 2009, such act occurred outside the time limit for the prosecution, and the time limit for the prosecution of this crime will not be interrupted. The People’s Court of Kuancheng District in its judgment numbered No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District did not find that Sun X (F) had committed the crime of illegally detaining Jiang X and Sui X, but he should be held criminally liable for his criminal conduct.

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The maximum sentence that could be imposed is less than five years, and the period of prosecution shall be five years, which shall be prosecuted from 2000 to 2005. During that period, Sun X (F) had not committed any act of evading investigation or trial, nor had he committed any new offence that would interrupt the period of prosecution for this crime. The accused Li X (B) involved himself in the illegal detention of Zhang X (B) in September 2002, but the People’s Court of Luyuan District in the criminal judgment numbered No. 186 [2007] Trial, Crim. Division, the People’s Court of Luyuan District, Changchun City did not find Li X (B) guilty of this crime. If the above-mentioned conduct is found to be a crime, the period of prosecution is five years, and he should be prosecuted from September 2002 to September 2007. During this period, Li X (B) has not committed any act to evade investigation or trial, nor did he commit any new crime that caused the interruption of the prosecution period for this crime. On January 1, 2008, the Public Security Bureau of Changchun City initiated criminal investigation into the above-mentioned crimes against Sun X (D), Liang X, Sun X (F), and Li X (B), which has already exceeded the time limit for prosecution. In accordance with Subparagraph 2 of Article 15 of the Criminal Procedure Law, Sun X (D), Liang X, Sun X (F), and Li X (B) were acquitted of all charges. The accused Sun X (B) and Sun X (E) were sentenced to two years and six months’ imprisonment for participating in the illegal detention of Jiang X (A) and Sui X, and were sentenced to only two years’ imprisonment for participating in the five crimes of illegal detention, including the illegal detention of Jiang X (A) and Sui X. As found by the criminal judgment numbered No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, the sentence imposed on Sun X (B) and Sun X (E) for the offence of unlawful detention was clearly inappropriate in view of their position and role in the crime, and should be corrected. Sun X (B)’s acts of obstructing the testimony taking of witnesses were not repeated by many persons or by bad means, and did not result in serious consequences; the offence of unlawful detention committed by Sun X (B) was not a serious offence, nor was the offence of shielding Sun X (A). The sentence of four years’ imprisonment for obstructing testimony taking of Sun X (B) was too harsh and should be corrected. All the criminal facts involved in the four criminal judgments numbered No. 94 [1997] Trial, Crim. Division, the People’s Court of Tiedong District, Anshan City; No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District; No. 236 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, Changchun City; and No. 186 [2007] Trial, Crim. Division, the People’s Court of Luyuan District, Changchun City have been determined and the enforcement had been completed. As no errors are contained in fact-finding, application of the law or understanding of policy, the res judicata, the certainty and the authority of the judgments should be respected and upheld. As the courts concerned either reversed the judgments or retried the case, or increased the sentence, this will not only run counter to the law and judicial interpretation, but also contravene the criminal policy of combined harshness and leniency, which is incompatible with the concept of modesty in criminal justice. It is hereby decided that:

The People v. Sun X (A), Sun X (B) et al. …

(1)

(2)

(3)

(4)

(5)

(6)

(7)

33

The judgment by the Higher People’s Court of Jilin Province numbered No. 48 [2012] Final, Crim. Division, the Higher People’s Court of Jilin Province and the judgment by the Intermediate People’s Court of Jilin City, Jilin Province numbered No. 56 [2011] Trial, Cirm. Division, the Intermediate People’s Court of Jilin City, Jilin Province were vacated; The criminal ruling by the Intermediate People’s Court of Anshan City, Jilin Province numbered No. 5 [2010] Final (Retrial), Crim. Division, the Intermediate People’s Court of Anshan City was vacated; The reopening decision of the case for new trial numbered No. 12 [2008] Decision, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, reopening decision numbered No. 7 [2009] Decision, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, criminal ruling numbered No. 1 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City, and No. 3 [2008] Retrial via Certiorari, Crim. Division, the People’s Court of Kuancheng District, and criminal ruling numbered No. 79 [2009] Retrial, Crim. Division, the People’s Court of Kuancheng District, Changchun City were vacated; Reopening decision numbered No. 11 [2008] Decision, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, reopening the case for new trial decision numbered No. 8 [2009] Decision, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, criminal ruling numbered No. 2 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City and criminal ruling numbered No. 2 [2009] Trial, Crim. Division, the People’s Court of Kuancheng District, Changchun City and criminal ruling numbered No. 80 [2009] Ruling, Crim. Division, the People’s Court of Kuancheng District, Changchun City were vacated; Reopening the case for new trial decision numbered No. 10 [2009] Decision, Judicial Supervision Division, the Intermediate People’s Court of Changchun City; criminal ruling numbered No. 3 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City, and criminal ruling numbered No. 3 [2009] Retrial, Crim. Division, the People’s Court of Luyuan District, Changchun City were vacated; The accused, Sun X (A), was convicted of intentional injury and sentenced to one year’s imprisonment; for creating and provoking disturbances, he was sentenced to four years’ imprisonment; for obstructing official duties, he was sentenced to two years’ imprisonment; for illegally disposing of seized property, he was sentenced to two years’ imprisonment. As multiple crimes are concurrently punished, it is decided that he shall be sentenced to eight years and six months’ imprisonment. The accused Sun X (B) was convicted of illegal detention and sentenced to one year and six months’ imprisonment; for creating and provoking disturbances, he was sentenced to three years and six months’ imprisonment; for obstructing testimony taking, he was sentenced to one year and six months’ imprisonment. As multiple crimes are concurrently punished, it is decided that he shall be sentenced to six years’ imprisonment.

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(8)

(9)

(10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21)

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The accused Qu X (A) was convicted of intentional injury and sentenced to two years’ imprisonment; for illegal detention, he was sentenced to one year and six months’ imprisonment; for creating and provoking disturbances, he was sentenced to three years and six months’ imprisonment. As multiple crimes are concurrently punished, it is decided that he shall be sentenced to six years’ imprisonment. The accused Zhou X (A) was guilty of creating and provoking disturbances and sentenced to three years’ imprisonment; for extortion and blackmail, he was sentenced to three years and six months’ imprisonment. As multiple crimes are concurrently punished, it is decided that he shall be sentenced to six years’ imprisonment. The accused Zhou X (B) was guilty of extortion and blackmail and sentenced to three years and six months’ imprisonment. The accused Liang X committed the crime of intentional injury and was sentenced to three years’ imprisonment. The accused Sun X (E) committed the crime of illegal detention and was sentenced to one year and six months’ imprisonment. The accused Sun X (D) was found not guilty. The accused Gao X was found not guilty. The accused Zou X was found not guilty. The accused Sun X (F) was found not guilty. The accused Li X (B) was found not guilty. The accused Li X (A) was found not guilty. The accused Tao X was found not guilty. The accused Sun X (C) was found not guilty. The accused Sun X (G) was found not guilty.

Comment on Rule Since 2012, China has steadily pushed forward a comprehensive adherence to the rule of law, comprehensively deepened judicial system reform, vigorously strengthened judicial safeguards for human rights, attached greater importance to correcting and preventing unjustified cases, and created a favourable social environment for correcting unjustified and false cases. 1. In Cases Where a Retrial is Not Initiated as a Result of a Protest by the People’s Procuratorate, the Decision on Reopening the Case for New Trial Shall Not, as a General Rule, Increase the Penalty of the Accused Who was Tried in the First Instance Procedure The principle of non-increase of penalty on appeal is one of the basic principles followed by various countries in the criminal proceedings. Article 237 of the Criminal Procedure Law clearly provides for the principle of non-increase of penalty on appeal, but also provides that the procuratorial authorities are not bound by the principle of non-increase of penalty on appeal if they initiate a protest at the same time. Though

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the Criminal Procedure Law does not explicitly provide for the principle of the nonincrease of penalty on reopening the case for new trial, but it does stipulate the spirit and value of the principle of the non-increase of penalty. Therefore, the principle of the non-increase of penalty on reopening the case for new trial is clearly stipulated in the Judicial Interpretation on the Application of the Criminal Procedure Law. Article 386 of the Interpretation provides: “Except where the people’s procuratorate protests against an appeal, reopening the case for new trial may generally not increase the penalty of a defendant who was originally tried.” This provision was first embodied in the Specific Provisions on the Procedure for the Opening of Criminal Retrial Cases (for Trial Implementation), which came into effect on January 1, 2002. In accordance with the spirit of the the Criminal Procedure Law and the provisions of the judicial interpretations, the principle of the non-increase of penalty in reopening a case for new trial can be understood in three ways: firstly, in cases where a reopening is initiated as a result of a protest lodged by the prosecution authorities, the reopening for new trial decision is not subject to the principle of the non-increase of penalty on appeal; secondly, in cases where a reopening is initiated as a result of a complaint lodged by the first instance accused, his or her representative or close relative, the reopening for new trial decision may not increase the penalty; and thirdly, in cases where the president of the people’s court at the same level has found an error in the first instance judgment and has initiated a retrial or reopening ex officio, or in cases where the people’s court at a higher level or the Supreme People’s Court has detected an error in the first instance judgment and has initiated a retrial or reopening ex officio, the reopening for new trial decision may increase the penalty of the accused in the first instance, provided that it is strictly limited and in accordance with the legal provisions and spirit of the law. In respect of the aforesaid four cases, the effective judgments numbered No. 94 [1997] Trial, Crim. Division, the People’s Court of Tiedong District, Anshan City, No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, No. 236 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, Changchun City and No. 186 [2007] Trial, Crim. Division, the People’s Court of Luyuan District, Changchun City had been executed. The cases were then brought before the people’s courts at the respective higher levels for trial in accordance with the judicial supervision procedure, which ruled that the original judgments should be vacated and remanded to the people’s court of first instance. During the retrial, the aforementioned latter three cases were withdrawn by the people’s procuratorates that had originally instituted the prosecution and were returned to the public security organs for additional investigation, and the public security organs merged those three cases into the Sun X (A) and others gang-related case, which were then handled jointly. The aforesaid first case was finally transferred to the people’s procuratorate where Sun X (A) and others were involved in mafia-style gang case through legally prescribed procedure, and the people’s procuratorate withdrew the prosecution for the case of Sun X (A) and others involved in a mafia-style gang by means of withdrawing the indictment, and merged it into the first case. After the court hearing, the Court changed the charges and increased the sentences of some of the accused in the first instance, particularly in the case of Sun X (A) and others in Anshan City, where the

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charge of intentional injury was changed to the charge of intentional homicide after the retrial of the aforesaid case. The change from a prison sentence on a probationary basis to a death sentence with reprieve was a dramatic reversal from a life sentence to a death sentence and constituted a serious departure from the facts and the law. In the opinion of the reopening collegiate panel, the facts in the four aforementioned criminal judgments were all punishable and the sentences had been carried out; no error can be found in the fact-finding, in the application of law or in the policy adopted; the procedures were lawful and proper; therefore the res judicata, the certainty and the authority of the judgments should be respected and upheld. The courts involved in those cases have violated the law and judicial interpretations by revoking the sentences and then retrying the accused and increasing their sentences. A specific analysis is made as follows: (1) The Initiation of Retrial or Reopening Proceedings in this Case Does Not Result from a Protest by the Prosecution Authorities According to the relevant provisions of the Criminal Procedure Law, there are three paths for initiating retrial or reopening proceedings: (a) The parties concerned file a petition for retrial or case reopening. Article 241 of the Criminal Procedure Law contains provisions on the submission of appeals by the parties concerned. However, the appeals requested by the parties do not necessarily lead to a retrial or reopening; only after the court has examined the case and found that the petition has satisfied legal requirements, and the court has decided that the retrial or reopening procedure should be initiated, can the case be retried or reopened for new trial. In this regard, Article 242 of the Criminal Procedure Law provides for the circumstances under which the people’s court shall retry the case brought before the court by the parties concerned, or their legal representatives or close relatives. (b) The court makes a decision ex officio. In criminal proceedings, the court is the intermediary, or impartial arbiter, not the party concerned. Pursuant to Articles 243 (1) and (2) of the Criminal Procedure Law, the court may, under certain conditions, initiate a retrial or reopening on its own motion and ex officio: firstly, the presidents of the people’s courts at all levels may initiate a retrial or of their legally effective judgments and rulings through submitting them to the adjudication committee for decision if the said judgments and rulings are found to be erroneous; secondly, the Supreme People’s Court and the people’s courts at a higher level shall have the right to reopen or retry those legally effective judgments and rulings adjudicated by the people’s courts at all levels or the people’s courts at a lower level via certiorari, or instruct the people’s courts at a lower level to retry the aforesaid judgments and rulings if definite errors have been detected. (c) The people’s procuratorate protests against the lawsuit. The protest of the people’s procuratorates is a direct consequence of the initiation of retrial or reopening proceedings, as provided in Article 243 (3) of the Criminal Procedure Law, which states that the Supreme People’s Procuratorate and the people’s

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procuratorates at a higher level shall have the right, in accordance with the judicial supervision procedure, to submit to the people’s court at the same level for a protest against the legally effective judgments and rulings adjudicated by the people’s courts at all levels or the people’s courts at a lower level if definite errors have been detected. It is also regulated that the people’s court that accepts the protest by the people’s procuratorate shall retry the case. Another manifestation that a protest initiates the retrial or reopening procedure is that the people’s courts do not need to issue a retrial or reopening decision for an affirmation. Article 382 of the Judicial Interpretation on the Application of the Criminal Procedure Law states that the people’s courts shall issue a decision on the retrial or reopening of a case that has been decided to be retried or reopened in accordance with the judicial supervision procedure, except in cases where the people’s procuratorate protests against the aforementioned decision. According to Article 386 of the Judicial Interpretation on the Application of the Criminal Procedure Law, a retrial or reopening of a case for new trial initiated by the people’s procuratorate in response to a protest may increase the sentence of the accused who was originally tried, while other retrials, such as those initiated as a result of appeals by the parties or decisions of the people’s courts ex officio, generally may not increase the sentence of the accused. In this case, the retrial or reopening was initiated by the people’s court ex officio, determining that, in general, the sentence or penalty of the accused in the first instance cannot be increased. (2) There are No Special Circumstances in this Case that Would Increase the Penalties of the Accused in the First Instance As mentioned above, in retrial or reopening proceeding initiated by the people’s court ex officio, the sentence of the accused in the original trial may not be increased unless there are circumstances other than “general” ones. There are differences in the understanding of what “general” means at the practical level. One viewpoint is that the word “general” should be linked to the preceding phrase “except for the procuratorial agency’s protest”, meaning that, except for the procuratorial agency’s protest, the retrial or reopening shall not increase the sentence of the accused in the first instance. Another viewpoint is that being “general” is a philosophical concept that refers to everything, or a class of things to which many individual things belong. It also refers to the commonality of things, the antonym of “general” is “special” or “specific”. In general the penalty may not be aggravated, whereas under exceptional circumstances, the increase of penalty may be imposed upon the accused. This view was shared by the collegiate panel during the reopening process, restricting the “exceptional circumstances” to those in which “there are new criminal facts and the people’s procuratorate supplements the indictment”, in accordance with Article

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226 (1) of the Criminal Procedure Law that regulates on non-increase of penalty on appeal. The advantages of doing this can be that: (a) it conforms to the spirit or the principle of non-increase of penalty on appeal, and (b) it is easy to handle the case and can reduce the subjective arbitrariness. In respect of this case, in the reopening process of the aforementioned cases, no “special” or “exceptional” circumstances as “introduction of new facts, or additional prosecution by the people’s procuratorate” are found to exist, thus the collegiate panel has not imposed heavier sentence upon the accused in the first instance. (3) Respect and Uphold for the Stability or Invariability of the Judgments The binding force of the effective judgments pronounced by the people’s courts is the most direct manifestation of the stability or invariability of the judgments, which means that the court has made an effective evaluation and an ultimate decision on the case at hand. This decision binds not only the behavior of both parties, but also the court’s own conduct in dealing with further stages of a trial. In principle, a court cannot arbitrarily revoke or modify a judgment once it had been pronounced. This kind of binding force on the court is also categorized as a kind of self-binding and self-restrainig force. Only by respecting and upholding the stability or invariability of the judgments can the stability of criminal justice be effectively achieved, and the authority of criminal justice be maintained, whereupon the people at large will rest assured of the steady psychological state and living condition, and will be truly guaranteed of the security brought by fair justice. With regard to the case at hand, a number of crimes committed by Sun X (A) and others, as determined by the first instance judgment, have been handled by the people’s courts in accordance with the law, and the penalties imposed have been executed. Upon re-examination, it is clear that there is no error in fact-finding, application of the law and the policy inherent in the criminal justice, therefore the res judicata, the certainty and the authority in the judgment should be respected and upheld. Although the Criminal Law neither expressly provides for the principle of nonretroactivity, nor the principle of “no remorse on the part of the officials”, once a judgment has been handed down by a people’s court, it cannot be lightly changed or altered except for due process requirements or reasons expressly provided in the law, which conforms well to the principle of rule of law. 2. Adherence to Procedural Fairness and Strict Application of the Law to the Withdrawal As to whether the people’s procuratorates can withdraw the indictment and how the people’s courts should handle the decision of the people’s procuratorates to withdraw the indictment, the Criminal Procedure Law is silent on those matters, but the Rules of Criminal Procedure of the People’s Procuratorates (for Trial Implementation) issued by the Supreme People’s Procuratorate and the Judicial Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law both contain detailed provisions in this regard.

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(1) Submission of the Withdrawal of Prosecution Withdrawal of prosecution refers to withdrawal for reasonable causes of all or part of the charges prosecuted by the people’s procuratorate when the prosecution has commenced, and before the people’s court has made its judgment. (a) In respect of the timing for withdrawing the criminal charges, withdrawal commences after the people’s procuratorate has instituted public prosecution of the case, and ends before the people’s court has rendered its judgment. Once the people’s court has rendered the judgment, there is no withdrawal of prosecution. (b) In respect of legal grounds for withdrawal, in accordance with the judicial interpretations by the Supreme People’s Procuratorate, absence of criminal facts, criminal activities committed by others rather than the accused, and the accused not held criminally responsible constitute legally valid reasons for the withdrawal of prosuction. (c) In respect of legal consequences of the withdrawal of prosecution, after withdrawing the prosecution, the people’s procuratorate shall not file another prosecution if no new facts or evidence is adduced. New facts refer to the addition of facts to the original indictment. The said criminal facts may be prosecuted with the same or different counts of crime. New evidence refers to evidence newly collected or investigated that can substantively incriminate the accused by the prosecution agency after the withdrawal of prosecution. (2) Review of the Withdrawal (a) In respect of the review, after the people’s procuratorate has made a decision to withdraw the indictment, the people’s court should focus on two aspects: (i) the timing, to wit, whether the withdrawal by the people’s procuratorate occurred before the judgment is pronounced. If withdrawal occurred after the judgment is pronounced, no withdrawal is allowed; and (ii) factual grounds, to wit, whether there exist such circumstances as absence of criminal facts, criminal activities committed by others rather than the accused and the accused not held criminally responsible. If no such legally required facts are adduced, no withdrawal is allowed. (b) In respect of handling this issue, if the withdrawal is submitted before the judgment is pronounced, and in line with the legal grounds for the decision to withdraw the indictment, the people’s court shall allow the withdrawal, otherwise it may reject this withdrawal. In cases where the people’s court has ruled that the withdrawal should be allowed, and no new facts or evidence is available, even if the people’s procuratorate files the new prosecution, the people’s court shall refuse to accept the case. (3)

The Way to Handle the Withdrawal in this Case

In respect of this case, among the four aforementioned criminal judgments, the last three, namely the case of Sun X (A) et al in Kuancheng District, the case of Qu X (A)

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in Kuancheng District and the case of Sun X (C) in Luyuan District were rendered as a result of the investigations by the Public Security Bureau of Jilin City. In September 2008, the Public Security Bureau of Jilin City, in the course of investigating the case of Sun X (A) and others involved in mafia-style triad-related activities, found out that some trial judges were suspected of having committed a crime, so they considered that errors in the first instance judgment might have occurred. Then after consultations among all parties, the Intermediate People’s Court of Changchun City, after initiating retrial proceedings, ruled that the first instance judgment should be revoked or vacated and be remanded to the people’s court of first instance for a new trial. During the retrial, the People’s Procuratorate of Kuancheng District and the People’s Procuratorate of Luyuan District decided respectively to withdraw their indictments, which were allowed by the people’s courts at the same level. Several cases were incorporated into the case of Sun X (A) and others involved in the mafiastyle triad-related activities, and were re-investigated by the police and re-prosecuted by the people’s procuratorate. In addition, under the circumstance that Sun X (A) and others have been prosecuted by reason of engaging in the mafia-style triad-related activities, the People’s Procuratorate of Changyi District decided to withdraw the prosecution on the grounds that there had been significant changes in the facts and evidence, as the public security authorities had already supplemented more information as to the case of Sun X (A) et al in Anshan City, therefore the Court ruled that this withdrawal should be allowed. After the withdrawal of the prosecution, the charged crimes of intentional homicide by Sun X (A) and Sun X (B) were examined and prosecuted together with the case of Sun X (A) and others involved in mafia-style triad-related activities. In sum, the withdrawal of public prosecution should be consistent with the specific circumstances provided in the law. Any prosecution that does not conform to the specific circumstance required by the law cannot be withdrawn by the people’s procuratorate; if the public prosecution has been withdrawn, the people’s procuratorate shall not pursue in the case any further if no new facts or evidence is adduced. In the present case, the people’s procuratorate has repeatedly withdrawn the prosecution, not on the grounds of absence of criminal facts, criminal activities committed by others rather than the accused, or the accused not held criminally liable. In the case where the prosecution was withdrawn, the re-launch of the public prosecution resulted not from emergence of new facts or evidence, but rather was an attempt to merge a case that had already been tried into a newly investigated case so that the previous crime and the new count of crime could be jointly tried with the purpose of imposing harsher punishment on the accused and making the behavior of the accused Sun X (A) and others more in line with the characteristics of a crime of the mafia-style nature. This kind of decision to withdraw the prosecution runs counter to the law and the judicial interpretations, which is unfavorable to the accused, and not in line with the concept of judicial protection of human rights. However, the relevant courts failed to have performed their review duties in strict accordance with the law, and issued rulings allowing the withdrawal of charges, permitting the people’s procuratorate to re-launch the public prosecution. Therefore, in the case of Sun X (A) and others who were involved in mafia-style triad-related activities, the withdrawal

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of prosecution, the permission to withdraw the prosecution and subsequent series of proceedings involved in the re-investigation, re-prosecution and retrial were all serious violation of the law, and the incorporation of all the relevant facts into the case of Sun X (A) and others who were involved in mafia-style triad-related activities, has aggravated the criminial punishment upon the accused, which can be said to have violated substantive justice. It is noted that there is an opinion believing, although the people’s procuratorate withdraws the indictment “before the people’s court makes a decision”, the people’s procuratorate should not withdraw the case from the indictment during the retrial procedure. Although the Intermediate People’s Court of Changchun City initiated the retrial procedure, and remanded the case to the first instance people’s court for a new trial through reversing the first instance judgment, the people’s procuratorate’s withdrawal of the indictment was permitted by the people’s court, and the case of Sun X (A) and others who were involved in a mafia-style gang-related activities was retried in accordance with the first instance procedure, however the nature of the said three cases as retrial cases does not change, which means that procedure undergone through the aforementioned three judgments, which had been issued before, is naturally different from the first trial procedure. From the perspective of safeguarding the authority of judiciary, protecting the legitimate rights of the accused in the first instance, and effectively restraining the improper exercise of public power, the people’s procuratorate should not withdraw the case from prosecution in the retrial process. The power of procedural justice is particularly strong in this case. Without a the violation of statutory procedures, such as the withdrawal of the indictment, the permission to withdraw the indictment, the present case could not have been retried together with the other mafia-style gang-related cases involving Sun X (A), whereupon the sentence imposed on the accused in the first instance could not have been increased through a retrial or reopening, and the damage to the legitimate rights of the accused in the original trial could not have been occurred. 3. The Adjudication Method in the Retrial or Reopening Shall be Directed at the Jurisprudence (1) The Issue of being Acquitted after Exceeding the Statute of Limitations In this case, as the original judgment found that the criminal activities carried out by the accused Sun X (D), Liang X, Sun X (F), and Li X (B) had exceeded the time limit for prosecution, the said accused were acquitted in accordance with the law in the reopening decision. Someone is puzzled by this decision and believes that the behavior of the accused was found to constitute a crime at the trial stage, but the statute of limitations has expired, in accordance with Subparagraph 8 of Article 241 of the Judicial Interpretation on the Application of the Criminal Procedure Law, a court shall terminate the trial. Why was the accused acquitted? The collegiate panel in the reopening process has made the acquittal decision. The reasons are listed as follows:

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(a) The method of ruling to terminate the trial does not apply to this case. The provisions of Subparagraph 8 of Article 241 of the Judicial Interpretation on the Application of the Criminal Procedure Law apply to the cases launched by the public prosecution in the first instance procedure. The opening of this article provides that “for first-instance public prosecution cases, the people’s court shall make judgments and rulings according to the following circumstances:…”. Although the present case is prosecuted by the public security agency, it is not a case in the first instance procedure. It is a case of reopening for new trial by the Supreme People’s Court after the Supreme People’s Court has made a decision on reopening via certiorari in accordance with judicial supervision procedure to follow a second instance procedure, so the method of making a ruling to terminate the trial does not apply to the present case. (b) In respect of the need for judgment in the reopening for new trial, the accused Sun X (D) participated in the crime of intentional injury of Ren X (C) on April 28, 2002, the accused Liang X participated in the crime of intentional injury of Ge X (A) on July 1, 2002, and the accused Sun X (B) participated in the crime of illegal detention of Jiang X and Sui X in 2000, and the accused Li X (B) participated in the crime of illegal detention of Zhang X (B) in September 2002. All the said cases have exceeded the statute of limitations. The court of first instance should have terminated the trial, but it has made a guilty judgment and was wrongly upheld by the court of second instance. Regarding the guilty judgment made in the original trial, the reversal of this judgment by the collegiate panel in the reopening to being acquitted can be deemed to follow the proper meaning of the principle of making a criminal judgment based upon evidence. The first instance procedure in a public prosecution case is the centre and heart of criminal proceedings, and the procedure is much more detailed and rigorous than the second instance or retrial/reopening procedure. This can be seen, for example, in Article 231 of the Criminal Procedure Law, which explicitly provides that the procedure for the trial of appeal or protest cases in the people’s court of second instance shall apply, mutatis mutandis, to the procedure in the first instance, unless otherwise provided in this chapter. Article 245 (1) of the Criminal Procedure Law states that the people’s courts shall conduct a retrial in accordance with the judicial supervision procedure, and if the case was originally tried in the first instance, the retrial shall be conducted in accordance with the first instance procedure, and the judgment or ruling rendered can be subject to appeal or protest; if the case was originally tried in the second instance, or if the case was brought before the people’s court at a higher level, the trial shall be conducted in accordance with the second instance procedure, and the judgment or ruling rendered shall be final. However, the procedure for reopening a case for new trial is different from the first instance and second instance procedure, enjoying its own unique features. In particular, many reopening cases have already been tried more than one circle of the first instance, the second instance and the reopening. The complexity of the case is unimaginable, and there is no clear guidance to be followed, which prompts the court to check thoroughly the various stages of the legal procedure, to handle the case in a comprehensive manner

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by following general rules of law and jurisprudence. By doing so, unreasonable and irrational judicial decisions cannot be issued and mechanical handling of the case can be avoided. For example, with regard to the offence of intentional injury committed by Liang X, in addition to the aforementioned one case which has exceeded the limitation period, there is another offence of intentional injury committed by Liang X on Tang X on April 6, 2009, but the act occurred beyond the limitation period of the aforesaid offence. After reopening the case for new trial, the collegiate panel in the reopening believes that the original conviction is accurate, but as the counts of crime on intentional injury have reduced from two to one, the penalty needs to be adjusted accordingly, that is, the original sentence of four-year imprisonment was changed to three years’ imprisonment. There is no doubt that this change of sentence should have been made in a judgment, whereas in the said case where the limitation period had expired, the trial would have needed to be terminated in a ruling in accordance with Article 241 of the Judicial Interpretation on the Application of the Criminal Procedure Law. In other words, for Liang X alone, two documents, a criminal judgment and a ruling would have to be produced, which are clearly contrary to the common sense. Of course, some will argue that, since the original sentence that has convicted Liang X to have committed one of the two crimes on intentional injury was adjudicated accurately, in the case-reopening, the judgment of this case can be directly changed with no need to acquit the previous case. The Court in the reopening process holds that this viewpoint deserves to be affirmed, but this is a jointly criminal cases. As like cases are to be treated alike, and taking into account different social evaluation and other factors for an individual who has committed one or two counts of crime, we have elected to treat the accused in the original trial favourably, and have acquitted him of criminal responsibility for the previous crime in a special statement. (2) The Way to Handle the Revocation of the Effective and Executed Judgment of the First Instance Where No Error Has been Detected As mentioned above, in this case, the aforementioned four criminal effective and executed judgments have been revoked by the relevant courts, with some incremental penalty for some of the accused. The collegiate panel in the reopening process believes that there is no error or mistake in fact-findinig, application of law and criminal justice policy in the four effective judgments, and their res judicata should be maintained. The thorny point is how to deal with the relationship between the sentences imposed by the said four effective judgments and those imposed upon new offences. For example, Sun X (A) was sentenced to four years’ imprisonment with reprieve for the crime of intentional injury in the first instance judgment, but was sentenced to four years’ or two years’ imprisonment for the subsequent offence of provoking public brawling or obstructing public affairs. According to the Criminal Law, a person who commits several offences shall be punished concurrently. The issues hereby arise as to how a suspended sentence of fixed-term imprisonment and a finite sentence of imprisonment can be concurrently punished, and whether it

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is a violation of the principle of double jeopardy to concurrently punish an offence imposed by an errorless judgment together with another offence. On the basis of these two considerations, the validity of the four effective first instance judgments is re-affirmed in the decision of the collegiate panel during the reopening process. (a) The collegiate panel makes a confirmation on the validity. That is to say, full expounding is penned in the reasoning part of the Decision after reopening the case for new trial, indicating that the res judicata of the four effective judgments should be maintained. After reopening the case for new trial, the Decision indicates that in four judgments titled No. 94 [1997] Trial, Crim. Division, the People’s Court of Tiedong District, Anshan City, No. 79 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, No. 236 [2005] Trial, Crim. Division, the People’s Court of Kuancheng District, Changchun City and No. 186 [2007] Trial, Crim. Division, the People’s Court of Luyuan District, Changchun City, criminal facts have all been ascertained and the penalty has been executed. As no mistakes have been detected in fact-finding, application of law and criminal justice policy, the res judicata, the certainty and the authority of the judgments should be respected and maintained. The relevant courts have revoked the judgment in the first instance and retried the cases with a heavier sentence for the accused in violation of the law, judicial interpretation, and the criminal justice policy of combining severity with leniency, which is deemed to be inconsistent with the concept of modesty in criminal justice. (b) The collegiate panel revokes the documents that had made the aforesaid judgments invalid. That is to say, in the main part of the Decision, a series of judgment opinions, such as the retrial decision, the retrial ruling, and the permission to withdraw the prosecution that have invalidated the aforesaid four judgments are revoked one by one. For example, the second to fifth items of the Decision state that: “(2)The criminal ruling by the the Intermediate People’s Court of Anshan City, Jilin Province numbered No. 5 [2010] Final (Retrial), Crim. Division, the Intermediate People’s Court of Anshan City was vacated; (3) the retrial decision numbered No. 12 [2008] Retrial, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, retrial decision numbered No. 7 [2009] Retrial, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, criminal ruling numbered No. 1 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City, and No. 3 [2008] Retrial via Certiorari, Crim. Division, the People’s Court of Kuancheng District, and criminal ruling numbered No. 79 [2009] Retrial, Crim. Division, the People’s Court of Kuancheng District, Changchun City were vacated; (4) retrial decision numbered No. 11 [2008] Retrial, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, retrial decision numbered No. 8 [2009] Retrial, Judicial Supervision Division, the Intermediate People’s Court of Changchun City, criminal ruling numbered No. 2 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City and criminal ruling numbered No. 2 [2009] Trial,

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Crim. Division, the People’s Court of Kuancheng District, Changchun City and criminal ruling numbered No. 80 [2009] Ruling, Crim. Division, the People’s Court of Kuancheng District, Changchun City were vacated; and (5) retrial decision numbered No. 10 [2009] Retrial, Judicial Supervision Division, the Intermediate People’s Court of Changchun City; criminal ruling numbered No. 3 [2009] Retrial via Certiorari, Crim. Division, the Intermediate People’s Court of Changchun City, and criminal ruling numbered No. 3 [2009] Retrial, Crim. Division, the People’s Court of Luyuan District, Changchun City were vacated.” In all, if no error has been detected in the first instance judgment that has been revoked and has taken effect, and the sentence has been executed, the case reopening for new trial by the Supreme People’s Court can be conducted either in the manner as the review of the original judgment for error or in the manner as the review of the original judgment during the case reopening. Considering that the vacated original judgment was lawful and fair, we have not retried the criminal conduct of the accused, re-convicted the accused with different counts of crime or imposed heavier penalty on the accused, but rather reaffirmed or restored the validity of the vacated judgment during the reopening process, and revoked each and every one of the judgment opinions that had invalidated the legal effect, which is a more positive and prudent approach.

Yunteng Hu Doctor of laws, the Honorable Justice, the full-time member of the Adjudication Committee of the Supreme People’s Court of the People’s Republic of China, the president of the Second Circuit Court of the Supreme People’s Court of the People’s Republic of China. Su Qi Juris Master (2 or 3-year LL.M.), senior judge, Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China.

Parfums Christian Dior v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce (SAIC) (Administrative Disputes over Reviewing the Rejection of Trademark Applications): Review Procedure and Applicable Legal Standards for International Trademark Applications for Entry into China Kaiyuan Tao and Shu Tong

Rule Where applicants for international registration of a trademark have completed the process of international registration in accordance with the provisions of the Madrid Agreement Concerning the International Registration of Marks and its Protocol, and have performed the obligations of representation and statement under Article 13 of the Regulations for Implementing the Trademark Law of the People’s Republic of China, the application formalities should be deemed basically complete. In the case where only partial views and other formal requirements provided in the Regulations for Implementing the Trademark Law of the People’s Republic of China were lacking in the application documents, the trademark administrative agency shall uphold the spirit of positively fulfilling its obligations under international conventions, and grant applicants a reasonable opportunity to make corrections. According to the government institutional reform plan, the duties and responsibilities of the former Trademark Office of the State Administration for Industry and Commerce, and Trademark Review and Adjudication Board have been uniformly exercised by National Intellectual Property Administration, the People’s Republic of China. Collegiate Panel: Kaiyuan Tao, Chuang Wang and Shu Tong (Edited by Wenyan Ding; translated by Daxuan Zheng and Yi Zheng) K. Tao (B) · S. Tong The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_3

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Case Information 1. Parties Appellant in Case Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Parfums Christian Dior Appellee in Case Reopening (Defendant in the First Instance, Appellee in the Second Instance): Trademark Review and Adjudication Board of SAIC (the State Administration for Industry and Commerce) 2. Procedural History First Instance: No. 3047 [2016] Trial, Adm. Division, Beijing Intellectual Property Court (Beijing 73) (dated Sept. 29, 2016) Second Instance: No. 744 [2017] Final, Adm. Division, Beijing Higher People’s Court (dated May 23, 2017) Application for Reopening the Case: No. 7969 [2017] Ruling, Adm. Division, the Supreme People’s Court (dated Dec. 29, 2017) Case-reopening via Certiorari: No. 26 [2018] Reopening, Adm. Division, the Supreme People’s Court (dated Apr. 26, 2018) 3. Cause of Action Administrative disputes over reviewing the rejection of trademark applications

Essential Facts The disputed trademark with international registration No. 1221382 (see the picture below) is applied by Parfums Christian Dior.

Registered Trademark

The country of origin of the applied trademark is France, and the registration is approved on April 16, 2014; the date of international registration is August 8,

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2014; the owner of the international registration is Parfums Christian Dior, and the designated goods are perfume and intensely perfumed water. After the applied trademark was internationally registered, Parfums Christian Dior, pursuant to relevant provisions of the Madrid Agreement on the International Registration of Marks and Protocol Relating to the Madrid Agreement on the International Registration of Marks, through the International Bureau of Intellectual Property (hereinafter referred to as International Bureau) of the World Intellectual Property Organization (hereinafter referred to as WIPO), by filing up the said mark at the International Bureau, requested for territorial extension of protection in Australia, Denmark, Finland, the United Kingdom, and the People’s Republic of China. On July 13, 2015, the Trademark Office of the State Administration for Industry and Commerce (hereinafter referred to as SAIC) of the People’s Republic of China issued a notice of rejection on the applied trademark to the International Bureau of WIPO, on the ground that the applied trademark was short of distinctiveness, whereupon the application for territorial extension of protection of all the designated products in the People’s Republic of China was rejected. During the legally prescribed period, Parfums Christian Dior applied for review by Trademark Review and Adjudication Board of SAIC. In the opinion of the Trademark Review and Adjudication Board of SAIC, the applied trademark has not played the role of identifying the origin of products, and the distinctiveness inherent in a mark or trademark was missing, therefore Trademark Review and Adjudication Board of SAIC made a decision (No. 13584) on rejecting the request for territorial extension of protection in the People’s Republic of China. Parfums Christian Dior was dissatisfied with the said decision and filed an administrative action against it. In the opinion of Parfums Christian Dior, firstly, the applied trademark falls within the category of three-dimensional mark with specified color, which had been submitted to the Trademark Review and Adjudication Board of SAIC for review, where the Trademark Review and Adjudication Board of SAIC had treated the applied mark as an ordinary trademark, the decision made by the Board was short of factual basis. Secondly, the applied mark is distinctively designed, and had been marketed and promoted for a long time by Parfums Christian Dior, obtaining a strong distinctiveness, therefore the request for territorial extension of protection shall be upheld and approved. However, neither Beijing Intellectual Property Court nor Beijing Higher People’s Court had approved the claims raised by Parfums Christian Dior, on the ground that Parfums Christian Dior failed to make a statement to the Trademark Office of SAIC of the People’s Republic of China within three months from the date of registration in the International Register of the International Bureau of WIPO, that the applied trademark is a three-dimensional sign, and also failed to submit a drawing of the said mark containing at least a three-sided view. Not until the review stage when Parfums Christian Dior was requested to firstly submit the additional statement of reasons had the said company explicitly stated that this is a three-dimensional mark and submitted its three-sided view. Therefore it was proper and appropriate for the Trademark Office of SAIC to review the applied trademark as an ordinary graphic mark under such circumstance that Parfums Christian Dior failed to claim it as a three-dimensional mark and submit the required documents thereof. Whether there is any mistake on

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the side of the Trademark Office of SAIC in registering information of the specified color, trademark form and others should not fall within the adjudication by the courts of first and second instance, Parfums Christian Dior can seek relief by other means. Parfums Christian Dior refused to accept the second instance judgment and applied to the Supreme People’s Court for reopening the case. On December 29, 2017, the Supreme People’s Court made a decision of No. 7969 [2017] Ruling, Adm. Division, the Supreme People’s Court, on reopening this case via certiorari.

Issue The review procedure and applicable legal standards for international trademark applications for entry into China.

Holding After reopening this case via certiorari, the Supreme People’s Court issued a decision of No. 26 [2018] Reopening, Adm. Division, the Supreme People’s Court (dated April 26, 2018), dismissing the first-instance and second-instance judgments and the decision by the Trademark Review and Adjudication Board of SAIC, and requested the Board to make a re-examination decision. The Supreme People’s Court holds that Parfums Christian Dior has completed the international registration procedure for the application of a trademark in accordance with relevant provisions of the Madrid Agreement on the International Registration of Marks and its Protocol, and has performed the obligations of representation and statement under Article 13 of the Regulations for Implementing the Trademark Law of the People’s Republic of China, the application formalities should be deemed basically complete. In the case where only partial view and other formal requirements provided in the Regulations for Implementing the Trademark Law of the People’s Republic of China were lacking in the application documents, the trademark administration office shall uphold the spirit of positively fulfilling its obligations under international conventions, and grant the applicant a reasonable opportunity to make corrections. Firstly, the Trademark Office of SAIC should faithfully record the type of applied trademark as a threedimensional mark on the basis of contents of the representation and statement made by Parfums Christian Dior in the international registration process. Secondly, in the case where Parfums Christian Dior has clarified the type of applied trademark, and only partial views were missing, the Trademark Office of SAIC should fully consider the particularity of the international trademark registration process. Pursuant to the provisions of Article 40 (2) of the Regulations for Implementing the Trademark Law of the People’s Republic of China, the Trademark Office of SAIC can provide Parfums Christian Dior an opportunity to correct the application documents to ensure equal

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and sound protection of the legitimate interests of international registration applicants. In this case, the Trademark Office of SAIC has not faithfully recorded the statement by Parfums Christian Dior of the type of trademark in the international registration process, and has not given Parfums Christian Dior an opportunity to make reasonable corrections; in addition, the Trademark Office of SAIC has arbitrarily changed the type of the applied trademark into an ordinary one, and has made a review decision unfavorable to the parties’ interests in the absence of parties’ claims and factual basis, whereas the Trademark Review and Adjudication Board of SAIC has failed to rectify the aforesaid conduct. All the abovementioned conduct, which is legally and factually unfounded, may prejudice the reasonable expectations of the administrative counterparts. Therefore, the Supreme People’s Court decides to make some corrections.

Comment on Rule 1. Examination of the Facts Underlying the Proceedings for the International Registration of a Trademark In accordance with Article 13 of the Regulations for Implementing the Trademark Law of the People’s Republic of China, where a three-dimensional trademark is to be applied for registration, the application form shall specify the three-dimensional mark and the manner in which the mark is to be used. A drawing that identifies the three-dimensional shape of the mark, including at least a three-sided view, also shall be submitted. In this case, one of the issues between the parties concerned is the specific type of applied trademark. In this regard, the Trademark Office of SAIC recorded the applied trademark in its file information as ordinary trademark, whereas the information in the international registration submitted by Parfums Christian Dior was recorded as a three-dimensional trademark. Since the specific type of the applied trademark is directly related to the review standard of distinctivenes, as the basic facts underlying the proceedings for the international registration of a trademark, the people’s court should, first of all, review those facts mentioned above. It is noted that an application for the international registration of a trademark differs from a domestic application in that procedurally an applicant for international registration of a trademark does not have to re-register it in a designated country. The relevant application documents should be based on the contents of the International Bureau of WIPO at the time of receiving the international application. Therefore, the information on the applied trademark transmitted by the International Bureau to the Trademark Office of SAIC should be the factual basis for the Trademark Office of SAIC to examine and decide whether the request for territorial extension of protection in the People’s Republic of China should be granted. From the perspective of the evidence available in the case at hand, firstly, the registration information for an international trademark application on the official website of the WIPO apparently states that the type of applied trademark is a three-dimensional one, rather than an ordinary

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trademark recorded in the files of the Trademark Office of SAIC, which was used by the Trademark Office of SAIC and the Trademark Review and Adjudication Board of SAIC for their review. On this basis, it can be reasonably inferred that, in the process of applying for territorial extension of protection in the People’s Republic of China, the information conveyed by the International Bureau of WIPO to the Trademark Office of SAIC is consistent with the application information, and the Trademark Review and Adjudication Board of SAIC should also be notified of the aforesaid information, and have the information of the type of above-mentioned trademark recorded in the trademark application file. Secondly, in the course of filing a request for review, Parfums Christian Dior has clarified the type of the applied trademark, and has supplemented the three-dimensional view in the re-examination. Based on the above-mentioned facts, the Trademark Office of SAIC and the Trademark Review and Adjudication Board of SAIC shall deem relevant information recorded in the international trademark registration file as the factual basis for the re-examination and review of the facts in this case. Therefore, the ascertainment of the judicial review procedure in this case has guided the future direction for the determination of basic facts in the process of international trademark registration, that is, the information on the applied trademark transmitted by the International Bureau of WIPO to the Trademark Office of SAIC should be deemed as the basis in the process of administrative and judicial review. 2. Opportunity for the Parties Concerned to Make Corrections in the Application Process of International Registration Article 43 of the Regulations for Implementing the Trademark Law of the People’s Republic of China provides that “an applicant for territorial extension of protection in the People’s Republic of China, requesting to protect three-dimensional signs, color combinations and sound marks as trademarks or protect a collective mark or a certification mark, shall, within three months from the date of registration with the International Register of the International Bureau (of WIPO), submit through the trademark agency established by law, to the Trademark Office (of SAIC) the relevant documents specified in Article 13 thereof. If and when the aforesaid documents are failed to submit within the above-mentioned period, the Trademark Office shall reject the application for territorial extension of protection”. For the new type of objects in the trademark application, such as three-dimensional signs, color combinations, sound recordings, etc., compared with words, graphics and other flat trademarks, certain differences are found in their composition and examination basis. In order to ensure an accurate evaluation of the registrability, the trademark applicant should strictly follow the requirements of the Regulations for Implementing the Trademark Law of the People’s Republic of China, and submit views, samples of sound recordings and other documents in a timely manner. But simultaneously, it is also noted that the Madrid Agreement on the International Registration of Marks and its Protocol are aimed to optimize and simplify the international registration procedures and to facilitate applicants to enjoy trademark protection in required countries at the lowest cost under an international cooperation mechanism.

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Therefore, in the process of examining international trademark applications, we should uphold the spirit of actively fulfilling the obligations of international conventions. In the case where no laws and regulations are violated, we should fully consider the peculiarities of international application procedures, and grant applicants a reasonable opportunity to make corrections. In respect of relevant facts of this case, it occurs to this Court that in the international registration procedures, Parfums Christian Dior has made a representation as to the type of trademark and the manner of its use in accordance with the provisions of the Regulations for Implementing the Trademark Law of the People’s Republic of China, and has submitted a one-sided view of the applied trademark in accordance with the requirements hereof. In this case, Parfums Christian Dior should be deemed to have completed the international registration of the applied trademark in accordance with the provisions of the Madrid Agreement on the International Registration of Marks and its Protocol, and to have performed the obligations of representation and statements under Article 13 of the Regulations for Implementing the Trademark Law of the People’s Republic of China. In the case where the application is only short of some elements involving formalities, such as a partial view, set forth in the Regulations on the Implementation of the Trademark Law, the trademark administration office should, in the spirit of positive fulfillment of its obligations under international conventions, grant applicants a reasonable opportunity to make corrections so that the international application process can be smoothly compatible to the domestic review procedure. 3. Legal Significance of this Case The case at hand was heard in curia on the World Intellectual Property Day, hereby the decision was read in court. A great many domestic and foreign news media, deputies to the National People’s Congress, members of the Chinese People’s Political Consultative Conference, intellectual property law scholars and selected general public, as well as representatives of foreign ambassadors from different countries, had attended the hearing, all of whom were highly appreciative of the decision on this case. China is committed to building an open economic system, vigorously promoting the establishment of bilateral trade zones and a Free Trade Area of the Asia-Pacific, and implementing the Belt and Road Initiative. As businesses and enterprises are going global increasingly, a favorable environment for international trade, investment and protection of intellectual property rights is urgently needed under such circumstance. In order to meet the newer needs of China’s open strategy, we should be more proactive in applying the intellectual property rights system to strengthening the protection of intellectual property rights, and play a greater role in participating in, promoting and even guiding international intellectual property rights protection and rule-making. The Supreme People’s Court, through judicial review of this case, has rectified the incorrect fact-finding made by the trademark administration agency, strengthened the requirements of the legitimacy of administrative procedures, and fully demonstrated the leading role of judiciary in the protection of intellectual property rights. In addition, optimizing international trademark registration procedures serves as an important manifestation of China’s active fulfillment of its obligations

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under international conventions, including the Madrid Agreement on the International Registration of Marks. By providing timely and effective judicial remedies to international trademark applicants, this case represents the protection of the legitimate rights of foreign parties concerned in all-round way, which is conducive to publicizing the achievements of China’s judicial protection on intellectual property rights, actively participating in, promoting and guiding international intellectual property protection and rule-making, and striving to make Chinese courts the preferred forum for international intellectual property dispute settlement trusted by parties concerned.

Kaiyuan Tao Doctor of Laws, the Honorable Justice, Vice-President of the Supreme People’s Court of the People’s Republic of China. Shu Tong Doctor of Laws, senior judge, the Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China.

Valeo Systemes d’Essuyage v. Xiamen Lucas Auto Parts Co. Ltd. and Xiamen Fuke Auto Parts Co. Ltd. (Dispute over Infringement of Invention Patent): Identification of Functional Characteristics and Processing of the Application for the Preliminary Injunction in Litigation Dongchuan Luo and Li Zhu

Rule 1. In the Patent Law, a functional characteristic in a technical solution of an invention or creation refers to the technical feature that does not directly define the structure, component, step, condition or relationship among them, but delineates the structure, component, step, condition or relationship among them by its function or effect on the invention or creation. Where a technical feature already defines or implies a particular structure, component, step, condition, or relationship among them, even if the technical feature also delineates its function or effect, in principle, it shall not fall within the scope of the functional characteristic provided in Article 8 of the Judicial Interpretation of Several Issues Concerning the Application of Law in the Trial of Patent Infringement Disputes (II). 2. In a case where an appeal is lodged against the judgment made in the first instance, the application for the preliminary injunction filed by a party concerned in the first instance procedure shall be subject to the jurisdiction of the people’s court of first instance; if and when the people’s court of second instance accepts this case submitted thereto, the aforementioned application shall be subject to the Collegiate Panel for the Second Instance Trial: Dongchuan Luo, Chuang Wang, Li Zhu, Zhuobin Xu and Xiaolan Ren (Edited by Wenyan Ding; translated by Daxuan Zheng and Yi Zheng) D. Luo (B) · L. Zhu The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_4

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jurisdiction of the people’s court of second instance. If the situation is critical or may cause other potential damage to the applicant, and the people’s court of second instance is unable to make a final judgment within the time limit for processing the application for the preliminary injunction, the said application shall be handled promptly in accordance with the law.

Case Information 1. Parties Appellant (Plaintiff in the First Instance): Xiamen Lucas Auto Parts Co. Ltd. (hereinafter referred to as Lucas Auto Parts Company) Appellant (Plaintiff in the First Instance): Xiamen Fuke Auto Parts Co. Ltd. (hereinafter referred to as Fuke Auto Parts Company) Appellee (Defendant in the First Instance): Valeo Systemes d’Essuyage 2. Procedural History First Instance: No.859 [2016] Trial, Civ. Division, Shanghai IP Court (Shanghai 73) (dated Jan. 22, 2019) Second Instance: No. 2 [2019] Final, Civ. Division, the Supreme People’s Court (dated Mar. 27, 2019) 3. Cause of Action Infringement of invention patent

Essential Facts Valeo Systemes d’Essuyage is the patentee of the Chinese invention patent No. ZL200610160549.2, titled as “Connectors and Corresponding Connection Devices for Wipers of Motor Vehicles”. In 2016, Valeo Systemes d’Essuyage filed a lawsuit with the Shanghai Intellectual Property Court (hereinafter referred to as Shanghai IP Court), claiming that Lucas Auto Parts Company and Fuke Auto Parts Company have, without any authorization by Valeo Systemes d’Essuyage, manufactured, sold, and promised to sell the wiper products manufactured and sold by Chen X, which has fallen into the scope of protection of patent rights enjoyed by Valeo Systemes d’Essuyage. Thereafter Valeo Systemes d’Essuyage requested Shanghai IP Court to order Lucas Auto Parts Company, Fuke Auto Parts Company, and Chen X to stop the infringement, compensate his loss and pay for reasonable expenses incurred by

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the said company, which is temporarily calculated at RMB 6 million yuan. Later Valeo Systemes d’Essuyage applied Shanghai IP Court to make a partial judgment, finding that the conduct of Lucas Auto Parts Company, Fuke Auto Parts Company and Chen X shall constitute infringement and ordering them to stop the infringement. In addition, Valeo Systemes d’Essuyage also filed an application for the preliminary injunction, requesting Shanghai IP Court to rule Lucas Auto Parts Company, Fuke Auto Parts Company, and Chen X to stop the infringement forthwith. Shanghai IP Court issued a partial judgment on January 22, 2019, finding that Lucas Auto Parts Company and Fuke Auto Parts Company shall constitute infringement and ordering them to stop the infringement, whereas the Court failed to handle the application for the preliminary injunction. Lucas Auto Parts Company and Fuke Auto Parts Company were dissatisfied with the partial judgment and appealed to the Supreme People’s Court, requesting the said court to vacate the partial judgment and dismiss the claim to stop the infringement made by Valeo Systemes d’Essuyage.

Issues 1. Whether the alleged infringing product falls within the scope of protection of the Patent Claim I; 2. How to handle the application for the preliminary injunction in this case?

Holding After hearing the case, the Supreme People’s Court holds that: 1. With Regard to Whether the Technical Features of “in the Stated Closed Position, the Stated Safety Buckle (Catch) Extends towards the Stated Locking Element to Prevent Elastic Deformation Hereof and Lock the Connector Described Therein” are Functional Characteristics and Whether the Alleged Infringing Products Possess Such Characteristics Firstly, whether the technical features can be defined as functional characteristics. In the Patent Law, a functional characteristic in a technical solution of an invention or creation refers to the technical feature that does not directly define the structure, component, step, condition or relationship among them, but delineates the structure, component, step, condition or relationship among them by its function or effect on the invention or creation. Where a technical feature already defines or implies a particular structure, component, step, condition, or relationship among them, even if the technical feature also delineates its function or effect, in principle, it shall not fall within the scope of the functional charateristic provided in Article 8 of

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the Judicial Interpretation of Several Issues Concerning the Application of Law in the Trial of Patent Infringement Disputes (II), therefore it shall not be used as a functional charateristic for infringement comparison. The aforementioned technical features actually define the positioning relationship between the safety buckle (catch) and the locking element, and imply a specific structure: “the safety buckle extending towards the locking element”, with a role of the said positioning and structure being to “prevent elastic deformation of the locking element and lock the connector”. According to this positioning and structural relationship, in combination with the specification of the alleged patent claims and its attached drawings, paragraph [0056] in particular of the specification in the patent claims regarding “the connector is locked by the inner surface of the vertical sidewall of the clasp, the inner surface extending along the outer surface of the clasp, therefore the buckle prevents the clasp from laterally deforming outward of the connector, so the connector cannot be released from the hook-shaped end”, an ordinary technician skilled in the art can understand when the gap or distance between the extension in “the safety buckle extending towards the locking element” and the outer surface of the locking element is sufficiently small, the effect of preventing the elastic deformation of the locking element and locking the connector can be achieved. It can be seen that the aforementioned technical features are characterized by defining both a particular position and structure and the function of that position and structure, and that only by combining the specific position and structure with their function can we clearly define the contents of the said position and structure. Although this technical feature of “position or structure + functional description” contains description of the function, it is a positioning or structure feature in nature, instead of a technical feature stipulated in Article 8 of the Judicial Interpretation of Several Issues Concerning the Application of Law in the Trial of Patent Infringement Disputes (II). Secondly, whether the alleged infringing product possesses the aforementioned technical features. The aforesaid technical features in the Patent Claim I not only define the position and structural relationship between the safety buckle (catch) and the locking element, but also describe the function of the safety buckle (catch), which can play a limiting role in determining the positioning and structural relationship between the safety buckle (catch) and the locking element. They are not functional characteristics, the determination of the position, the structure and the limiting function should be considered when ascertaining the patent infringement. In the case at hand, there are a pair of bulges on both sides of the wall inside the surface of the safety buckle (catch) of the alleged infringing product, which are perpendicular to the side wall of the projection, when the safety buckle (catch) is located in the closed position, the bulges in the sidewall towards the outer surface of the elastic element, can play a role in limiting the deformation or the extension of the elastic element, locking the elastic element and preventing the wiper arm from coming out of the elastic element. As for the alleged infringing product, the description that when the safety buckle (catch) is located in the closed position, the projections or bulges on the inner

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surface of the wall on both sides of the safety buckle, which are perpendicular to the sidewall, would face the elastic element, is deemed as a form of “the stated safety buckle (catch) extending from the stated locking element” in the Patent Claim I, achieving the function of “preventing the elastic deformation of the locking element and locking the connector”. Therefore, the alleged infringing product possesses the aforementioned technical features, and falls within the scope of protection of the Patent Claim I. On the basis that the above-mentioned characteristics are functional characteristics, Shanghai IP Court found that the infringing product possesses the equivalent technical features. Deviations in the comparison method and conclusion could not affect the decision of patent infringement in this case. 2. With Regard to How the Application for the Preliminary Injunction in Litigation Can be Handled by the People’s Court During the first instance of this case, Valeo Systemes d’Essuyage requested Shanghai IP Court to issue a preliminary injunction, ordering Lucas Auto Parts Company, Fuke Auto Parts Company and Chen X to stop infringing the patent right, and provide corresponding guarantee. After the court of first instance made a partial judgment in favor of the patentee’s claim to stop the infringement of the patent right, the application for the preliminary injunction in this case had not yet been handled, and this part of judgment was retried in the procedure of second instance. In respect of how to handle the above-mentioned application for the preliminary injunction requested by Valeo Systemes d’Essuyage, the Supreme People’s Court holds: Firstly, in respect of the jurisdiction over the application for the preliminary injunction in litigation in this case, in a case where an appeal is lodged against the judgment made in the first instance, the application for the preliminary injunction filed by a party concerned in the first instance procedure shall be subject to the jurisdiction of the people’s court of first instance; if and when the people’s court of second instance accepts this case submitted thereto, the aforementioned application shall be subject to the jurisdiction of the people’s court of second instance. In this case, the Supreme People’s Court has accepted this case, whereupon the application for the preliminary injunction shall be subject to the jurisdiction of the Supreme People’s Court. Secondly, in respect of the specific manner of handling the application for the preliminary injunction in litigation in this case, the special circumstance in this case is that, although the court of first instance had issued a partial judgment to stop the infringement of the patent right, the said judgment had not come into effect, and the patentee continued to insist on his application for the preliminary injunction in the first instance procedure. Under such circumstance, the people’s court of second instance may take the following situations into consideration and handle the aforementioned application accordingly: where the situation is critical or may cause other damage, and the application of the patentee for the preliminary injunction cannot be handled within the processing period by the people’s court of second instance, the application for the preliminary injunction shall be processed separately, and a ruling shall be made in time according to the law; where the requirements of the preliminary injunction are met, the injunctive measures shall be taken in time. At this time, the

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judgment of the people’s court of first instance had determined the constitution of infringement, whereupon the people’s court of second instance may review the application for the preliminary injunction on the basis of the facts without any guarantee. If the people’s court of second instance can make a final judgment within the time limit for processing the application for the preliminary injunction, it shall make a timely judgment and reject the application for the preliminary injunction. In the case at hand, Valeo Systemes d’Essuyage insisted that Shanghai IP Court order Lucas Auto Parts Company and Fuke Auto Parts Company to stop infringing the patent right by way of applying for the preliminary injunction, whereas the evidence was insufficient to prove that an emergency that may cause damage to Valeo Systemes d’Essuyage exists, and as the Supreme People’s Court has rendered a decision in court, which has already become legally effective, it is not necessary to make another order to stop the infringement of the patent right. Therefore the application of Valeo Systemes d’Essuyage for the preliminary injunction shall be denied, it is hereby adjudicated that the appeal shall be rejected and the judgment made in the first instance shall be affirmed.

Comment on Rule The case was heard by the Intellectual Property Division of the Supreme People’s Court when the “first gavel” was banged, and the decision was pronounced in court, attracting extensive domestic and international concern. For the first time, this decision has elucidated the criteria for determining functional characteristics in depth, and clarified the relationship between application for preliminary injunction in litigation and the cessation of infringement in a partial judgment. It is of great significance for guiding the adjudication of patent infringement and improving the mechanism of patent protection throughout the judiciary. 1. Criteria for Judging Functional Characteristics (1) Legal Features of Functional Characteristics In the Patent Law, a functional characteristic is a technical solution that is defined by the function, rather than the structure, of an invention or creation. A functional characteristic is a distinctive feature of the technology, which follows a special method for comparing the infringement. If we look only at the wording of the functional characteristic, it seems that it should be understood as covering any possible structure or means that can perform the function. However, such an understanding may extend the protection of the patent claims to technical means not contemplated by the applicant at the filing date. Therefore, the scope of patent protection does not correspond to the technological contribution by the applicant. In order to clarify the defining content of functional characteristics and make the scope of protection of patent claims consistent with the applicant’s technological contribution, Article 4 of

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the Judicial Interpretation of Several Issues Concerning the Application of Law in the Trial of Patent Infringement Disputes (II) limits the content of functional characteristics to “specifications and specific embodiment of that function or effect described in the attached drawings and their equivalents”. Subsequently, Article 8 of the Judicial Interpretation of Several Issues Concerning the Application of Law in the Trial of Patent Infringement Disputes (II) further clarifies the method of making comparisons of the functional characteristics when making infringement comparisons. The second paragraph of the said article provides, “Compared with the technical features described in the specification and attached drawings that are indispensable for the performance of the functions or realization of effects mentioned in the preceding paragraph, the corresponding technical features of the alleged infringing technical solution can be determined by the people’s court on the basis of basically the same means, the same function, and the same effect, and whether an ordinary technician skilled in the art can think of them without creative work when the alleged infringement occurs. When all these conditions are met, the people’s court shall decide that the corresponding technical features are identical or equivalent to the functional characteristics.” Therefore, it can be observed from those two Judicial Interpretations that two important features stand out among the provision of functional characteristics: first, the coverage of functional characteristic is limited, which includes only the specific or equivalent way of performing the function or achieving the effect given in the patent specification and attached drawings. Second, the scope of equivalent functional characteristic is limited, and the determination of the equivalence at the occurrence of any infringement is directed at the technical means indispensable to perform the function or achieve the effect, and is limited to whether the technical means are basically the same, whether the same function can be performed or the effect achieved. Therefore, whether a feature is a functional characteristic is directly related to the protection scope of the alleged patent claims. In this sense, the functional characteristic is not a purely factual concept, but a legal concept, whose essence is based on the principle that the protection scope of the patent claims is consistent with the applicant’s technical contribution, and a strict literal interpretation is to be adopted for construing the language or wording and the equivalence in the patent claims. (2) Specific Criteria for Determining Functional Characteristics Article 8 (1) of the Judicial Interpretation of Several Issues Concerning the Application of Law in the Trial of Patent Infringement Disputes (II) provides the criteria for determining functional characteristic that “Functional characteristic is a technical feature that is limited by the function performed or the effect achieved in the invention or creation by a structure, component, step, condition, or relationship among them, except that an ordinary technician skilled in the art can directly and explicitly determine the specific means of performing the above-mentioned function or achieving the aforementioned effect simply by reading the patent claims”. Where the said provisions have defined the meaning of functional characteristic from both positive and negative aspects, due to the complexity of the practical problems, there is still a great

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deal of issues over how to make a judgment on the functional characteristics. The core of those issues lies in the specific criteria for judging functional characteristics. In order to resolve this issue, we should first understand the specific types of technical features that involve function or effect in practice, then resolve the issue combined with an anlysis of the legal substance of functional characteristics. In practice, three main types of technical features involving function or effect come into existence, but not any feature that describes the function or achieves the effect is a functional characteristic. The first type concerns those that limit only the function or effect of the technical feature without limiting the structure, component, step, condition, or relationship among them. This type of technical feature usually does not involve any structure, components, steps, conditions, etc., but any technician skilled in the art can understand such technical features as specific structure, components, etc., on the basis of the function performed or the effect achieved by the said technical feature and the specific means of performing the function or achieving the effect described in the specification and attached drawings. For this reason, this type of technical feature may have the possibility of exceeding its literal scope of technical contribution, thereby it becomes the target of constraint particularly provided in the aforementioned Judicial Interpretations. This type of technical feature is a typical functional characteristic in the legal sense. The second concerns those that limit not only the structure, component, step, condition or relationship among the technical features, but the function or effect of the technical feature as well, whereas the said function or effect is an inevitable outcome of the structure, component, step, condition or the like. The function or effect described therein is only an objective record of the function or effect that the structure, component, step, condition, etc. must have, and therefore the function or effect is not substantially limited to the technical feature. Although such a feature appears to describe a function or an effect, the essence of the technical feature is a characteristic of structure, component, step, or condition, and the function or effect described therein is not materially limited to the invention. This type of technical feature usually does not have the possibility of exceeding its literal scope of technical contribution, and therefore is not treated as a functional feature in the sense of the aforementioned Judicial Interpretations. Therefore, this type of technical feature is only in the form of a functional characteristic, and is not a functional characteristic in the legal sense. The third concerns both the structure, component, step, condition or relationship among the technical features described therein and the function or effect it serves, and only when the said structure, component, step, condition or relationship is associated with the function or effect it enjoys can those factors be identified. This case provides a good example of such technical features. The technical feature at issue is that “in the stated closed position, the stated safety buckle (catch) extends towards the said locking element to prevent the elastic deformation hereof and lock the connector described therein”. This technical feature is characterized by both a specific orientation and construction—“the stated safety buckle (catch) extends towards the stated locking element”, and the function hereof —“to prevent elastic

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deformation of the said locking element and lock the connector described therein”. Moreover, the said orientation and structure and their function cannot be separated from each other, and only when they are understood together can it is possible to clearly define the specific content of the orientation and structure. In this type of technical feature, the function or effect it achieves is essential for understanding the structure described therein, and limitations on orientation, structural relationship and function should all be taken into account in determining infringement. However, in essence, the description of the function or effect in the technical feature is intended to confine the particular structure, component. step, condition and relationship, whereas it is not intended to cover all means of achievement of the function or effect described herein. Therefore, this type of technical feature usually does not have the possibility of exceeding its literal scope of technical contribution, and is not a functional characteristic in the legal sense. From the above analysis, it can be seen that only those technical features that only define the function or effect of the technical feature, but not the structure, component, step, condition or relationship, etc., can be considered as functional characteristics in the legal sense. As stated in the decision of this case, “the functional characteristic in a technical solution of an invention or creation refers to the technical feature that does not directly define the structure, component, step, condition or relationship among them, but delineates the structure, component, step, condition or relationship among them by its function or effect on the invention or creation. Where a technical feature already defines or implies a particular structure, component, step, condition, or relationship among them, even if the said technical feature also delineates the function or effect it achieves, in principle, it shall not fall within the scope of the functional characteristic provided in the aforesaid Judicial Interpretations, thereby it shall not be used as the functional characteristic for the infringement comparison”. 2. With Regard to How the Court of Second Instance Handles the Application for the Preliminary Injunction The patentee in this case requested Shanghai IP Court to issue a preliminary injunction to stop the Defendant from infringing the patent right. When the appeal was filed to the Supreme People’s Court, Shanghai IP Court had not yet dealt with the application for the said preliminary injunction. Therefore, this case involves the jurisdiction and handling of the application for the preliminary injunction in litigation made by the party concerned in the first instance. With regard to the jurisdiction over the application for the preliminary injunction in litigation, as the purpose of the preliminary injunction is to provide temporary and convenient protection to the petitioner and protect the interests of the respondent at the same time, the people’s court should not only deal with the application for the preliminary injunction in a timely manner, but also be attentive to the opinions of both parties concerned when necessary, so as to ensure that the handling of the application for the preliminary injunction is consistent with the outcome of the decision. Therefore, when the court of first instance accepts an application for the preliminary injunction in the course of proceedings, it should deal with it promptly. Where the judgment in the first instance has been rendered, one of the parties concerned has

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lodged an appeal and the court of second instance has accepted the case submitted thereto, the application for the preliminary injunction should be subject to the jurisdiction and be handled by the court of second instance rather than the court of first instance. Therefore, the decision on this case takes “the people’s court of second instance has accepted this case submitted thereto” as the time period to determine the jurisdiction over the application for the preliminary injunction in the legal proceedings. In a case where an appeal is lodged against the judgment made in the first instance, the application for the preliminary injunction filed by a party concerned in the first instance procedure shall be subject to the jurisdiction of the people’s court of first instance; if and when the people’s court of second instance accepts this case submitted thereto, the aforementioned application shall be subject to the jurisdiction of the people’s court of second instance. With regard to the specific treatment of the application for the preliminary injunction in litigation, in the case at hand, the patentee applied for a preliminary injunction to order the Defendant to stop infringement of the alleged patent right. There is overlap between the core content of the said application and the partial judgment made by the court of first instance, that is, finding the Defendant’s conduct constitutes infringement of the patent right and ordering the Defendant to stop his infringement; in addition, there are also functional similarities in clarifying the legal relations between the parties concerned as expeditiously as possible, and improving the efficiency of dispute resolution. However, as two different institutional designs, an application for the preliminary injunction to stop the infringement enjoys its unique value. For example, when there is an emergency in which the applicant’s interests has been infringed or there are other circumstances which may cause damage to the applicant, whereas a partial judgment on the stop of infringement has not yet been effective as it is under appeal, an application for the preliminary injunction in litigation to stop the infringement can function forthwith and offer better protection to the patent right. In particular, as there are no provisions in China’s civil procedure law for the interim enforcement of judgment that has not yet entered into force, the above-mentioned preliminary injunction can fill in this gap and function as an interim enforcement. Subject to the above-mentioned considerations, the decision in this case has explicitly explained the relationship between the application for the preliminary injunction in litigation and the partial judgment on the stop of infringement, and underlined the unique value of the application for the preliminary injunction in litigation, thus encouraging the people’s courts, while making a partial judgment on the stop of infringement, to be in favor of the aforesaid application filed by the patent owner, which can optimize the judicial protection mechanism of patent right, and enhance the quality and efficiency of such judicial protection. As the “first gavel” was banged by the Intellectual Property Division of the Supreme People’s Court, the hearing of this case marks a sound launch of the unified appeal mechanism of patent and other technical cases. The decision in this case has clarified such substantive issues as the interpretation of functional characteristics, and resolved such important procedural issues as the preliminary injunction and

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the partial judgment, exerting a far-reaching influence on the improvement of the judicial protection mechanism of technical cases.

Dongchuan Luo Doctor of Laws, the Honorable Justice, Vice-President of the Supreme People’s Court of the People’s Republic of China, the president of Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China. Li Zhu Doctor of Laws, senior judge, Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China.

Yiyang Investment Company Ltd. (Dandong City) v. The Intermediate People’s Court of Dandong City, Liaoning Province (Application to the Intermediate People’s Court of Dandong City for State Compensation Resulting from Wrongful Enforcement of the Judgment): Elements and Liability for Wrongful Enforcement of Court Judgment Kaiyuan Tao and Erjun Zhu

Rule In a case where the people’s court has committed an erroneous act in the enforcement of a judgment, which has already resulted in harm or damage to the enforcee who has been found to be insolvent and unable to make any further payment, the state compensation may be awarded even if the enforcement proceeding has yet to be completed.

Collegiate Panel: Kaiyuan Tao, Erjun Zhu, Jinlong Huang, Ke Gao and Qing Liang (Edited by Deqiang Han; translated by Daxuan Zheng and Yi Zheng) K. Tao · E. Zhu (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_5

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Case Information 1. Parties Petitioner (Claimant for State Compensation): Yiyang Investment Company Ltd. (Dandong City) (hereinafter referred to as Dandong Yiyang Investment Company) Respondent (Institution Obligated to Make State Compensation): the Intermediate People’s Court of Dandong City, Liaoning Province 2. Procedural History Active Compensation (Self-initiated Compensation): No decision on the state compensation has been made by the Intermediate People’s Court of Dandong City (Dandong Yiyang Investment Company had applied for state compensation since 2009) Compensation by State Compensation Committee: No. 29 [2015] Decision, State Compensation Committee, the Higher People’s Court of Liaoning Province (dated Apr. 27 of 2016) Case Reopeninng: No. 3 [2018] Reopening via Certiorari, State Compensation Commission, the Supreme People’s Court (dated Jun. 29 of 2018) 3. Cause of Action State compensation resulting from wrongful enforcement of the civil judgment

Essential Facts On November 7, 1997, Dandong Branch of the Bank of Communications entered into a loan contract with Dandong Tyre Factory, agreeing that the latter would borrow RMB 4.22 million yuan with monthly interest rate of 7.92‰ from the former. On June 7, 2004, the creditor’s right was transferred to Shenyang Office of China Cinda Asset Management Company, and was later acquired by Dandong Yiyang Investment Company, who filed a civil lawsuit in the Intermediate People’s Court of Dandong City, Liaoning Province, requesting Dandong Tyre Factory (Liaoning Province) to repay the money. Upon the hearing of the case, the Intermediate People’s Court of Dandong City (Liaoning Province) made a civil ruling of No. 32–1 [2007] Trial, Civ. Division, the Intermediate People’s Court of Dandong City (dated May 23, 2007), on the request of Dandong Yiyang Investment Company for property preservation, whereupon the said court had frozen the bank deposits totalling RMB 10.5 million yuan of Dandong Tyre Factory or seized the factory’s property in corresponding value.

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On the next day, the Intermediate People’s Court of Dandong City issued a Notice of Assistance to the Bureau of Land and Resources of Dandong City, requesting to seize six plots of lands possessed by Dandong Tyre Factory. On June 29, 2007, the Intermediate People’s Court of Dandong City made a judgment of No. 32 [2007] Trial, Civ. Division, the Intermediate People’s Court of Dandong City, ruling that Dandong Tyre Factory shall make a payment of RMB 4.22 million yuan and corresponding interest thereon totalling RMB 6,209,022.76 yuan to Dandong Yiyang Investment Company. After the judgment came into effect, Dandong Tyre Factory had not actively fulfilled its obligations, thereby Dandong Yiyang Investment Company applied to the Intermediate People’s Court of Dandong City, Liaoning Province for compulsory enforcement. On November 19, 2007, a decision was made at the 51st Mayor’s Executive Meeting of the People’s Government of Dandong City, in response to matters regarding the realization of assets, the placement of employees and the reimbursement of debts by Dandong Tyre Factory, instructing State-owned Assets Supervision and Administration Committee (Dandong City), together with Dandong Land and Resources Bureau, Dandong Finance Bureau and other government departments to work out a practicable implementation plan in accordance with the principles determined at the Executive Meeting for the listing of lands possessed by Dandong Tyre Factory to ensure a smooth transfer of lands. On November 21, 2007, Dandong Land and Resources Bureau announced in the Dandong Daily that lands of Dandong Tyre Factory (Parent Plant) were listed for public sale or transfer. On December 28, 2007, the Property Rights Trading Center of Dandong City announced that the lands where the boiler room and the nursery of Dandong Tyre Factory were located were to be listed for public sale or transfer. On January 30, 2008, the Intermediate People’s Court of Dandong City made civil rulings of No. 53–1 and No. 53–2 [2007] Filing & Enforcement Division, the Intermediate People’s Court of Dandong City, lifting the seizure of three plots of lands possessed by Dandong Tyre Factory. Thereafter, the aforesaid six plots of lands possessed by Dandong Tyre Factory were transferred to Taipingwan Power Plant, collecting RMB 46.8 million yuan by Dandong Tyre Factory for repaying employees’ debts, employee fund-raising, medical expenses and ordinary debts without any payment for Dandong Yiyang Investment Company. Since 2009, Dandong Yiyang Investment Company had repeatedly submitted applications to the Intermediate People’s Court of Dandong City for state compensation of the principal totaling RMB 10,429,022.76 yuan and corresponding interest thereon. The Intermediate People’s Court of Dandong City placed the case on file on August 13, 2013, but failed to make any decision. Thereafter, Dandong Yiyang Investment Company applied to the State Compensation Committee of the Higher People’s Court of Liaoning Province on July 16, 2015, for a decision on state compensation of the principal totalling RMB 10,429,022.76 yuan and corresponding interest thereon totalling RMB 9,826,676.78 yuan (calculated as of the date of September 4, 2014).

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On October 28, 2015, the State Compensation Committee of the Higher People’s Court of Liaoning Province put the case on file. In the hearing of this case, it is found that, on March 1, 2016, the Intermediate People’s Court of Dandong City made an enforcement decision of No. 15 [2016] Decision, Enforcement Division, the Intermediate People’s Court of Dandong City (Liaoning 06), in response to the application submitted by Dandong Yiyang Investment Company for the enforcement of the civil judgment, stating that there temporarily existed no other property available on the side of Dandong Tyre Factory for enforcement of the judgment. Therefore, the aforesaid court ruled that the civil ruling of No. 32 [2007] Trial, Civ. Division, the Intermediate People’s Court of Dandong City had terminated the enforcement proceeding. In the opinion of the State Compensation Committee of the Higher People’s Court of Liaoning Province, Article 8 of the Judicial Interpretation of Several Issues about Applying the State Compensation Law (I) provides “if and when the claimant for state compensation deems that the people’s court was taken under such circumstances specified in Article 38 of the State Compensation Law of 2010, any claim(s) for state compensation shall be filed in the court after the termination of the civil and administrative procedures or enforcement proceeding ….”. When Dandong Yiyang Investment Company applied to the Intermediate People’s Court of Dandong City, Liaoning Province for compulsory enforcement of the judgment numbered No. 32 [2007] Trial, Civ. Division, the Intermediate People’s Court of Dandong City, the enforcement procedure had not terminated yet. If Dandong Yiyang Investment Company insisted that any damage or harm, resulted from the wrongful enforcement of the judgment, had been caused by the Intermediate People’s Court of Dandong City the said company shall submit a claim for state compensation after the enforcement proceeding had been terminated. Therefore, on April 27, 2016, in accordance with the provisions of Article 3 (1) of the Regulations on the Procedure of the People’s Court State Compensation Committee for Hearing State Compensation Cases, the State Compensation Committee of the Higher People’s Court of Liaoning Province made the decision that the application of the claimant, Dandong Yiyang Investment Company for state copensation shall be dismissed, whereas the aforesaid company refused to accept the decision and appealed to the Supreme People’s Court for reopening this case.

Issues 1. Whether lifting the seizure of lands by the Intermediate People’s Court of Dandong City is in the nature of an act of property preservation or an act of enforcement; 2. Whether lifting the seizure of lands by the Intermediate People’s Court of Dandong City constitutes wrongful enforcement of the judgment, and what is the specific legal basis;

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3. Whether the Intermediate People’s Court of Dandong City should assume any liability for the state compensation.

Holding The State Compensation Commission of the Supreme People’s Court holds: 1. With Regard to Whether Lifting the Seizure of Lands by the Intermediate People’s Court of Dandong City is in the Nature of an Act of Property Preservation or an Act of Enforcement The State Compensation Commission of the Supreme People’s Court holds that, in hearing the case involving transfer of creditors’ right in a contract in Dandong Yiyang Investment Company v. Dandong Tyre Factory, the Intermediate People’s Court of Dandong City had taken proper measures to preserve the property in accordance with the law and seized plots of lands possessed by Dandong Tyre Factory. After the civil judgment had become effective and the enforcement proceeding had been initiated, the provisions of Article 4 of the Regulations on the Seizure, Attachment and Freezing of Property in Enforcing Civil Judgment by the People’s Courts state that the measures of preservation and sequestration in litigation have been automatically turned into measures of seizure of property in the enforcement proceeding. Therefore, the act of lifting the seizure of lands by the Intermediate People’s Court of Dandong City, Liaoning Province is an act of enforcement. 2. With Regard to Whether Lifting the Seizure of Lands by the Intermediate People’s Court of Dandong City Constitutes Wrongful Enforcement of the Judgment and Its Legal Basis The State Compensation Commission of the Supreme People’s Court holds that, the Intermediate People’s Court of Dandong City had acted in cooperation with the government to handle the land transfer, thereby the said court was placed in the position of lifting the seizure of lands invloved in this case, whereas the amount of money obtained from the land transfer should be placed under effective control, and be distributed in accordance with the legal order of precedence so as to ensure the enforcement of effective judgment. However, after the lifting of the land seizure, the Intermediate People’s Court of Dandong City had not effectively controlled the land transfer and distributed the aforesaid amount in accordance with the law, whereupon the claim of Dandong Yiyang Investment Company remained unsatisfied. This is inconsistent with the policy adopted by the Supreme People’s Court on properly hearing the financial non-performing assets cases, and has infringed upon the legitimate rights and interests of Dandong Yiyang Investment Company, constituting a wrongful enforcement of the civil judgment. In respect of the specific legal basis, as lifting the land seizure by the Intermediate People’s Court of Dandong City occurred in 2008, the then effective Judicial Interpretation of Several Issues about Judicial

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Compensation in Civil and Administrative Actions should be applied. The aforementioned actions of the Intermediate People’s Court of Dandong City, were conducted in the enforcement proceeding since the civil judgment took effect, constituting the wrongful act of lifting the land seizure without authorization and preventing the civil judgment from being enforced, thereby the Subparagraph 7 of the Article 4 of the said Judicial Interpretation, which stipulates other circumstances of wrongful enforcement in violation of the law, should be applied. 3. With Regard to Whether the Intermediate People’s Court of Dandong City Should Assume any Liability for the State Compensation The State Compensation Commission of the Supreme People’s Court holds that the termination of the enforcement proceeding is not a golden criterion for the initiation of state compensation proceeding. As a rule, it is only after the termination of the enforcement proceeding that the amount of damage to the parties concerned resulting from the wrongful enforcement of the judgment could be ascertained, that an overlapping existence between the enforcement and state compensation proceeding could be avoided, and then the case for state compensation could be reviewed for finality since other remedies have been exhausted. However, this reading should be understood in a substantive sense rather than in an absolute and formal manner. Where the people’s court has not made any progress for a long period of time and no further progress is possible, where the enforcee has, in effect, lost his ability to pay off all the debts, and where the party concerned applying for enforcement of the judgment has suffered irreparable loss as a result of the wrongful enforcement, the claimant shall be allowed to apply for state compensation. Otherwise, subject to a court that has committed an erroneous enforcement act does not make a decision on terminating the enforcement proceeding, the state compensation proceeding could not be initiated, such an understanding runs counter to the original intention of the State Compensation Law and the policy inherent in the Judicial Interpretation. In this case, the Intermediate People’s Court of Dandong City, Liaoning Province, had been acting without any progress in its enforcement of the judgment for the past eleven years, and its act of wrongful enforcement of the judgment had been ascertained to have caused actual loss that cannot be recovered through other channels to Dandong Yiyang Investment Company, therefore the Intermediate People’s Court of Dandong City should assume liability for the state compensation. The decision of the State Compensation Committee of the Higher People’s Court of Liaoning Province, rejecting the application of Dandong Yiyang Investment Company for state compensation on the grounds that the enforcement proceeding had not been terminated, shall be corrected due to an error in applying the law.

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As to the extent of specific damage and the amount of compensation, through consultations between the Petitioner and the Respondent organized by the State Compensation Commission of the Supreme People’s Court, the parties concerned have voluntarily reached the following agreement on the enforcement of the judgment numbered No. 32 [2007] Trial, Civ. Division, the Intermediate People’s Court of Dandong City, Liaoning Province: (1) The Intermediate People’s Court of Dandong City, Liaoning Province, within five days as of the effective date of this Decision, shall make a state compensation payment of RMB 3 million yuan to Dandong Yiyang Investment Company; (2) Dandong Yiyang Investment Company shall voluntarily waive other requests for state compensation; (3) Dandong Yiyang Investment Company shall voluntarily waive the enforcement of the civil judgment, and the Intermediate People’s Court of Dandong City, Liaoning Province shall make a ruling that the enforcement of the judgment is to be terminated. In sum, the State Compensation Commission of the Supreme People’s Court holds that the facts that the Intermediate People’s Court of Dandong City, Liaoning Province, has wrongfully enforced the judgment, are clear, and the evidence is sufficient and reliable; the decision of the State Compensation Committee of the Higher People’s Court of Liaoning Province to dismiss the application of Dandong Yiyang Investment Company is erroneous and should be corrected; and the state compensation agreement reached by Dandong Yiyang Investment Company and the Intermediate People’s Court of Dandong City, Liaoning Province, has manifested the true intention of both parties concerned, and has also been found in conformity with the provisions of the law, which is to be upheld by the Supreme People’s Court. In accordance with Articles 30 (1) and (2) of the State Compensation Law and Article 11 (4), Article 18, and Article 21 (3) of the Regulation on Several Issues Concerning the Procedure for Supervising State Compensation, the State Compensation Commission of the Supreme People’s Court rules as follows: (1) The decision numbered No. 29 [2015] Decision, State Compensation Committee, the Higher People’s Court of Liaoning Province (dated April 27, 2016) shall be vacated and reversed; (2) The Intermediate People’s Court of Dandong City, Liaoning Province shall make a state compensation payment of RMB 3 million yuan to Dandong Yiyang Investment Company within 5 days as of the effective date of this Decision; (3) Dandong Yiyang Investment Company shall be allowed to waive any other claims for state compensation.

Comment on Rule The case arises out of the enforcement of a contract dispute between Dandong Yiyang Investment Company and Dandong Tyre Factory over the payment of the

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transferred creditor’s rights. During the hearing, the Intermediate People’s Court of Dandong City, Liaoning Province, on application, seized six plots of lands possessed by Dandong Tyre Factory, whereupon the said court ruled that Dandong Tyre Factory make a payment of RMB 4.22 million yuan and corresponding interest thereon to Dandong Yiyang Investment Company. In the course of enforcement, the lands possessed by Dandong Tyre Factory were put up for sale or transfer as a result of a public notice made by a government department pursuant to a resolution of the mayor’s Executive Meeting to put the lands of Dandong Tyre Factory up for sale or transfer. Thereafter, the above-mentioned six plots of lands were sold out, but the collected money of RMB 46.8 million yuan has not been used by Dandong Tyre Factory to set-off the debts owed to Dandong Yiyang Investment Company, rather than for the factory employees’ debts, medical expenses and other expenses. Therefore Dandong Yiyang Investment Company applied to the Intermediate People’s Court of Dandong City, Liaoning Province for state compensation due to the wrongful enforcement of the judgment, whereas the said court failed to make any decision on state compensation within the legally prescribed period. During the hearing conducted by the State Compensation Committee of the Higher People’s Court of Liaoning Province, the Intermediate People’s Court of Dandong City, Liaoning Province ruled that the enforcement proceeding was terminated on the ground that Dandong Tyre Factory did not have any other property available for enforcement. Thereafter, the State Compensation Committee of the Higher People’s Court of Liaoning Province decided to dismiss the application for state compensation submitted by Dandong Yiyang Investment Company, on the ground that the civil enforcement proceeding had not been completed, which cannot meet the requirements for filing a state compensation case in the court. Dandong Yiyang Investment Company appealed against the decision to the State Compensation Commission of the Supreme People’s Court. After examining the case, the State Compensation Commission of the Supreme People’s Court decided to reopen the case via certiorari and examined the evidence in curia. During the examining, the collegiate panel organized consultations between Dandong Yiyang Investment Company and the Intermediate People’s Court of Dandong City, Liaoning Province, which resulted in a state compensation agreement, stating that the Intermediate People’s Court of Dandong City, Liaoning Province should make a state compensation payment of RMB 3 million yuan to Dandong Yiyang Investment Company. Thereafter, Dandong Yiyang Investment Company applied to the Intermediate People’s Court of Dandong City, Liaoning Province for the revocation of the application for enforcement of the civil judgment, and requested the aforesaid court to rule that the case be closed. Subsequently, following the deliberations of the State Compensation Commission by the Supreme People’s Court, the collegiate panel read out the decision on state compensation and ascertained the agreement between the parties concerned. This case is the first one reviewed by the State Compensation Commission of the Supreme People’s Court involving application for state compensation due to the wrongful enforcement. It is understood that, in recent years, nearly half of the judicial compensation disputes handled by the state compensation committees of the people’s courts at all levels are disputes over state

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compensation due to the wrongful enforcement of judgment. A large proportion of these applications are rejected because the enforcement proceeding has not yet been completed. This situation is related, on one hand, to the state compensation system itself, where determination of damage and exhaustion of other avenues of remedies are considered a prerequisite for applying for state compensation. Therefore, if the enforcee has been found that no property available can be enforced, the remedy for the damage suffered by the Petitioner should still be sought by way of the enforcement procedure, and the remedy granted through state compensation should not come as “early intervention”, otherwise confusion between two channels of remedy occurs, which ultimately affects the effectiveness of the entire judicial system. On the other hand, this situation has to do with the fact that the Judicial Interpretations are not detailed enough and are not applied precisely in practice. In the past, as the Judicial Interpretation on the connection between state compensation and enforcement procedure was relatively principled in wording, and some people’s courts sometimes misread the provisions thereof, cases involving wrongful enforcement of the judgment inevitably occur. Some enforcees have been found insolvent or unable to repay any debts, but for a long time, the courts have declared that the enforcement proceeding was terminated on the ground of insolvency or inability. In this case, the general public can only be left with the impression of “hard to enforce the judgment” and “hard to obtain state compensation”, which has greatly affected the image of justice, efficiency and authoritativeness on behalf of the Chinese judiciary. Such “secondary harm” to the public must be corrected. This accounts for why the State Compensation Commission of the Supreme People’s Court brought the present case under scrutiny and reopened it via certiorari, with ultimate purpose of setting an exemplary benchmark for handling such disputes, that is to say, where the people’s court has committed an act of wrongful enforcement of judgment and has caused damage, and the enforcee is ascertained to be insolvent and can no longer make any payment, state compensation may be awarded even if the enforcement procedure has not yet been completed. The conclusion of this case by the Supreme People’s Court will play an important leading and facilitating role in further improving the quality and efficiency of the state compensation trials in people’s courts throughout the country, effectively strengthening judicial safeguards for human rights, pushing the people’s courts to standardize the enforcement proceeding, and achieving the goal of basically resolving difficulties or challenges in the enforcement of judgments.

Kaiyuan Tao Doctor of Laws, the Honorable Justice, Vice-President of the Supreme People’s Court of the People’s Republic of China. Erjun Zhu Doctor of Laws, senior judge, Office of State Compensation Commission of the Supreme People’s Court of the People’s Republic of China.

Cases by the Adjudication Committee

Shanxi Yicheng Chengdong Renhe Iron & Steel Co., Ltd. v. Luoyang Pengfei Refractory and Wear-resistant Material Co. Ltd. et al. (Dispute over Sales Contract): The Debt Assumption Agreement is Revoked by the Court and the Creditor Can Only Request the Fulfillment of Debt Repayment by the Debtor Mingyi Li

Rule The debtor and the third party concluded a debt assumption agreement, under which it’s agreed upon that all the debts owed by the debtor to the creditor were to be assumed by the third party upon the conclusion thereof, and which became valid and enforceable with the consent of the creditor. Later the Agreement was revoked by the court on the ground of obvious unfairness. Whereupon, the Agreement should be treated as void ab origine, by which the creditor’s request lacks factual and legal basis that the third party assume the debt repayment under said Agreement. The creditor can only request the debtor to perform its obligation under the contract originally concluded therebetween.

Collegiate Panel: Yanbin Han, Mingyi Li and Qiang Jiang (Edited by Li Zhong; translated by Xiaohua Zhu) M. Li (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_6

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Case Information 1. Parties Applicant in the Reopening of the Case ( Defendant in the First Instance and Appellant in the Second Instance): Shanxi Yicheng Chengdong Renhe Iron & Steel Co., Ltd. (hereinafter referred to as Shanxi Renhe Iron & Steel Company) Respondent in the Reopening of the Case (Plaintiff in the First Instance and Appellee in the Second Instance): Luoyang Pengfei Refractory and Wear-resistant Material Co., Ltd. (hereinafter referred to as Luoyang Pengfei Material Company) Defendant in the First Instance: Shanxi Huaxin Yujin Casting and Smelting Co. (hereinafter referred to as Shanxi Yujin Casting Company) Defendant in the First Instance: Yan X 2. Procedural History First Instance: No. 9 [2010] Trial, Civ. Division, the Intermediate People’s Court of Luoyang City (dated Aug. 15 of 2011) Second Instance: No. 45 [2012] Final, Civ. Division, the Higher People’s Court of Henan Province (dated Sept. 25 of 2012) Case Reopening: No. 162 [2013] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 4 of 2014) 3. Cause of Action Dispute over sales contract

Essential Facts In 2005, after the delivery of the contracted goods by Luoyang Pengfei Material Company to Shanxi Yujin Casting Company, it was confirmed by the both parties following the payment settlement that Shanxi Yujin Casting Company owed Luoyang Pengfei Material Company the payment of the purchase price in the amount of RMB 1,037,526.50 yuan. Later in 2006, Shanxi Yujin Casting Company concluded with Shanxi Renhe Iron & Steel Company the Asset Transfer Agreement and the Supplementary Agreement, mutually agreeing that, in consideration of the cooperation agreement between the two parties and for the purpose of the smooth realization of the creditors’ rights against Shanxi Yujin Casting Company through the thorough assumption of said debt by Shanxi Renhe Iron & Steel Company, the Supplementary Agreement was therefore concluded therebetween, under which

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(1) All the debts owed by Shanxi Yujin Casting Company prior to the conclusion thereof are to be assumed, wholly and solely, by Shanxi Renhe Iron & Steel Company upon the conclusion thereof, which include all the unpaid taxes, all the payments of the purchase price, deposits and advances collected; wages, medical care expenses, disability subsidies and pension costs owed to the employees; basic endowment insurance and medical insurance to be included in the employees’ personal accounts; and indemnities payable to employees under related laws and administrative regulations. (2) Shanxi Renhe Iron & Steel Company promises to fulfil the assumed debt repayment obligation set forth above in a thorough and timely manner, repaying the debts to the creditors of Shanxi Yujin Casting Company when it is so requested by such creditors. The grounds of defense held by Shanxi Yujin Casting Company against the same is concurrently shared by Shanxi Renhe Iron & Steel Company. (3) The Agreement comes into effect once signed by the both parties and no party has any right to make any modification thereto without a prior consensus between them. The Agreement will be terminated upon the complete realization of the creditors’ rights against Shanxi Yujin Casting Company. (4) The parties to the Agreement shall properly notify all the creditors of the content thereof. Shanxi Renhe Iron & Steel Company shall, in the presence of any opposition from any creditor, repay the debt at maturity immediately or reach a new agreement with that creditor, failing which it should be deemed to have committed a breach of contract. Shortly after the conclusion of the Supplementary Agreement, Shanxi Renhe Iron & Steel Company initiated a lawsuit with the People’s Court of Jiang County, Shanxi Province, petitioning for the revocation of the Agreement on the ground of obvious unfairness, and the court revoked the Agreement (No. 6 [2007] Trial, Civ. Division, the People’s Court of Jiang County, dated July 12, 2007). Dissatisfied with the decision, Shanxi Yujin Casting Company appealed to the Intermediate People’s Court of Yuncheng City and the court reached a default decision against Shanxi Yujin Casting Company (No. 752, Final, Civ. Division, the Intermediate People’s Court of Yuncheng City, dated July 7, 2011), by which the case was treated as voluntary withdrawal of the appeal by Shanxi Yujin Casting Company and the both parties were subject to the first instance decision. Luoyang Pengfei Material Company recognized the Supplementary Agreement, underwhich it unsuccessfully requested the payment of the purchase price from Shanxi Yujin Casting Company and Shanxi Renhe Iron & Steel Company. It then filed a lawsuit as of January 2, 2008 with the Intermediate People’s Court of Luoyang City. The court entered its decision (No. 9 [2010] Trial, Civ. Division, the Intermediate People’s Court of Luoyang City, dated August 15, 2011), ordering that: (1) Shanxi Renhe Iron & Steel Company pay Luoyang Pengfei Material Company the purchase price in the amount of RMB 1,037,526.50 yuan. (2) Shanxi Renhe Iron & Steel Company pay Luoyang Pengfei Material Company the interest incurred thereon.

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(3) All the remaining claims raised by Luoyang Pengfei Material Company be dismissed. The court of second instance entered its decision (No. 45 [2012] Final, Civ. Division, the Higher People’s Court of Henan Province, dated September 25 of 2012), dismissing the appeal and upholding the decision of first instance, the execution of which has already been completed. Shanxi Renhe Iron & Steel Company then appealed to the Supreme People’s Court for the reopening of the case. After review and deliberation, the Supreme People’s Court rules for the commencement of reopening proceedings, holding that the Supplementary Agreement was already revoked and Luoyang Pengfei Material Company thus lacks any contractual basis on which it asserts its creditor right against Shanxi Renhe Iron & Steel Company. It may only assert creditor rights against Shanxi Yujin Casting Company.

Issue The definition of possible legal consequences within the current legal framework arising from the revocation of a debt assumption agreement.

Holding It is found by the Supreme People’s Court that, Shanxi Yujin Casting Company and Shanxi Renhe Iron & Steel Company concluded as of October 10, 2006 the Supplementary Agreement, under which it was agreed upon that all the debts owed by Shanxi Yujin Casting Company prior to the conclusion thereof were solely assumed by Shanxi Renhe Iron & Steel Company, and Shanxi Yujin Casting Company was consequently released from the repayment obligation. With the consent from Luoyang Pengfei Material Company and its assertion of creditor rights against Shanxi Renhe Iron & Steel Company, the debt transfer relationship was established. Such legal relationship was based on the tripartite consent among the three parties, with as its fundamental reason the original debtor-creditor relationship between Shanxi Yujin Casting Company and Luoyang Pengfei Material Company, and its immediate reason the debt assumption agreement concluded between Shanxi Yujin Casting Company and Shanxi Renhe Iron & Steel Company. Namely, the debt assumption agreement between Shanxi Renhe Iron & Steel Company and Shanxi Yujin Casting Company served as the contractual and legal basis on which Shanxi Renhe Iron & Steel Company was under the payment obligation toward Luoyang Pengfei Material Company. Once established, such relationship, unless otherwise ruled by a court of jurisdiction or agreed upon among the three parties, can’t be changed. In this case, the debt transfer relationship between Shanxi Renhe Iron & Steel Company

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and Shanxi Yujin Casting Company was already revoked by the People’s Court of Jiang County. So, the contractual basis no longer exists on which Shanxi Renhe Iron & Steel Company assumes the payment obligation to Luoyang Pengfei Material Company, and the previously established debt transfer relationship shall be dissolved accordingly. The legal relationship among the three parties thus shall be restored to the original state prior to the conclusion of the Supplementary Agreement between Shanxi Yujin Casting Company and Shanxi Renhe Iron & Steel Company, in which case Luoyang Pengfei Material Company lacks legal grounds in asserting creditor rights against Shanxi Renhe Iron & Steel Company and may only do so against Shanxi Yujin Casting Company. The underlying Supplementary Agreement in the decisions of first instance and second instance has already been revoked, with the legal effect of the decisions only on the reason of the debt transfer relationship, impairing no determination of the validity of the debtor-creditor relationship between Shanxi Renhe Iron & Steel Company and Luoyang Pengfei Material Company, which thus shall be corrected. Luoyang Pengfei Material Company claimed in the first instance litigation for the joint and several liability for the payment of the purchase price and the interest thereon on the part of Shanxi Yujin Casting Company, Shanxi Renhe Iron & Steel Company and Yan X. However, Yan X was not held liable in the first instance litigation and Luoyang Pengfei Material Company also did not file appeal against him on such grounds. During the reopening proceedings, Luoyang Pengfei Material Company again, did not present any evidence and argument concerning the necessary repayment liability on the part of Yan X. Whereupon, it’s deemed by the Supreme People’s Court that Luoyang Pengfei Material Company held no objection to the fact that Yan X was under no repayment obligation. In summary, after adequate discussion and deliberation, it is ruled, by the Professional Committee of Civil and Administrative Justice affiliated to the Adjudication Committee of the Supreme People’s Court, that: “(1) the decisions of the first and second instance shall be reversed; (2) Shanxi Yujin Casting Company is liable to Luoyang Pengfei Material Company for the payment of the purchase price in the amount of RMB 1,037,526.50 yuan plus the interest thereon; (3) The remaining claims of Luoyang Pengfei Material Company shall be dismissed.”

Comment on Rule The principal issue of law involved in this case is how to define within the current legal framework the possible legal consequences of the revocation of a debt assumption agreement. In respect thereof, there exists much controversy among jurists and practitioners, with also contending opinions regarding how to deal with this case. One view holds that, under the principles of contract law, the debtor in this case concluded with the third party the Asset Transfer Agreement and the Supplementary Agreement, under the latter agreement it was agreed upon that all the debts owed by the debtor to the creditors should be assumed, through the consent of the creditors, by

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the third party upon the conclusion thereof. The two agreements were concluded out of the genuine intention of the parties thereto, free from violation of any mandatory provision, with also the recognition from the creditors, and should therefore be treated as valid. In this case, since the Supplementary Agreement was already revoked by the court on the ground of obvious unfairness, the debt assumption agreement between the parties should be treated as void ab origine. Therefore, it lacks both contractual and legal basis for Luoyang Pengfei Material Company to request the debt repayment from Shanxi Renhe Iron & Steel Company in accordance with the revoked Supplementary Agreement (the debt assumption agreement). Luoyang Pengfei Material Company may only request Shanxi Yujin Casting Company to perform the obligation in accordance with the agreement therebetween. In conclusion, the theory of peremptory debt assumption does not apply to this case which should be dealt with within the current legal framework of this country. The decisions of first and second instance are erroneous in the application of law that Shanxi Renhe Iron & Steel Company was liable for the repayment of the debt to Luoyang Pengfei Material Company. It is argued, however, that, according to the theory of peremptory debt assumption, the debt assumption is an act of disposition. Once the debt assumption agreement takes effect and obtains the consent from the creditors, the debt transfer shall be deemed to have occurred even without actual and physical transfer. Namely, the third party, in the substitute of the original debtor, becomes one party to the current debtor-creditor relationship, assuming all the debts to the creditors; the original debtor is consequently outside the debtor-creditor relationship, and the creditors may only assert their rights against the third party. Even if the debt assumption agreement is revoked by law and becomes void, the validity of the act of debt assumption should not be impaired. In this case, the debtor concluded with the third party the Asset Transfer Agreement and the Supplementary Agreement, under the latter agreement the content of debt assumption obligation was agreed upon with the consent from the creditors. Such two agreements were concluded out of the genuine intention of the parties thereto, free from violation of any mandatory provision, with also the recognition from the creditors, and thus should be treated as valid. In this case, although the Supplementary Agreement was revoked by the court, the revocation thereof does not impair the establishment of the debt assumption, and the creditors may, and may only, request the third party to repay the debt. In spite of the controversy over this issue, the theory of peremptory debt assumption lacks currently its legal basis in our country. In this case, the debt transfer relationship was established on the tripartite consent among the three parties, with as its fundamental reason the original debts between Luoyang Pengfei Material Company and Shanxi Yujin Casting Company, and its immediate reason the debt assumption agreement concluded between Shanxi Yujin Casting Company and Shanxi Renhe Iron & Steel Company. Namely, the debt assumption agreement between Shanxi Renhe Iron & Steel Company and Shanxi Yujin Casting Company serves as the contractual and legal basis on which Shanxi Renhe Iron & Steel Company are under the payment obligation toward Luoyang Pengfei Material Company. Once established, such relationship among the three parties, unless otherwise ruled by a court

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of jurisdiction or agreed upon thereamong, can’t be changed. In this case, the asset transfer relationship between Shanxi Renhe Iron & Steel Company and Shanxi Yujin Casting Company was already revoked by the court, with the cause no longer existing by which Shanxi Renhe Iron & Steel Company owes the payment of the purchase price to Luoyang Pengfei Material Company, and the previously established debt transfer relationship among the three parties was dissolved accordingly, in which case the legal relationship among the three parties shall be restored to the original state prior to the conclusion of the Supplementary Agreement between Shanxi Yujin Casting Company and Shanxi Renhe Iron & Steel Company where Luoyang Pengfei Material Company lacks any contractual and legal basis in asserting its creditor right against Shanxi Renhe Iron & Steel Company. Instead, it may only assert the same against Shanxi Yujin Casting Company. The underlying Supplementary Agreement in the decisions of the first and second instance has already been revoked, with the legal effect of the decisions only on the reason of said debt transfer relationship, impairing no determination of the validity of the debtor-creditor relationship between Shanxi Renhe Iron and Steel Company and Luoyang Pengfei Material Company.

Mingyi Li Juris Master, senior judge, Environment and Resources Division of the Supreme People’s Court of the People’s Republic of China.

Agricultural Bank of China Co., Ltd. Bortala Branch v. Xinjiang Xinchengji Catering Service Training, LLC (Dispute over Loan Contract): Determination of the Guarantor Liability in the Case of “Repayment of the Prior Loan with the New Loan” Fubo Wang

Rule 1. Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law provides that, “When the parties to a principal contract agree upon the repayment of a prior loan with a new loan, unless the guarantor knows or should have known of such agreement, the guarantor does not assume any related civil liability. In the case where the new loan and the prior loan are guaranteed by the same person, the preceding paragraph shall not apply”. Accordingly, in the case of “repayment of the prior loan with the new loan”, if the creditor fails to prove that the guarantor provides the guarantee with the knowledge to that effect, such guarantor shall be exempted from his guarantor liability. 2. In the case of a mortgage over a third party’s property where the guaranteed loan constitutes the repayment of the prior loan with the new one, the liability of the mortgagor can be subject, mutatis mutandis, to the provision concerning guarantor liability as is set forth in Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law.

Collegiate Panel: Fubo Wang, Lijian Sun and Ying Zhang (Edited by Yi Yang; translated by Xiaohua Zhu) F. Wang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_7

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Case Information 1. Parties Applicant in the Reopening of the Case (Plaintiff in the First Instance and Appellee in the Second Instance): Agricultural Bank of China Co., Ltd. Bortala Branch (hereinafter referred to as Agricultural Bank of China Bortala Branch) Respondent in the Reopening of the Case (Defendant in the First Instance and Appellant in the Second Instance): Xinjiang Xinchengji Catering Service Training, LLC (hereinafter referred to as Xinjiang Xinchengji Trading Company) Defendant in the First Instance: Alashankou Tianren Trading Co.(hereinafter referred to as Alashankou Tianren Company) 2. Procedural History First Instance: No. 5 [2011] Trial, Civ. Division, the Intermediate People’s Court of Bortala Mongol Autonomous Prefecture, Xinjiang Uygur Autonomous Region, (dated Jul. 4 of 2011) Second Instance: No. 1 [2012] Final, Civ. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region (dated Mar. 15 of 2013) Case Reopening: No. 136 [2014] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 29 of 2014) 3. Cause of Action Dispute over loan contract

Essential Facts On July 29, 2005, the Alashankou Sub-Branch of Agricultural Bank of China Bortala Branch and Alashankou Tianren Company concluded two loan agreements, under which Alashankou Tianren Company, for the purpose of L/C settlement, loaned from the Sub-Branch in the amount of RMB 5 million yuan and RMB 2.84 million yuan respectively, with the loan term effective as of July 29, 2005 through July 29, 2006. It was also agreed between the two parties upon the warranty as the form of loan guarantee, with the relevant guarantee contract to be separately concluded. On the same day, the Sub-Branch disbursed two loans to Alashankou Tianren Company in the amount of RMB 5 million yuan and RMB 2.84 million yuan respectively. At the beginning of August, 2005, the Maximum Mortgage Contract was concluded jointly among Agricultural Bank of China Alashankou Sub-Branch, Alashankou Tianren Company and Xinjiang Xinchengji Trading Company, under which it was

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agreed upon that, “Xinjiang Xinchengji Trading Company voluntarily provides a guarantee for the highest balance of the debt owed by Alashankou Tianren Company to Alashankou Sub-Branch in the amount of RMB 8 million yuan arising from the conducting of the contractual businesses there between from July 29, 2005 through July 29, 2006; Xinjiang Xinchengji Trading Company promises to create a mortgage over the premises located at No. 8, Hongshan Road, Shuifugou District, Urumqi with 1,397.30 m2 of building area and 563 m2 of land using area. Such premises is temporarily priced at RMB 18,188,717 yuan, the final value of which shall be subject to the net income gained upon the realization of the mortgage; The mortgagor shall take the initiative to obtain necessary information relating to the business status of the debtor, as well as the occurence and performance of all the contractual businesses; The principal contract(s), borrowing voucher(s), and related certificate(s) of indebtedness for all such contracted businesses shall no longer be delivered to the mortgagor.” On August 8, 2005, a mortgage was registered over the said premises with Urumqi Housing Property Rights Transaction Management Center, with the registration of the mortgage of land use right on August 10, 2005. On March 17, 2007, the Agricultural Bank of China Alashankou Sub-Branch issued a Notice of Overdue Debt Collection to Alashankou Tianren Company, asking for the repayment of said two loans. On the same day, Alashankou Tianren Company signed for the notice, but didn’t repay the loans. To recover the arrears, Agricultural Bank of China Bortala Branch filed a lawsuit, asking the court to order Alashankou Tianren Company and Xinjiang Xinchengji Trading Company to repay the loan principal in the amount of RMB 681,531,053 yuan plus the interest thereon in the amount of RMB 132,110,242 yuan (calculated through December 20, 2007, with the interest thereafter to be calculated as agreed upon until liquidation). The court of first instance, after hearing the case, rendered its decision (No. 5 [2011] Trial, Civ. Division, the Intermediate People’s Court of Bortala City), ordering that: (1) Alashankou Tianren Company repay to Agricultural Bank of China Bortala Branch the loan principal in the amount of RMB 6,815,310.53 yuan within 15 days from the effective date of the decision; (2) Alashankou Tianren Company repay to Agricultural Bank of China Bortala Branch the loan interest in the amount of RMB 861,059.99 yuan within 15 days from the effective date of the decision (calculated through December 20, 2007), with the interest thereafter to be calculated until the date of actual payment at the loan interest rates over the same period set by People’s Bank of China. (3) Xinjiang Xinchengji Trading Company repay to Agricultural Bank of China Bortala Branch said debt out of its mortgaged property with the maximum amount of RMB 8 million yuan. Dissatisfied with the decision of first instance, Xinjiang Xinchengji Trading Company filed an appeal. The court of second instance reached its decision (No.1 [2012] Final, Civ. Division, the Higher Court of Xinjiang Uygur Autonomous Region), (1) upholding item 1 and 2 of the decision of first instance, (2) reversing item 3 of the decision of first instance, and (3) dismissing all the remaining claims filed by Agricultural Bank of China Bortala Branch. After the decision came into effect, Agricultural Bank of China Bortala Branch appealed to the Supreme People’s Court for reopening, asking the Court to reverse item 2 of the decision of second instance and order Xinjiang Xinchengji Trading

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Company to repay to Agricultural Bank of China Bortala Branch the debt of Alashankou Tianren Company out of its mortgaged property with the maximum amount of RMB 8 million yuan.

Issues 1. Whether the money-borrowing by Alashankou Tianren Company for the purpose of L/C settlement constitutes “repayment of a prior loan with a new loan”; 2. Whether Xinjiang Xinchengji Trading Company knows or should have known of the money-borrowing by Alashankou Tianren Company for the purpose of L/C settlement; 3. Whether Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law can apply to the case where a third party sets up a mortgage over his property.

Holding After review and deliberation, the Supreme People’s Court holds that, the Maximum Mortgage Contract concluded between Alashankou Sub-Branch of Agricultural Bank of China Bortala Branch and Xinjiang Xinchengji Trading Company conforms to the genuine intention of the parties thereto in no violation of any statutory provision, which should therefore be treated as the legal basis for the determination of the guarantee relationship therebetween. During the mortgage period, Alashankou Tianren Company borrowed from Agricultural Bank of China Alashankou Sub-Branch in the amount of RMB 5 million yuan and RMB 2.84 million yuan respectively for the purpose of “L/C settlement”, which was essentially the repayment with new loans of the financing advances Alashankou Tianren Company owed to Agricultural Bank of China in the previous L/C relationship. From a formal point of view, the loan for L/C settlement is slightly different from the new loan designed for the repayment of the prior one. However, given the nature of these two legal relationships, both constitute “repayment of the prior debt with the new one”, in which case the borrowed money in the new debt is not physically paid to the borrower, but used to directly offset the prior one. So, no essential difference exists between the two legal relationships, which fall within the same class of “borrowing the new to repay the prior” and can be subject to the same legal norms. From a temporal point of view, though the two loan agreements between Alashankou Tianren Company and Agricultural Bank of China Alashankou Sub-Branch were entered into prior to the conclusion of the Maximum Mortgage Contract, Agricultural Bank of China Bortala Branch admitted that, when signing the Contract, it didn’t present the previous loan agreements to Xinjiang Xinchengji Trading Company, neither did it present any evidence to show that Agricultural Bank of China Bortala Branch had otherwise

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informed Xinjiang Xinchengji Trading Company of the existence of “the new loan for the repayment of the prior one” between its Alashankou sub-branch and Alashankou Tianren Company. Considering such circumstance, the Court rules in favor of the assertion by Xinjiang Xinchengji Trading Company that it had no knowledge of the loan purpose in question. The establishment of the loan relationship occurs only between the two parties to the loan contract, to wit: Agricultural Bank of China Alashankou Sub-Branch and Alashankou Tianren Company. Without the disclosure thereof by the parties thereto, it is essentially impossible for a third party to have knowledge of the loan purpose. Therefore, it can be safely concluded that there exists no subjective fault to that effect on the part of Xinjiang Xinchengji Trading Company. Literally, Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law only deals with warranty guarantees. However, in the case of a third party mortgage over his property, a mortgage guarantee shares much in common with a warranty guarantee in subject, content, purpose, effect, etc. In the absence of clear provisions of judicial interpretations defining the mortgagor liability in the “repayment of a prior loan by a new one”, the relevant provisions of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law covering warranty guarantees can be applied mutatis mutandis to mortgage. In summary, when signing the Maximum Mortgage Contract with Xinjiang Xinchengji Trading Company, Agricultural Bank of China Alashankou Sub-Branch did not inform Xinjiang Xinchengji Trading Company of the “repayment of the prior loan with the new loan” by Alashankou Tianren Company. Besides, Agricultural Bank of China Bortala Branch failed to present any evidence to show that Xinjiang Xinchengji Trading Company voluntarily provided the mortgage with knowledge of the “repayment of the prior loan by a new one”, and such case would impair the anticipatory judgment of Xinjiang Xinchengji Trading Company on guarantee risk in providing the mortgage, and increase its guarantor liability. For the purpose of Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law, the assertion by Xinjiang Xinchengji Trading Company should be supported that it is exempt from guarantor liability. In conclusion, the Supreme People’s Court holds that, subject to Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law, Xinjiang Xinchengji Trading Company should be exempted from guarantor liability, and the decision of second instance is clear in its findings of fact and correct in its application of the law, thus should be upheld. After discussion and deliberation by the Specialized Committee for Civil and Administrative Trials of the Supreme People’s Court, and subject to Article 170 (1)(1), and Article 207 of the Civil Procedure Law , the Supreme People’s Court rules to uphold the decision of second instance (No. 1 [2012] Final, Civ. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region).

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Comment on Rule In this case, the dispute is over whether Xinjiang Xinchengji Trading Company should be liable to Agricultural Bank of China Bortala Branch for the mortgage guarantee out of its mortgaged property with the maximum amount of RMB 8 million yuan. The key issue involved is, in the case where the third party mortgages his property to provide guarantee for the debt incurred in the “repayment of the prior loan with the new loan” by the debtor, how to determine the conditions under which the mortgagor, to wit: the third party, assumes his guarantor liability. Namely, whether such determination can be subject mutatis mutandis to Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law. Besides, the case also involves such issues as the factual determination of the “repayment of the prior loan with the new loan” and the allocation of the burden of proof. 1. The Determination of “Repayment of the Prior Loan with the New Loan” “Repayment of a prior loan with a new one”, also known in practice as “repaying prior loans with new loans”, “borrowing new loans to repay prior loans”, etc., normally refers to the case where, when a debtor fails to pay off a prior loan at maturity, a bank or any other financial institution signs a new loan contract with him, agreeing on the repayment of the prior loan with a new one. In spite of much theoretical controversy over the legal effect of “repayment of a prior loan with a new loan”, such practice is normally treated as effective in judicial practice. In fact, relevant provisions can be found in the Reply Letter of the People’s Bank of China on the Relevant Legal Issues Concerning Loan Contracts (No. 320 [1997] Bank Letter, the General Office of the People’s Bank of China) dealing with the “repayment of the prior loan with the new loan”, it is, however, always quite difficult in judicial practice to determine whether or not a borrowing behavior between the parties can be defined as the “repayment of the prior loan with the new one”. With more than one loan contract existing concurrently between the parties, there currently exists much controversy over whether the case where the new loan contract is concluded between the parties for the purpose of liquidating the unpaid prior debt can constitute the “repayment of the prior loan with the new loan” as prescribed in Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law . Therefore, it is necessary to determine the constituent elements of the “repayment of the prior loan with the new one”. With practical insights and theoretical generalization, the elements constituting the “repayment of the prior loan with the new loan” should be defined as follows: Firstly, the subjects of the prior loan relationship must be the same as those of the new loan relationship. It is because in the case of “repayment of the prior loan with the new loan”, an payment flow does not actually occur between the parties, and it is just the offset or elimination of the prior loan by the new loan, which is equivalent to the extension of the prior one. So, in the case of “repayment of the prior loan with the new loan”, the subjects of the new loan relationship must be the same as those of

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the prior loan relationship, with the two relationships identical in nature. Thus, the case where the borrower signs a loan contract with a third party to repay the prior loan with borrowed fund does not constitute such “repayment of the prior loan with the new loan”. Secondly, a mutual consent must occur between the borrower and the financial institution as to the repayment of the prior loan with the new loan. If it is expressly agreed upon in a loan contract that the money is borrowed for the purpose of the repayment of the prior loan with the new one, or for any other purpose with the same legal nature, the existence of a mutual consent can then be confirmed. In the absence of said agreement in a loan contract, a mutual consent is presumed to exist between the parties as to the “repayment of the prior loan with the new one” under any of the following circumstances: The new loan is not physically lent at all, with the bank merely replacing the prior loan certificate with a new one; The new loan is repaid within a very short period of time, e.g., the loan is made in the morning and repaid in the afternoon; The sum of the new loan is exactly the sum of the prior loan principal plus the interest thereon, and the borrower repays the prior loan within a relatively very short period of time, etc.1 Thirdly, there occurs an actual repayment of the prior loan with the new loan, the new loan being made solely for the repayment of the prior one, and there exists a very clear correlation therebetween. 2. The Conditions for the Guarantor Liability in the “Repayment of the Prior Loan with the New Loan” Normally, where the guarantor voluntarily provides guarantee on the debt to the creditor, he shall, when the debtor becomes incapable of performing the obligation (general guarantee) or fails to do so upon the expiration of the principal contract (joint and several guarantee), assume the guarantor liability under the guarantee contract, which practice conforms to the principle of strict contract compliance and good faith. Only in the event that the parties to the principal contract collude to obtain guarantee, or the creditor of the principal contract takes fraud, duress, coercion or otherwise to make the guarantor provide the guarantee against his genuine intention, etc., may the guarantor be exempted from guarantor liability. In other words, as a general rule, the guarantor assumes the guarantor liability as a matter of principle, with as an exception his exemption from such liability. However, in the event of an agreement on the “repayment of the prior loan with the new loan” concluded between the parties to the principal contract, subject to Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law, the guarantor assumes the guarantor liability only if he knows or should have known of such agreement therebetween. Otherwise, he should be exempted from the liability. In other words, the guarantor here takes the exemption from the guarantor liability as a matter of principle, with his assumption of the guarantor liability as an exception. Such difference, of course, is determined by the peculiarities of “repayment of the prior loan with new one”. The ground for the guarantee provided by the guarantor comes from his guarantor liability to the principal creditor under the guarantee contract. In view of the guarantee contract as unilateral in nature, it should be assured 1

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that the guarantor, when signing a guarantee contract, assumes the guarantee risk by an express manifestation of his genuine intention. Therefore, the guarantor should have a full access to true and correct information relating to the principal debts guaranteed, especially the repayment competence of the debtor. With regard to an ordinary loan contract, whether or not the guarantor should assume the guarantor liability depends on the debtor’s repayment competence upon the expiration of the principal debt period, which the guarantor normally cannot fully foresee when signing the guarantee contract, and his assumption of guarantee liability is at inevitable contingent risks. However, in the case of “repayment of the prior loan with a new loan”, the debtor has already lost all the repayment competence, with the “repayment of the prior loan with the new loan” agreed upon solely for the purpose of the extension of the unpayable debt. Where the liability risk has already occurred when the guarantor enters into such guarantee contract, the guarantor will surely take a much higher risk than would normally be the case, in which case it would be unfair to the guarantor to conceal from him any real and correct information concerning the debtor. In view of the relativity nature of a contract, if the parties to the principal contract don’t disclose the relevant content thereof to the outside, it is almost impossible for the guarantor to learn the truth concerning the contract, it is thus approximately beyond the guarantor’s ability to know of the genuine intention of the parties thereto which has not been disclosed yet. Therefore, in the case of “repayment of the prior loan with the new loan”, it is fair and reasonable that the debtor and the financial institution involved are obligated to inform the guarantor of the truth in the principal debt so that the guarantor is able to, with actual or should-be knowledge to that effect and the manifestation of his genuine intention, choose freely whether or not to provide his guarantee. The guarantor shall be at his own risk if he enters into the guarantee contract with knowledge of the “repayment of the prior loan with a new loan” agreed upon between the parties to the principal contract, in which case it conforms to the principle of self-accountability for him to assume the guarantor liability. 3. The Burden of Proof in the Case of “Repayment of the Prior Loan with the New Loan” Under the principle of “who claims, who proves”, if the creditor asserts that the guarantor assumes the guarantor liability in the case of “repayment of the prior loan with the new loan”, he shall bear the burden of proof, proving the existence of such guarantee relationship and that the guarantor voluntarily provides the guarantee with actual or should-be knowledge of the “repayment of the prior loan with the new loan”. If the creditor fails to prove that the guarantor knows or should have known of the “repayment of the prior loan with the new loan”, he shall bear any and all adverse consequences, the guarantor liability thus exempted. Where the creditor presents evidence to prove his case and the guarantor intends to rebut him, the guarantor shall, subject to Article 90 of the Judicial Interpretation on the Application of the Civil Procedure Law, present evidence to support his assertion, or otherwise bear any and all adverse consequences.

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4. How to Deal Mutatis Mutandis with a Mortgage over the Third Party’s Property Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law provides for the certain conditions under which the guarantor assumes guarantor liability for the “repayment of the prior loan with the new loan” as agreed upon between the parties to the principal contract. Then here comes a question: Can that provision be applied mutatis mutandis to the mortgage over the third party’s property? In this case, the answer is definitely “Yes”. This is because in this case the conditions applicable to a mortgage and a warranty are essentially the same, so is the applicable legal basis. Therefore, there exist conditions as a reference for the application. In this case, Xinjiang Xinchengji Trading Company set up a maximum mortgage over its own premises, and was obligated to, as the mortgagor, assume the mortgage liability only if it knows, or should have known of the “repayment of the prior loan with the new loan”. The reason here is that, when a mortgage is set up over a third party’s property, a mortgage guarantee and a warranty guarantee share essentially the same features in various aspects–-subject, content, purpose, effect, etc., so is the legal basis for liability assumption involved in the two forms: In the case of a mortgage and a warranty over a third party’s property, although the mortgage guarantee is set up over the value of the mortgaged property, with the warranty guarantee over the creditworthiness of the guarantor, the guarantor, in both cases, is a third party other than the parties to the principal obligation, and needs to assume guarantor liability to the creditor under the guarantee contract. Unlike the mortgage over the debtor’s own property, in the case of a mortgage over a third party’s property, the mortgagor, like a guarantor, is confronted with such issues as whether he has knowledge of the loan purpose of the principal contract, and the potential exposure to various transaction risks beyond his prediction if the debtor conceals the loan purpose from him. However, no laws, regulations or judicial interpretations have been stipulated so far to deal with the liability assumption by the mortgagor, to wit: a third party who sets up the mortgage over his property, in the case of “repayment of the prior loan with the new loan”. In consideration of the similarity between a warranty guarantee and a mortgage guarantee in this aspect, it’s held in this case that, in the case of a third party providing a mortgage for the purpose of “repaying the prior loan with the new loan”, the conditions for liability assumption by such mortgagor can be subject, mutatis mutandis, to the provision concerning guarantor liability as is set out in Article 39 of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law.

Fubo Wang Doctor of Laws, senior judge, the Second Civil Division of the Supreme People’s Court of the People’s Republic of China.

Hainan Huaqi Industrial Development Company v. The People’s Government of Haikou City, and the Third Party: Hainan Xinming Real Estate Co., Ltd. (Dispute over Issuance of State-owned Land Use Certificate): The Determination and Adjudication on the Third-party Bona Fide Acquisitions in Administrative Litigation Hong Yu

Rule 1. The legality of the sued registration and certification shall be judged in administrative litigation, but the negative evaluation of such sued administrative act does not necessarily result in the revocation thereof. In the case where the sued administrative act is illegal, but its revocation would cause significant damage to national or public interests, the court shall rule to confirm the illegality thereof without revoking it. Circumstance judgment is one of the adjudication modes of administrative litigation, namely, it only negatively evaluates the legality of the sued administrative act, but does not change the legal relationship formed thereby. 2. The conditions for the application of circumstance judgment include not only circumstances involving national or public interest, but also those involving a bona fide third party. Where the sued house registration is illegal, but the revocation thereof will cause significant damage to public interest, or the underlying house has already been acquired bona fide by a third party, the court shall confirm the illegality of that sued administrative act without revoking it. The Collegiate Panel: Hong Yu, Jinlong Huang and Bangyou Gong (Edited by Deqiang Han; translated by Xiaohua Zhu) H. Yu (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_9

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court, when hearing a house registration case, shall decide by substantive legal norms whether the party thereto acquires bona fide the underlying property right. Land and houses are both included in the class of real estate, with registration as the essential element required for effective changes to relevant property rights, which also brings about the same legal consequences between the two. Therefore, where any party asserts that he has acquired bona fide the land use rights, the court shall hear the case by reference to relevant laws or judicial interpretations.

Case Information 1. Parties Appellant in the Reopening of the Case (Third party in the First Instance): Hainan Xinming Real Estate Co., Ltd. (hereinafter referred to as Xinming Real Estate) Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Hainan Huaqi Industrial Development Company (hereinafter referred to as Huaqi Industrial Development) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Haikou Municipal People’s Government 2. Procedural History First Instance: No. 42 [2013] Trial, Adm. Division, the Intermediate People’s Court of Haikou City, Hainan Province (dated Nov. 17 of 2014) Second Instance: No. 48 [2015] Final, Adm. Division, the Higher People’s Court of Hainan Province (dated May 22 of 2015) Case Reopening: No. 2 [2016] Reopening, Adm. Division, the Supreme People’s Court (dated Sept. 30 of 2016) 3. Case of Action Dispute over the issuance of state-owned land use certificate

Essential Facts On November 6, 1995, the Land Management Bureau of Chengmai County (now Land and Environmental Resources Bureau of Chengmai County) and Huaqi Industrial Development concluded the State-owned Land Use Right Transfer Contract, under which it’s agreed upon the transfer of the 200-mu state-owned land, which

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was located in Yingbin Island district under Yingbin Economic Cooperative, Laocheng Town, Chengmai County, to Huaqi Industrial Development. On January 9, 1997, the People’s Government of Chengmai County issued No. 183 Land Certificate to Huaqi Industrial Development, with the land use right area thereunder of 133,334.82 square meters. On May 14, 1999, the People’s Government of Chengmai County issued an administrative penalty decision (No. 9 [99] Penalty) (hereinafter referred to as the No. 9 Penalty Decision), recovering the land use right from Huaqi Industrial Development without any indemnity, and cancelling the underlying land use certificate. On July 21, 2003, the People’s Government of Chengmai County issued the Letter on issues relating to the recovery of the 200-mu idle state-owned land use rights of Hainan Huaqi Industrial Development Company without compensation (No. 132 [2003] government letter of Chengmai County) (hereinafter referred to as No. 132 Letter). In response, Huaqi Industrial Development filed an administrative litigation with the former Hainan Intermediate People’s Court of Hainan Province (now First Intermediate People’s Court of Hainan Province) and the court rendered on November 10, 2003 an administrative decision (No. 39 [2003] Trial, Adm. Division), confirming the invalidity of the No. 9 penalty decision made by the People’s Government of Chengmai County, and revoking the No.132 Letter issued by the same. Dissatisfied with the decision, the People’s Government of Chengmai County filed an appeal, and the Higher People’s Court of Hainan Province issued the final administrative decision on May 17, 2004 (No. 23 [2004] Final, Adm. Division), dismissing the appeal and upholding the first instance decision. Later, Huaqi Industrial Development applied for the renewal of the No.183 Land Certificate to the People’s Government of Chengmai County and the Land and Environmental Resources Bureau of Chengmai County. With no any subsequent processing of the application in return, Huaqi Industrial Development filed an administrative lawsuit, asking the court to order the People’s Government of Chengmai County and the Land and Environmental Resources Bureau of Chengmai County to renew the 200mu state-owned land use right certificate. After the first instance, the second instance and the reopening proceedings of the case, the Higher People’s Court of Hainan Province finally rendered the decision on May 7, 2013 (No.6 [2010] Reopening, Adm. Division), ordering the People’s Government of Chengmai County and the Land and Environmental Resources Bureau of Chengmai County to renew for Huaqi Industrial Development within 30 days from the effective date of the decision the State-owned Land Use Certificate of the 200-mu land located in Yingbin Island, Laocheng Town, Chengmai County, Hainan Province. On March 11, 2002, the People’s Government of Chengmai County issued the Reply on agreeing to arrange 12.1991 hectares of state-owned land to Hainan Xinming Real Estate Company as the compensation for the infrastructure project payment (hereinafter referred to as No. 63 Reply), deciding to offset the infrastructure project payment owed to Hainan Xinming Real Estate Company with the 200-mu land originally assigned to Huaqi Industrial Development but then recovered without indemnity, the 50-mu land under the name of Qiongshan Rongde Co., Ltd. and the 100-mu land under the name of Haikou Yili Industrial Co., Ltd., totalling 12.1991-hectare land use right out of the 22.0359-hectare state-owned idle land,

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at the price of RMB 600,000 yuan per hectare. Later, through public listing and transfer, the Land and Environmental Resources Bureau of the Chengmai County concluded with Hainan Xinming Real Estate Company the State-owned Land Use Right Transfer Contract, transferring said land use right to Xinming Real Estate at the price of RMB 9.2 million yuan. In August, 2002, the People’s Government of Chengmai County issued the No. 0541 Land Certificate to Hainan Xinming Real Estate Company. In 2011, after the 9806.01-square meter land use right under the No. 0541 Land Certificate of Hainan Xinming Real Estate Company was recovered by the government due to the need for the construction of the Binhai West Road project phase II, Haikou City, Hainan Xinming Real Estate Company filed the registration of the change to the land use right with the Land and Environmental Resources Bureau of Haikou City. On February 24, 2012, the Land and Environmental Resources Bureau of Haikou City issued the Letter on Issues relating to Land Certificate Renewal to the Land and Environmental Resources Bureau of Chengmai County, requesting its assistance in verifying the mortgage, transfer, seizure and idle state of the land use rights under the No. 0541 Land Certificate. The Land and Environmental Resources Bureau of Chengmai County asserted in its reply that, as of 18:00 on March 5, 2012, the land under the No. 0541 Land Certificate had sustained no right restriction from the Bureau in the form of mortgage, transfer, seizure and idle state registration, etc. Therefore, Haikou Municipal People’s Government issued to Xinming Real Estate the No. 002259 and No. 002260 Land Certificates with the use right area of 102,501.63 square meters and 15,413.91 square meters respectively. In 2013, after obtaining the said decision, Huaqi Industrial Development filed separate litigations, asking the courts to revoke the No. 0541 Land Certificate issued by Haikou Municipal People’s Government to Xinming Real Estate, and the No. 00259 and No. 002260 Land Certificate issued as the result of renewal. Hainan Xinming Real Estate Company participated in those litigations as a third party, and asserted its bona fide acquisition therein. Under the effective decision involving No. 0541 Land Certificate, it’s ruled that the No. 0541 Land Certificate had already been cancelled due to road repairs, and there was nothing left for revocation, so the issuance of the land certificate concerning the particular part of the land under the No. 0541 Land Certificate was illegal, which overlapped with the 171.2346-mu land under the No. 83 Land Certificate under the name of Huaqi Industrial Development. Whether the bona fide acquisition of Hainan Xinming Real Estate Company was established could be handled in the cases concerning No. 002259 and No. 002260 Land Certificate. Under the effective decisions involving No. 002259 and No. 002260 Land Certificate, the courts dismissed the issue of bona fide acquisition by Xinming Real Estate, reversed the first instance decision which had confirmed the establishment of that asserted bona fide acquisition, and revoked No. 002259 and No. 002260 Land Certificate under the name of Xinming Real Estate. Dissatisfied with the decision, Xinming Real Estate appealed to the Supreme People’s Court for reopening proceedings, and the Court rules to bring the case to reopening via certiorari.

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Issues 1. The connection between the illegality of the administrative act by the People’s Government of Chengmai County, where Chengmai government recovered without indemnity the underlying land use right under the name of Huaqi Industrial Development, and the acquisition of the underlying state-owned land use right by Hainan Xinming Real Estate Company through transfer; 2. Whether there exists the bona fide acquisition by Hainan Xinming Real Estate Company of the underlying state-owned land use right; 3. Whether the second instance decision is erroneous in the findings of fact and application of law in the case where the court of second instance revoked the underlying state-owned land use certificate issued to Xinming Real Estate by Haikou Municipal People’s Government without first determining whether Xinming Real Estate acquired bona fide the land use right.

Holding The sued administrative act in this case refers to the land registration and the issuance of land certificate by Haikou Municipal People’s Government for Hainan Xinming Real Estate Company. Therefore, it is necessary to judge the legality of said registration and certificate issuance. According to the effective decisions of related cases, the People’s Government of Chengmai County infringed the legal rights and interests of Huaqi Industrial Development through its administrative act of registering the land and issuing the No. 0541 Land Certificate for Hainan Xinming Real Estate Company. Besides, the No. 002259 Land Certificate issued by Haikou Municipal People’s Government to Hainan Xinming Real Estate Company stemmed from the No. 0541 Land Certificate. Therefore, the Supreme People’s Court confirms the illegality of the land registration and the issuance of the No. 002259 Land Certificate by Haikou Municipal People’s Government for Xinming Real Estate. However, the negative evaluation of the sued administrative act does not necessarily lead to the revocation thereof. It’s clearly provided in the Administrative Procedure Law and the judicial interpretations thereof that circumstance judgment functions as one mode of administrative adjudications where the court only makes a negative evaluation of the legality of the sued administrative act without changing the legal relationship formed thereby. Subject to Article 74(1) of the Administrative Procedure Law, and Article 58 of the Judicial Interpretation of the Supreme People’s Court on Several Issues in Implementing the Administrative Procedure Law of the People’s Republic of China (repealed), in the event that the sued administrative act is illegal but the revocation thereof will cause significant damage to national or public interests, the court shall confirm the illegality of that administrative act without revoking it. Apart from national and public interests, the applicable conditions for circumstance judgment also include situations involving a bona fide third party. Article 11(3) of the Rules on Several Issues about the Trial of Housing Registration Cases provides that, where

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the sued house registration is illegal but the revocation thereof will cause significant damage to public interest, or the underlying house has already been acquired bona fide by a third party, the court shall confirm the illegality of that sued administrative act without revoking it. Such judicial interpretation clearly provides that the court, when hearing a house registration case, can judge whether the party concerned is bona fide in his acquisition under substantive legal norms such as the Property Law, and establishes the adjudication rule that the third party bona fide acquisition can deter the registration revocation in a house registration case. Even though this case is a land registration case, since land and houses are both classified as real estate, identically with the registration as the essential element required for effective changes to property rights under the Property Law, and both land registration and house registration share the same legal consequence, when any party asserts that he has bona fide acquired the land use rights, the court shall hear the case by reference to the Rules on Several Issues about the Trial of Housing Registration Cases. The focus of the dispute in this case is whether there exists the establishment of a bona fide acquisition by Xinming Real Estate. When a court makes a findings concerning the bona fide acquisition in administrative litigation, it shall apply Article 106 of the Property Law in deciding whether the bona fide acquisition has been established. However, the court of second instance, without first determining whether Xinming Real Estate acquired bona fide the underlying state-owned land use right, or paid an adequate consideration, etc., directly reversed the first instance decision in favor of Xinming Real Estate, which actually constituted an erroneous application of law. Since the No. 002259 Land Certificate in this case stemmed from the No. 0541 Land Certificate only through a change registration, no matter whether the bona fide acquisition by Xinming Real Estate has been established or not, the People’s Government of Chengmai County has a stake in the outcome of this case. Moreover, in the process of transferring the underlying state-owned land use right, the People’s Government of Chengmai County, as the land transferor, the debtor of the project payment, and the administrative organ that granted the land registration and issued the No. 0541 Land Certificate, has close connections with the investigation of such issues as whether there exists malicious collusion, whether the reasonable consideration is paid and whether the bidding, auction and listing procedures are violated, and is therefore a necessary party to this litigation. The court of second instance also held that it was procedurally illegal for the court of first instance to rule, without adding relevant interested parties to the litigation, that the bona fide acquisition procedure was illegal, and directly modified the decision instead of remanding the case to the court of first instance for a new trial. To sum up, the court of second instance didn’t handle the key issues involving the establishment of bona fide acquisition such as whether the debtor-creditor relationship of the project payment actually existed, and whether Xinming Real Estate actually offsetted the land transfer fee with the project payment, which constitutes the failure to hear the basic facts of the case. The courts of first and second instance did not summon the People’s Government of Chengmai County to appear in this case, which

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also constitutes the omission of the necessary party to the case. Through the discussion and deliberation by the Specialized Committee on Civil and Administrative Matters of the Adjudication Committee of the Supreme People’s Court, and subject to Article 101 of the Administrative Procedure Law, Article 4 and Subparagraph 1 of Article 5 of the Rules on Several Issues about Strictly and Legally Applying Instructed Case-reopening and Case-remanding in the Civil Judicial Supervision Procedure, and Subparagraph 13 of Article 63 and Article 76(1) of the Judicial Interpretation of the Supreme People’s Court on Several Issues in Implementing the Administrative Procedure Law of the People’s Republic of China (repealed), the Supreme People’s Court rules to: (1) reverse the administrative decision of the Higher People’s Court of Hainan Province (No. 48 [2015] Final, Adm. Division) and the administrative decision of the Intermediate People’s Court of Haikou City (No. 42 [2013] Trial, Adm. Division); (2) remand the case to the Intermediate People’s Court of Haikou City for a new trial.

Comment on Rule The Ruling herein clarifies the adjudication modes involving the third party’s bona fide acquisition in administrative litigation and the adjudication rules by which the issue of bona fide acquisition is handled. The focus of the dispute in this case is that the administrative act of the administrative organ recovering the state-owned land use right from Huaqi Industrial Development without indemnity was invalidated and revoked by the effective decision years later, but the underlying land use right had already been further transferred prior to the decision with Xinming Real Estate, as the transferee, having already registered the underlying land use right. Huaqi Industrial Development, as the original land rights owner, filed a litigation requesting the court to revoke the land registration issued to Xinming Real Estate. In response, Xinming Real Estate asserted its bona fide acquisition. Whether such assertion is admissible or not leads directly to the application of different laws and regulations, and consequently, different decisions. The reasoning behind the decision herein will be further explained hereinbelow from such aspects as follows: the connection between the illegality of the prior recovery without indemnity and this case, the connection between the prior certificate issuance and the subsequent certificate issuance, the evaluation of the illegality of an act and whether that act shall be revoked, the bona fide acquisition as one of the legal reasons for the non-revocation of an illegal act, and the way by which the issue of bona fide acquisition is handled. 1. The Connection between this Case and the Invalidation and Revocation of the Land Use Right Recovery without Indemnity by Effective Decision Judging from the arising of the dispute, the whole litigation process, and the final effective decision, the decision of the administrative organ to recover the land without indemnity was invalidated, so Huaqi Development, as a legitimate right holder, has the right to request the administrative organ to renew its land certificate and

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that administrative organ shall perform the renewal obligation accordingly. Besides, according to the effective decision, the land area under the land certificates successively acquired by the two companies overlapped to a great extent. The land use right under the No. 0541 Land Certificate under the name of Xinming Real Estate was recovered by the government due to road repair, the certificate having already been revoked with nothing left for revocation. So that part of the No. 0541 Land Certificate is ruled to be illegal, which covers the overlapping 171.2346-mu land also under the No. 83 Land Certificate under the name of Huaqi Development. Such decision not only makes a negative evaluation on the administrative organ’s recovering without indemnity the land use right enjoyed by Huaqi Development, but also provides Xinming Real Estate the prerequisite under the Property Law in its claim for bona fide acquisition that the bona fide acquisition must meet the requirement for “unauthorized disposition”. It’s provided that, after an administrative act is invalidated or revoked by legal proceedings, that act becomes void ab initio, namely, in this case, the People’s Government of Chengmai County has no right to further transfer the land use right legally enjoyed by Huaqi Development. 2. The Existence of a Succession Relationship between the Prior Certification and the Subsequent Certification In the litigation where Huaqi Industrial Development claimed for the invalidation of the No.0541 Land Certificate issued by the People’s Government of Chengmai County to Xinming Real Estate, the court of second instance ruled that, since the overlapping part under the No.0541 Land Certificate under the name of Xinming Real Estate and the No.183 Land Certificate under the name of Huaqi Industrial Development covered the same piece of 171.2346-mu land, so the administrative act of the People’s Government of Chengmai County transferring to Xinming Real Estate the state-owned land use right which was then still legally enjoyed by Huaqi Industrial Development constituted a obvious violation of relevant laws, infringing on the legal rights and interests of Huaqi Development, and thus shall be invalidated or revoked. However, the sued state-owned land use certificate had already been cancelled, and there existed no legal grounds for revocation or invalidation thereof, so the decision of first instance illegalizing the No. 0541 Land Certificate was not improper. With regard to the issue of bona fide third party raised by Xinming Real Estate, since the claims by Huaqi Industrial Development for the revocation of the No. 002259 and No. 002260 Land Certificate issued to Haikou Xinming Real Estate Company by the People’s Government Haikou City were handled in separate cases, the courts involved may continue the proceedings and enter decisions by law. The Supreme People’s Court holds that, judging the objective facts of the generation, elimination and transfer of the underlying land use right, the scope of the land certificate under the name of Xinming Real Estate and the scope of the land certificate previously acquired by Huaqi Industrial Development highly overlap, so the second instance decision on the illegality of the land registration by Hainan Xinming Real Estate is not improper. However, the second instance decision did not deal with the issue of bona fide acquisition raised by Xinming Real Estate, and also was incomplete and illogical in its reasoning. Xinming Real Estate participated in the litigation

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as a third party, and also raised its assertion of bona fide acquisition. Whether that assertion can be recognized by the court or not leads directly to the application of different legal provisions and different judicial outcomes, so the issue of bona fide acquisition is the exact focus of the dispute and the most critical issue in this case. The fact that Huaqi Industrial Development sued Haikou Municipal People’s Government in separate actions with, as the cause of action, the Government’s renewal of the No.002259 and No. 002260 Land Certificate for Xinming Real Estate and it is not improper for the court of second instance to refer the issue of bona fide acquisition to another case also shows the existence of succession relationship between the two successive land registrations acquired by Xinming Real Estate. 3. Evaluation of the Illegality of an Act and whether Such Act Should be Revoked The sued administrative act in this case refers to the land registration and the issuance of the No. 002259 Land Certificate by Haikou Municipal People’s Government for Xinming Real Estate. So, it is necessary to judge the legality of such registration and certificate issuance. According to the effective administrative decisions (No. 23 [2004] Final, Adm. Division, the Higher People’s Court of Hainan Province; No. 168 [2005] Final, Adm. Division, the Higher People’s Court of Hainan Province; No. 6 [2010] Reopening, Adm. Division, the Higher People’s Court of Hainan Province; No. 56 [2014] Final, Adm. Division, the Higher People’s Court of Hainan Province), the decision and notification letter of the People’s Government of Chengmai County have already been invalidated and revoked, and the People’s Government of Chengmai County and the Land and Environmental Resources Bureau of Chengmai County shall renew the underlying land use right certificate for Huaqi Industrial Development. In February, 2012, when the Land and Environmental Resources Bureau of Haikou City sent a letter to the Land and Environmental Resources Bureau of Chengmai County for consultation on issues related to the underlying land certificate renewal, the aforementioned No.23 decision had already been legally effective, and the No.168 decision had already been brought via certiorari to the reopening procedure. However, the People’s Government of Chengmai County and the Land and Environmental Resources Bureau of Chengmai County failed to truthfully inform the Haikou Municipal People’s Government of the land disputes and relevant decisions, resulting in Haikou Municipal People’s Government issuing the No. 002259 and No. 002260 land certificates to Xinming Real Estate without knowledge of the underlying land dispute. According to the effective decision, the People’s Government of Chengmai County bitterly infringed the legal rights and interests of Huaqi Industrial Development with its administrative act of the land registration and issuance of No. 0541 Land Certificate for Xinming Real Estate, with the land area thereof highly overlapping that of the No. 183 Land Certificate under Huaqi Development. Moreover, the No. 002259 and No. 002260 Land Certificate issued by Haikou Municipal People’s Government to Xinming Real Estate stemmed just from the No. 0541 Land Certificate. Therefore, the land registration and the land certificate issuance by Haikou Municipal People’s Government for Xinming Real Estate shall be found illegal.

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However, the negative evaluation of the sued administrative act does not necessarily lead to the revocation thereof. It’s clearly provided in the Administrative Procedure Law and the judicial interpretations thereof that circumstance judgment functions as one mode of administrative adjudications where the court only makes the negative evaluation of the legality of the sued administrative act without changing the legal relationship formed thereby. Regarding the application of circumstance judgment, subject to Article 74(1) of the Administrative Procedure Law, and Article 58 of the Judicial Interpretation of the Supreme People’s Court on Several Issues in Implementing the Administrative Procedure Law of the People’s Republic of China (repealed), in the event that the sued administrative act is illegal but the revocation thereof will cause significant damage to national or public interests, the court shall confirm the illegality of that administrative act without revoking it. 4. Bona Fide Acquisition as One of the Statutory Grounds for Non Revocation of Illegal Acts Apart from the involvement of national and public interests, the applicable conditions for circumstance judgment also include situations involving a bona fide third party. Article 11(3) of the Rules on Several Issues about the Trial of Housing Registration Cases provides that, where the sued house registration is illegal but the revocation thereof will cause significant damage to public interest, or the underlying house has already been acquired bona fide by a third party, the court shall confirm the illegality of that sued administrative act without revoking it. Such judicial interpretation not only clearly provides that the court, when hearing a house registration case, can judge whether the party concerned is bona fide in his acquisition under substantive legal norms such as the Property Law, but also establishes the adjudication rule that the third party bona fide acquisition can deter the registration revocation in a house registration case. Even though this case concerns land registration, since land and houses are both classified as real estate, identically with the registration as the essential element required for effective changes to property rights in accordance with the Property Law, and both land registration and house registration share the same legal consequence, when any party asserts that he has bona fide acquired the land use rights, the court shall hear the case by reference to the Rules on Several Issues about the Trial of Housing Registration Cases. In this case, Huaqi Industrial Development claimed for the revocation of the No. 002259 Land Certificate issued to Xinming Real Estate by Haikou Municipal People’s Government and Xinming Real Estate defended, asserting that it acquired bona fide the land certificate, and the court of first instance heard the case and made its decision accordingly. The court of second instance, however, dismissed the issue of bona fide acquisition, and revoked said land certificate, which essentially denied the bona fide acquisition of Xinming Real Estate, with the reasoning and the outcome of the case being obviously contradictory. Besides, in another litigation where Huaqi Industrial Development petitioned for the revocation of the land registration and the issuance of the No. 0541 Land Certificate by the People’s Government of Chengmai County for Xinming Real Estate, Xinming Real Estate, as a third party, also asserted its bona fide acquisition. The No. 1 Intermediate People’s Court of

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Hainan Province and the Higher People’s Court of Hainan Province both made it clear in the first and second instance decisions that the factual issue of whether or not Xinming Real Estate was a bona fide third party should be determined in the litigation. Therefore, the issue of the bona fide acquisition by Xinming Real Estate should be handled here in this case. The decision of second instance is erroneous in that it dismissed such issue, which should thus be corrected. The No. 002259 and No. 002260 Land Certificate issued by Haikou Municipal People’s Government stemmed from the No. 0541 Land Certificate granted by the People’s Government of Chengmai County, with a succession relationship therebetween. Even though the issuers of the two certificate issuances are different, the subject of rights is the same company: Xinming Real Estate, and the land rights under the two certificates are clearly defined, so, Xinming Real Estate may assert its bona fide acquisition in another separate case involving the No. 0541 Land Certificate and in this case regarding the No. 002259 Land Certificate. Therefore, the focus of the dispute in this case can be summarized as whether or not the bona fide acquisition asserted by Xinming Real Estate can be established. 5. Tips for Dealing with Bona Fide Acquisition When a court tries to reach a findings on the bona fide acquisition in an administrative litigation, it shall apply Article 106 of the Property Law in deciding whether the bona fide acquisition has been established, with as prerequisite therefore the fact that the disposer makes an unauthorized disposition. According to the factual findings, the People’s Government of Chengmai County recovered without providing any indemnity the land use right of Huaqi Development, and then deposited the land recovery decision in the cadastral file and cancelled the previous land registration. Before such recovery decision was revoked, or illegalized as null and void, the People’s Government of Chengmai County had the right to transfer the underlying land use right. Afterwards, Huaqi Industrial Development filed an administrative litigation against the administrative act of People’s Government of Chengmai County recovering the land use right without providing any indemnity. the Higher People’s Court of Hainan Province issued the final administrative decision (No. 23 [2004] Final, Adm. Division), invalidating the without-indemnity recovery decision. From the effective date of the decision, the without-indemnity recovery decision becomes void ab initio, and the administrative act of the People’s Government of Chengmai County transferring the state-owned Land use right still enjoyed by Huaqi Industrial Development to Xinming Real Estate with the relevant registration and certificate issuance constitutes an unauthorized disposition, which conforms to the prerequisite for bona fide acquisition. It should meet the three essential requirements set forth in Article 106 of the Property Law to establish a bona fide acquisition, namely, the transferee has already bona fide acquired the real property, an adequate consideration has already been paid, and the transferred real property has already been registered by law. Following the conclusion of the land transfer agreement with Xinming Real Estate, the People’s Government of Chengmai County registered the No. 0541 Land Certificate acquired by Xinming Real Estate, which act satisfies the legal requirement that “the transferred

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real estate which should be registered has already been registered”. Therefore, the key to the establishment of a bona fide acquisition in this case is whether Xinming Real Estate acquired bona fide the underlying land use right, and paid an adequate consideration. In respect of whether Xinming Real Estate acquired bona fide the underlying land use right, according to the factual findings, when the People’s Government of Chengmai County transferred the land use right to Xinming Real Estate in 2002, the registration of the No. 183 Land Certificate under the name of Huaqi Industrial Development had already been cancelled, and the Land and Environmental Resource Bureau of Chengmai County had deposited the recovery decision in the cadastral file, with no other registered right holders left of the underlying land use right. With reasonable reliance on the involved land use registration, Xinming Real Estate had reasons to believe that the People’s Government of Chengmai County had the right to transfer the underlying state-owned land use right. Unless otherwise proved, it should be presumed that Xinming Real Estate was bona fide when acquiring that land use right. Huaqi Industrial Development alleged in the second instance that the People’s Government of Chengmai County, in violation of the provisions on transferring commercial and residential land by bidding, auction and listing, first approved agreement transfer, but then fraudulently manipulated the listing procedure, so that Xinming Real Estate was able to enter into the transfer contract at the base price of the listing price (evaluated price), in which case serious malice occurs. Whether said allegation of Huaqi Industrial Development is admissible or not can facilitate the findings on the bona fide acquisition of Xinming Real Estate, which the court of second instance should have handled but actually failed to do so. In respect of whether Xinming Real Estate paid an adequate consideration, in the first instance, Xinming Real Estate asserted that the People’s Government of Chengmai County had covered its owed infrastructure project payment with the land transfer fee. But Huaqi Industrial Development raised its objection to the asserted fact that Xinming Real Estate had actually carried out the related project, and to the amount of the project payment. However, the court of first instance only confirmed, with the government documents provided by the People’s Government of Chengmai County, that Xinming Real Estate offset the land transfer fee with the construction payment of sewage pipeline project, and did not reply to the objection raised by Huaqi Development. Although the court of second instance found that Xinming Real Estate did not actually build a sewage pipeline project, in respect of the assertion by Xinming Real Estate that Sanfang Company built the sewage pipeline project and acquired the underlying land use right, and later transferred that right to Xinming Real Estate with an adequate consideration, the court dismissed it on the grounds that there existed no other supporting evidence, the person concerned was not a party to the case, and the transfer contract had not been presented as evidence, etc. In short, the dertermination of the existence of the above-mentioned issues can facilitate the findings on whether Xinming Real Estate actually paid an adequate consideration, which the court of second instance should have handled but actually failed to do so.

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6. Correct the Procedural Violations in the First and Second Instance Trials by Law Since the No. 002259 Land Certificate in this case stemmed from the No. 0541 Land Certificate through change registration, the People’s Government of Chengmai County has a stake in the outcome of this case, regardless of whether the bona fide acquisition by Xinming Real Estate has been established or not. Moreover, in the process of transferring the underlying state-owned land use right, the People’s Government of Chengmai County, as the land transferor, the debtor of the project payment, and the administrative organ that granted the land registration and issued the No. 0541 Land Certificate, has close connections with the investigation and determination of such issues as whether there exists malicious collusion, whether the reasonable consideration is paid and whether the bidding, auction and listing procedures are violated, and is therefore a necessary party to this litigation. The court of second instance held that it was procedurally illegal for the court of first instance to confirm bona fide acquisition without adding the relevant interested party to the litigation. It is, however, also procedurally illegal for the court of second instance to modify the decision instead of remanding the case to the court of first instance for a new trial. In the reopening procedure of this case, Xinming Real Estate claimed that, if its bona fide acquisition was closely related to the interests of the People’s Government Chengmai County and others, the reopening court shall find the facts and modify the decision, or remand the case to the court of first instance for a new trial. Huaqi Industrial Development also claimed in its defense that if the issue of bona fide acquisition by Xinming Real Estate needed to be decided, the case should be remanded to the Intermediate People’s Court of Haikou City for a new trial. The above claims of Xinming Real Estate and Huaqi Industrial Development are justified and thus are supported by the Supreme People’s Court. To sum up, the court of second instance didn’t handle the key issues involving the establishment of bona fide acquisition such as whether the debtor-creditor relationship of the project payment actually existed, and whether Xinming Real Estate actually offset the land transfer fee with the project payment, which case constitutes its failure to hear the basic facts of the case. The courts of first and second instance did not summon the People’s Government of Chengmai County to appear in this case, which case constitutes the omission of the necessary party to the case.

Hong Yu Doctor of Laws, senior judge, Administrative Division of the Supreme People’s Court of the People’s Republic of China.

Characteristic Cases

The People v. Zhang X, and Zhang X (A) (Intentional Homicide and Using a Cult to Undermine Law Enforcement): Principles of Punishment against Cult-related Crimes and Application of the Death Penalty on Cult Members Committing Serious Crimes Qiquan Wang

Rule Those who establish any evil cult, or, after an evil cult is banned by the state, reestablish such evil cult or set up a new evil cult, or those who are aware that an evil cult has been banned by the state, yet nonetheless organize members of the cult to hold gatherings, produce and disseminate propaganda for the evil cult, recruit new cult members, provide funding for the activities of any cult, and undermine the implementation of any of the laws and administrative regulations of the state, shall be prosecuted for criminal responsibilities for the crime of organizing and using a cult to undermine law enforcement. Those who, in the process of organizing or using a cult to undermine the enforcement of any of the laws and administrative regulations of the state, commit crimes such as intentional homicide, having illicit sexual relationship with women or fraud, shall be punished in accordance with relevant provisions on concurrent sentence for multiple crimes, and those who serve as the initiators, organizers, commanders and main perpetrators of serious crimes, such as intentional homicide, shall be severely punished in accordance with law.

Death Penalty Review Collegiate Panel: Jie Zhang, Qiquan Wang and Xinjun Chen (Edited by Xianrong Bao; translated by Zhijian Cao) Q. Wang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_10

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Case Information 1. Parties The Public Prosecution Organ: Yantai People’s Procuratorate of Shandong Province, China The Accused: Zhang X The Accused: Zhang X (A) 2. Procedural History First Instance: No.48 [2014] Trial, Crim. Division, the Intermediate People’s Court of Yantai City, Shandong Province (dated Oct. 11 of 2014) Second Instance: No.117 [2014] Final, Crim. Division, the Higher People’s Court of Shandong Province (dated Nov. 27 of 2014) Death Penalty Review: No.02209851 [2015] Review, Crim. Division, the Supreme People’s Court (dated Jan. 26 of 2015) 3. Cause of Action Intentional homicide and using a cult to undermine law enforcement

Essential Facts The defendants Zhang X, Zhang X (A) (who is the father of Zhang X), Lu X, Zhang Y (younger sister of Zhang X), Zhang Y (A) (all of whom are co-defendants in the case and have been convicted), as well as Zhang Z (younger brother of Zhang X, who was then 12 years old) are all members of an evil cult sect, the Church of Almighty God. At about 15: 00 of May 28, 2014, Zhang X, Zhang X (A), Lu X, Zhang Y, Zhang Y(A), and Zhang Z dined in a MacDonald’s restaurant at the Fuqian Plaza in Zhaoyuan City, Shandong Province, China. At about 21: 00 of the same day, Zhang X and Lu X, in an attempt to recruit new members for the evil cult, “Church of Almighty God”, sent Zhang Y, Zhang Y(A) and Zhang Z to ask customers in the restaurant for their contact information. When Zhang Y approached the victim, Wu X, (female, who was 35 years old at the time of her death) and asked for her mobile phone number, the victim refused. When Zhang Y informed Zhang X and Lu X of what happened, they again sent Zhang Y to demand for the victim’s mobile phone number. When Zhang Y’s demand was declined for the second time, Zhang X and Lu X believed that the victim, Wu X, was an “evil spirit”, and Zhang A loudly cursed the victim as an “evil spirit” and “devil”, approaching her and requiring her to leave the restaurant.

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When Wu X, the victim refused, Zhang X struck her with a seat from the restaurant. When Wu X tried to resist, Zhang X (A), Lu X and Zhang Y, who were present at the scene, joined in the attack and helped Zhang X knock Wu X down. In the process, Zhang X repeatedly shouted “Kill her! She is a devil!” and repeatedly jumped up and stomped Wu X on the head and face by using a table in the restaurant as support. After that, Zhang X handed Zhang X (A) and Zhang Z each with a mop, and ordered Zhang X (A), Zhang Y, Zhang Y(A) and Zhang Z to approach the victim to “curse” and beat her. Zhang X (A) struck the face of the victim repeatedly with the mop, until the mop handle was broken; and then, at Lu X’s instigation, Zhang X (A) dragged the victim, Wu X, out from between the table and chairs, and fiercely kicked, stamped on and stomped the victim’s face. At the same time, Zhang Y struck the back and legs of the victim with a chair and a broom; Lu X kicked Wu X’s waist and buttocks, and instigated Zhang Y(A) and Zhang Z to join the attack on the victim. In the process, Lu X hit the restaurant staff with his fist and threatened that “whoever dares to intervene must die”, in a bid to prevent the restaurant staff and other customers in the restaurant from rescuing Wu X. Further, Lu X and Zhang X threw a helmet on the restaurant counter at the restaurant staff to prevent them from alerting the police. Later, the victim, Wu X, died on the spot from traumatic brain injury. Zhang X, became a follower of the evil cult, Church of Almighty God, in 2007. He came to know Lu X via the Internet in 2008 and had been in close contact with the latter since then. Later, Zhang X followed Lu X to Zhaoyuan City for many times to attend gatherings of members of the evil cult. At the end of the same year, Zhang X went back to his hometown, Wuji County, Hebei Province, and recruited Zhang X (A), Chen X (mother of Zhang A, who is prosecuted in another case), Zhang Y and Zhang Z as members of the Church of Almighty God. In 2009, Zhang X, together with Zhang X (A), Zhang Y and others, relocated from Wuji County to Zhaoyuan City. In the summer of the same year, Zhang X was ordained as “the Eldest Son” by Fan X and Li X, members of “the Church of Almighty God” cult (both of whom are prosecuted in another case). After that, Zhang X and Lu X secretly organized more than 40 members of “the Church of Almighty God” cult in Zhaoyuan City and nearby villages and towns, and held more than 100 gatherings. In the process, Zhang X and Lu X printed and distributed a large amount of propaganda materials of the cult. In addition, instigated by Zhang X, Zhang X (A) rented or bought a number of housing properties and storefronts with his own money, which were then used as venues for activities of the cult and residences of “the Church of Almighty God” followers. Zhang X (A) also purchased two cars, with which he sent Zhang X, Lu X and others to Qingdao City, Laiwu City and Dongying City in Shandong Province to attend gatherings of “the Church of Almighty God” believers and promote the doctrines of the cult. Starting from the year 2008, Zhang X and Lu X produced and disseminated a total of 97 articles on “the Church of Almighty God” in domestic and overseas cyberspace, which were accessed for over 170,000

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times. After November 2010, under instigation of Zhang X and Lu X, Zhang X (A) donated more than RMB10 million yuan of his household property to “the Church of Almighty God” cult, which was then deposited in the names of Lu X and Zhang X. Later in May 2014, Lu X and Zhang X recruited Zhang X (B) as a member of “the Church of Almighty God” cult sect. On October 11, 2014, the Intermediate People’s Court of Yantai City, Shandong Province, rendered a criminal decision (No. 48 [2014] Trial, Crim. Division, the Intermediate People’s Court of Yantai City, Shandong Province), according to which, the Court ruled that Zhang X shall be sentenced to death and be deprived of political rights for life on conviction of intentional homicide; Zhang X shall be sentenced to a fixed-term imprisonment of seven years on conviction of the crime of using a cult to undermine law enforcement; as a concurrent sentence, the Court ruled that Zhang X shall be sentenced to death and be deprived of political rights for life; the Court ruled that Zhang X (A) shall be sentenced to death and be deprived of political rights for life on conviction of intentional homicide; Zhang X (A) shall be sentenced to a fixed-term imprisonment of five years on conviction of the crime of using a cult to undermine law enforcement; as a concurrent sentence, the Court ruled that Zhang X shall be subject to the death penalty and deprivation of political rights for life. After the decision was announced, Zhang X and Zhang X (A) lodged an appeal. On November 27, 2014, the Higher People’s Court of Shandong Province rendered a ruling, (No. 117 [2014] Final, Crim. Division, the Higher People’s Court of Shandong Province) according to which the appeal was rejected, the decision by the court of first instance was upheld and the case was submitted to the Supreme People’s Court for review in accordance with law.

Issues 1. How to distinguish the crime of “organizing a cult to undermine law enforcement” from the crime of “using a cult to undermine law enforcement”; 2. Principles of punishment for cult-related crimes; 3. Law-based severe punishment of the initiators, organization commanders and main perpetrators of intentional homicide and serious crimes involved in cult activities.

Holding After reviewing the case, the Supreme People’s Court holds that the defendants, Zhang X and Zhang X (A), on the basis of the doctrines of “the Church of Almighty God”, viewed the victim, Wu X, as a “evil spirit”, and based on such a belief, jointly murdered the victim by striking her with a chair and mops, and stomping on her face

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and head, which constitute the crime of murder. Zhang X and Zhang X (A), who were fully aware that “the Church of Almighty God” cult had been banned by the state, organized followers of the cult to hold gatherings, produced and disseminated propaganda for the cult, recruited members for the cult, and provided funding for activities of the cult, all their conduct undermined the enforcement of laws and administrative regulations of the state; therefore, their conduct constitutes the crime of using a cult to undermine law enforcement. Zhang X and Zhang X (A) had each been convicted of multiple crimes and therefore shall be subject to concurrent sentence in accordance with law. Zhang X and Zhang X (A) committed intentional homicide at a public place; their striking and stomping of the head of the victim were the direct cause of the victim’s death on the spot. As Zhang X was the initiator, organizer and main perpetrator of the intentional homicide, he played a major role in the joint crime and therefore is a principal offender; Zhang X (A) was a main perpetrator of the crime and played a major role in the joint crime, therefore, he is also a principal offender. The two defendants were firm and steady in their intention to kill, employed cruel means to commit their crimes, and resulted in serious consequences and extremely vicious social impacts. Therefore, their crimes were extremely serious and they must be severely punished in accordance with law. The decision by the court of first instance and the ruling by the court of second instance are clear in identification of facts, valid and sufficient in terms of evidence, accurate in conviction, appropriate in sentencing and legal in terms of the trial procedure. Therefore, in accordance with Articles 235 and 239 of the Criminal Procedure Law and Subparagraph 1 of Article 350 of the Judicial Interpretation on the Application of the Criminal Procedure Law, the Supreme People’s Court rules to approve the ruling by the Higher People’s Court of Shandong Province (No. 117 [2014] Final, Crim. Division, the Higher People’s Court of Shandong Province), uphold the decision by the court of first instance, i.e., Zhang X shall be sentenced to death and be deprived of political rights for life on conviction of intentional homicide; Zhang X shall be sentenced to a fixed-term imprisonment of seven years on conviction of the crime of using a cult to undermine law enforcement; as a concurrent sentence, the Court ruled that Zhang X shall be subject to the death penalty and deprivation of political rights for life; the Court ruled that Zhang X (A) shall be sentenced to death and be deprived of political rights for life on conviction of intentional homicide; Zhang X (A) shall be sentenced to a fixed-term imprisonment of five years on conviction of the crime of using a cult to undermine law enforcement; as a concurrent sentence, the court ruled that Zhang X shall be subject to the death penalty and deprivation of political rights for life.

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Comment on Rule 1. Adhere to the Criminal Justice Policy of Tempering Justice with Mercy and Follow the Principles of Seeking Unity with, Educate and Save the Vast Majority While Isolating and Punishing a Tiny Minority Freedom of religious belief is a basic right of all citizens of our country and is protected by the state. All normal religious activities, such as those of Buddhism, Taoism, Christianity, Catholicism, Islam, etc., feature religious doctrines that conform to law, religious classics that have been handed down from generation to generation, fixed venues for religious activities, and strict religious rites. In contrast, “evil cults” refer to illegal organizations that are rigged up under the pretense of practicing religions, or qigong, which deify and promote their ringleaders, and adopt such illicit means as fabricating and spreading superstition and heresy to delude and deceive others, recruit and control members and thereby endanger society. Cults, to varying degrees, can be found all over the world. The social damage and negative influences they inflict have become problems that cannot be ignored in some countries, and China is no exception. Some people, under the guise of religion or practicing qigong, advocate feudal superstition, incite anti-social sentiments, undermine public morality by spreading unfounded rumors, and deceive the people, thus seriously disrupting social order and resulting in serious damages to the people’s lives and property. In October 1999, the Standing Committee of the National People’s Congress of the People’s Republic of China adopted a resolution titled the Decision on Banning Cult Organization, Guarding against and Punishing Cult Activities, which provides that cults and cult activities that seriously disrupt social order under the guise of religion, qigong and so on “must be banned in accordance with law and resolutely punished”, and that “criminal activities such as organizing and using cults to undermine the enforcement of the laws and administrative regulations of the state, gather crowds to create disturbances, disrupt social order, deceive others with superstition and heresy, cause the death of any other person, engage in illicit sexual relationship with women, fraud and other criminal activities shall be severely punished in accordance with law”. At the same time, in view of the fact that cults are highly deceptive in nature, the Decision on Banning Cult Organizaiton, Guarding against and Punishing Cult Activities provides that in order to win over and educate the vast majority of the people, and isolate and crack down on criminals, who merely form a tiny minority of the population, the Decision on Banning Cults and Preventing and Punishing Cult Activities states: “we must adhere to the criminal justice policy of tempering justice with mercy and follow the principles of seeking unity with, educate and save the vast majority while isolating and punishing a tiny minority. In the process of fighting against cults in accordance with law, it is necessary to distinguish those who are involved in cult activities without realizing the true nature of such cults, from those criminals who organize and use cults to carry out illegal activities and deliberately undermine social stability. The people who are deceived into joining cults will not be

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investigated; while the organizers, planners, commanders and diehard elements of cults who commit crimes shall be resolutely investigated for criminal responsibilities in accordance with law. Those who surrender themselves to the authorities voluntarily or perform meritorious service may be given a lighter or mitigated punishment or may even be exempted from punishment in accordance with law.” In recent years, the people’s courts across the country have been closely adhering to the criminal justice policy of tempering justice with mercy and the principles of seeking unity with, educate, and save the vast majority on the one hand and isolating and cracking down against a tiny minority on the other hand, and heard different types of criminal cases involving cults, effectively combating the criminal activities perpetrated by evil cults and curbed the development and spread of cults. However, at the same time, we should clearly see that the cults, as are represented by “Falun Gong” and “the Church of Almighty God”, still retained considerable influence through their activities, and more people would fall victims to those cults if timely and intense efforts failed to be made to crack down on them. 2. The Defendants Zhang X and Zhang X (A) in this Case Should be Prosecuted for Criminal Responsibilities for the Crime of Intentional Homicide and the Crime of Using a Cult to Undermine Law Enforcement (1) Accurately Distinguish the Crime of Organizing a Cult to Undermine Law Enforcement from the Crime of Using a Cult to Undermine Law Enforcement Zhang X and a co-defendant in the case, Lu X, who are both followers of “the Church of Almighty God” cult, recruited Zhang X (A), and Zhang Y into the cult. Zhang X and Lu X secretly organized more than 40 members of “the Church of Almighty God” in Zhaoyuan City and nearby villages and towns in Shandong Province to hold more than 100 gatherings, and printed and disseminated quite a number of propaganda materials for “the Church of Almighty God”. During the hearing of the case, controversy arose as to whether the conducts should be identified as “organizing a cult”. We hold that the term “organizing” as in the crime of “organizing a cult” refers to the act of initiating or creating a cult, or merging, splitting, or reorganizing a cult. However, in the present case, although Zhang X and Lu X did organize more than 100 gatherings of the cult, what they had done cannot be categorized as initiating or creating a cult, or as merging, splitting or reorganizing the cult. Therefore, their conduct should not be deemed as constituting the crime of organizing a cult to undermine law enforcement. (2) Accurately Ascertain whether Article 300 (2) or Article 300 (3) of the Criminal Law Should be Applied According to Article 7 of the Judicial Interpretation on Several Issues about the Application of Law in Handling Criminal Cases Involving Obstructing the Legal Enforcement by Way of Establishing and Making Use of Cult Organizaitons, organizing or using a cult to “deceive any person…, thereby giving rise to serious injury or death of such person” under Article 300 (2) of the Criminal Law refers to organizing or using a cult to fabricate and spread superstitious heresies, deceive cult followers

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or any other person into abstaining from food or engaging in self-abuse, etc., or deceiving patients into refusing to accept normal medical treatment and thereby resulting in serious injuries and deaths. In the present case, the defendants Zhang X, Zhang X (A), Lu X and other members of “the Church of Almighty God” cult beat the victim, Wu X, to death, in the presence of customers at the restaurant, after their requests for the victim’s telephone number, which were made in a bid to recruit new cult members, were declined by the victim. In addition, after the tragedy happened, the defendants still claimed repeatedly that “the woman was a ‘devil’ and an ‘evil spirit’, so we must kill her”, that “we are not afraid of the law, and we believe in the God.” Under the influence of the heresy promoted by “the Church of Almighty God” cult, Zhang X, Zhang X (A) et al., believe that anyone who refuses to obey their will is an “evil spirit” and “devil”, and so they must kill him/her. That is the very reason for the tragedy, in which the victim was beaten to death by Zhang X, Zhang X (A), et al., for the simple fact that she refused to give them her telephone number. Such conduct, however, does not conform to the scenarios provided under Article 300 (2) of the Criminal Law, and therefore do not constitute the crime of using a cult to cause the death of any person; so Article 300 (3) of the Criminal Law should apply, and the conduct constitutes the crimes of intentional homicide and using a cult to undermine law enforcement. In view of this, the two defendants should be prosecuted for criminal responsibilities on the basis of concurrent sentence for multiple crimes. 3. Defendants Zhang X and Zhang X (A) are the Principal Offenders in this Case and Should be Severely Punished in Accordance with Law Defendants Zhang X and Zhang X (A) intentionally killed a person at a public place, in which Zhang X was the initiator, organizer and main perpetrator of the intentional homicide, and played a major role in the joint crime and is therefore the principal offender. Zhang X (A), for his part, is also a main perpetrator of intentional homicide and played a major role in the joint crime. In this sense, he is also a main offender. The two defendants committed intentional homicide with cruel means, which resulted in serious consequences and extremely adverse social impact. In view of this, their crimes are extremely serious, and they must therefore be severely punished in accordance with law. According to the criminal justice policy of tempering justice with mercy and on the basis of the facts, nature, and degree of negative social impact of the crimes committed by each of the defendants, the people’s court sentenced Zhang X and Zhang X (A) to death, and sentenced the other defendants to life imprisonment and fixed-term imprisonments; Zhang Z, who was less than 14 years of age, was placed under custodial education by the police authority, which testifies to the criminal justice policy of “seeking unity with, educate and save the vast majority while isolating and punishing a tiny minority”. The verdict of the present case has won wide recognition and acceptance from the public, and reflects China’s firm determination to severely punish serious cult-related crimes. The combat against crimes committed by cults not only entails severely punishing perpetrators, honoring the memory of the deceased and eliminating panic

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through fair and equitable court trials; to a greater extent, it also depends on the rule of law: the fight against evil cults must be guided by the principles of the rule of law and be fueled with law-based means; and the education against cults should also be based on the rule of law. The people’s courts, by duly hearing cases involving crimes committed by cults, not only defend the authority of law in terms of severely cracking down on crimes committed by cults, but also strictly uphold a principle of the rule of law, i.e., separating evil cults from normal religions. Such efforts of the people’s courts not only enable the society to clearly recognize the nature and harm of evil cults, and enhance the people’s awareness to cherish their lives and stay away from cults. The openness and transparency of the judicial process have brought justice to light, consolidated the confidence of the society as a whole in defeating evil cults, guided the general public to acquire and uphold socialist core values, and enhanced the ability of the people to identify and guard against evil cults.

Qiquan Wang Juris Master, senior judge, the Second Criminal Division of the Supreme People’s Court of the People’s Republic of China.

The People v. Wang X (Obstruction of Testimony): Identifying Standards for the Constitution of the Crime of Obstruction of Testimony Jinya Wang and Jianfang Yun

Rule For a conduct of witness tampering, a comprehensive assessment shall be carried out on the basis of the specific circumstances of the case from the perspectives of the perpetrator’s motivation, the amount claimed, the means adopted, the consequences and the degree of impact on litigation activities, so as to determine whether it constitutes a crime.

Case Information 1. Parties The Public Procuratorial Organ: The People’s Procuratorate of Guichi District, Chizhou City, Anhui Province Petitioner (the Accused in the Trial): Wang X 2. Procedural History First Instance: No. 0083 [2010] Trial, Crim. Division, the People’s Court of Guichi District, Chizhou City, Anhui Province (Dated Jul. 21 of 2010)

Petition Review Panel: Jinya Wang, Baojun Dong and Fang Mei (Edited by Xianrong Bao; translated by Zhijian Cao) J. Wang (B) · J. Yun The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_11

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Second Instance: No. 0042 [2010] Final, Crim. Division, the Intermediate People’s Court of Chizhou City, Anhui Province (Dated Oct. 11 of 2010) Application for Reopening the Case: No. 433 [2018] Appeal, Crim. Division, the Supreme People’s Court (Dated Sept. 28 of 2018) 3. Cause of Action Witness tampering

Essential Facts On November 7, 2006, Anhui Dongdun Wood Industry Co., Ltd. (hereinafter referred to as Anhui Dongdun) and Quzhou Andi Steel Structure Co., Ltd. (hereinafter referred to as Quzhou Andi) concluded the Contract on Construction Project Implementation, under which it was agreed that Quzhou Andi would construct the steel structure workshops of the main facility of Anhui Dongdun. At 23: 55, March 3, 2007, all the steel structure workshops that had been constructed by Quzhou Andi collapsed. Upon receiving a notice from Anhui Dongdun on the incident, the defendant, Wang X, who is the Legal Representative, Board Chairman and General Manager of Quzhou Andi, rushed to the scene at Anhui Dongdun’s premises to deal with the incident. After holding consultations, both parties signed the Supplementary Agreement on March 5, 2007, which confirmed that Quzhou Andi must bear the direct economic loss sustained by Anhui Dongdun from the collapse, i.e., RMB5.5 million yuan, and stipulated that Wang X must guarantee with his own assets the performance of the contracts between the two parties and that Wang X must bear unlimited liability. Wang X affixed his signature to the supplementary agreement, indicating his approval thereof. In January 2008, in order to bring a lawsuit against Anhui Dongdun in Quzhou City, Wang X directed the co-defendant in the case, Zhang X, to re-draft a Contract of Undertaking on the basis of the content of the original Contract on Construction Project Implementation, and backdated the newly drafted Contract of Undertaking, as March 8, 2007. After that, Pan X, an employee of the Engineering Division of Quzhou Andi, brought the new contract to Anhui Dongdun and requested Anhui Dongdun to stamp the contract, claiming that it was for the purpose of issuing VAT invoices. Anhui Dongdun stamped the contract after Quzhou Andi issued a statement that “This Contract is exclusively for the purpose of issuing tax invoices and may not be used for any other purpose”. Later in October 2008, Wang X again instructed Zhang X to print out two copies of the Contract of Undertaking after minor changes were made to the format of the contract, and then affixed the two copies with the company’s official seal [hereinafter referred to as Contract of Undertaking (II)]. On October 27 of the same year, Wang X and Zhang X went to the office of Anhui Dongdun and requested Anhui Dongdun to stamp the two copies of the contract, claiming again that it was exclusively for

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the purpose of issuing tax invoices. After Wang X issued an undertaking stating that “The contract by and between our company and your company dated March 8, 2007 shall be null and void and shall not have any legal effect whatsoever”, Anhui Dongdun affixed its official seal to the two copies of the contract and handed them back to Wang X. However, for the purpose of illegally seizing assets of Anhui Dongdun through litigation, Wang X instructed Zhang X to add a hand-written supplementary clause in the blank space on the Contract of Undertaking (II) in November 2008, i.e., “Supplement: The Contract on Construction Project Implementation concluded by and between Party A and Party B on November 7, 2006, and the Supplementary Agreement concluded by and between them on March 5, 2007 shall be invalidated. Party A and Party B shall each bear 50% of the direct economic losses in the amount of RMB5.5 million yuan sustained by Party B from the collapse of the steel-structure works on March 3, 2007.” Subsequently, Wang X signed the contract and changed the numeral “8”, as in the date “March 8, 2007” on the print-out copies of the contract, to “11” [hereinafter referred to as Contract of Undertaking (III)]. In December 2008, Quzhou Andi filed a civil lawsuit with the People’s Court of Kecheng District, Quzhou City, Zhejiang Province, citing the dispute over the Contract of Undertaking, submitting the Contract of Undertaking (III) as the main item of evidence to the court, and demanding Anhui Dongdun to bear the economic losses from the collapse of the works in the amount of RMB2.75 million yuan and construction project payment in the amount of RMB2.2 million yuan, as was required by the handwritten supplementary clause in Contract of Undertaking (III). Further, Quzhou Andi filed an application to the court for property preservation on December 25, 2008, demanding the seizure of RMB4.95 million yuan worth of assets of Anhui Dongdun. The People’s Court of Kecheng District issued a civil ruling on December 25, 2008, ordering the seizure of RMB4.95 million yuan worth of property of Anhui Dongdun or the freezing of RMB4.95 million yuan in bank deposits of Anhui Dongdun, as a result of which, the bank account of Anhui Dongdun was frozen. In January 2009, Anhui Dongdun brought a civil lawsuit with the People’s Court of Guichi District of Chizhou City, Anhui Province, against Quzhou Andi and Wang X as defendants, demanding Quzhou Andi to indemnify Anhui Dongdun against the direct economic losses, in the amount of RMB5.5 million yuan, which Anhui Dongdun sustained from the collapse of its workshops, in accordance with the Supplementary Agreement. Quzhou Andi submitted the Contract of Undertaking (III) as the main item of evidence to the People’s Court of Guichi District on February 5, 2009 after receiving the Notice of Response served on it by the People’s Court of Guichi District; further, it also raised an Application for Jurisdiction Objection. On February 28, 2009, Anhui Dongdun reported Wang X to the police authority of Chizhou City on the ground of alleged witness tampering. Later, Zhang X and Wang X were placed under detention. On July 21, 2010, the People’s Court of Guichi District, Chizhou City, Anhui Province, rendered a criminal decision (No. 0083 [2010] Trial, Crim. Division, the People’s Court of Guichi District, Chizhou City, Anhui Province), according to which

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Wang X was convicted of the crime of witness tampering and sentenced to three years’ imprisonment. After the sentence was pronounced, Wang X lodged an appeal. On October 11, 2010, the Intermediate People’s Court of Chizhou City, Anhui Province, rendered a criminal ruling (No. 0042 [2010] Final, Crim. Division, the Intermediate People’s Court of Chizhou City, Anhui Province), rejecting the appeal and upholding the decision by the court of first instance.

Issue Whether Wang X’s conduct constituted the crime of witness tampering.

Holding Wang X refused to accept the ruling by the court of second instance, and lodged a petition to the Supreme People’s Court to reopen the case for new trial, mainly on the ground of the following claims: (1) The petitioner’s attempt to resolve the economic disputes between the two parties through litigation and in accordance with the Contract of Undertaking involved in the case was an exercise of the petitioner’s legal rights. The petitioner did not have the intent to illegally seize Anhui Dongdun’s property and therefore, the Supplementary Agreement signed by and between both parties was obviously unfair; (2) The signing of the Contract of Undertaking involved in the case was based on a consensus by and between the two parties. The existing evidence showed that Anhui Dongdun also held a copy of the Contract of Undertaking, but refused to provide it for comparison (with the copy held by the petitioner). Therefore, the rulings by the courts of first and second instances, according to which the petitioner was found to have directed another person to make unauthorized addition to Contract of Undertaking, had been made exclusively on the oral testimony of Zhang X, and therefore, were based on unclear facts and inadequate evidence. In view of this, the petitioner should be acquitted according to the principle of in dubio pro reo. Upon review of the case, the Supreme People’s Court held that the fact that the defendant, Wang X, instigated other persons to forge evidence, as had been noted in rulings by the court of first and second instances, was supported by numerous items of evidence, such as witnesses’ testimonies, judicial expert opinions, confessions by the co-defendants in the case, Zhang X and Wang X, among others. Furthermore, the Defendant, Wang X, in order to reduce his liability for indemnity, instigated others to forge evidence, brought a lawsuit and raised jurisdiction objection on the ground of such forged evidence, in the absence of any evidence showing that the Supplementary Agreement was invalid or obviously unfair, as a result of which the court rendered a ruling on property preservation and another ruling rejecting the jurisdiction objection, thus impairing the normal adjudication order of the court.

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Such conduct of the defendant constituted the crime of witness tampering. In view of this, conviction and sentencing by the court of first instance on the ground of such crime was not improper or invalid, and hence the grounds for the defendant’s petition were untenable.

Comment on Rule In the process of hearing the present case, the judges at all levels of courts involved in the case had different opinions on the characterization of the case. One opinion held that Wang X’s conduct had met the constitutive requirements of the crime of witness tampering provided in law and should therefore be deemed as a crime. Another opinion argued that the current law and judicial interpretations do not provide for the specific applicable standards for the crime of witness tampering, which are difficult to quantify. Judging from the circumstances of Wang X’s conduct in the present case, it would be inappropriate to deem Wang X’s conduct as a crime, as his primary purpose was to safeguard his legitimate rights and interests; on the other hand, in the objective sense, the court did not accept the forged evidence and therefore did not result in a miscarriage of justice or cause any serious damage to Anhui Dongdun. After proper review, the Supreme People’s Court found that Wang X had committed the crime of witness tampering. 1. Basis for Identifying the Crime of Witness Tampering Article 307 (1) of the Criminal Law states that: “Whoever, by violence, threat, bribery or any other means, obstructs a witness from giving testimony or instigates another person to give false testimony shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; if the circumstances are serious, such person shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years.” Paragraph 2 of the same article states that: “Whoever helps any of the parties destroy or forge evidence, if the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention.” Viewed exclusively from the perspective of Paragraph 1, the crime of witness tampering falls into the category of behavioral offense, i.e., as long as the perpetrator has any behavior of witness tampering, he or she will be deemed as having committed the crime, regardless of whether there arises any objective harmful consequence. However, in judicial practice, not all conduct of witness tampering is investigated for criminal responsibility. Article 111 of the Civil Procedure Law provides that if a participant in an action or any other person uses violence, threats or subornation to prevent a witness from giving testimony, or instigates, suborns, or coerces any other person to commit perjury, the people’s court may fine him or her or detain him or her according to the seriousness of the case; if the act constitutes a crime, the person shall be prosecuted in accordance with law.

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In addition, as is stated under Article 13 of the Criminal Law, the constitution of a crime requires not only that the underlying behaviors meet the constitutive requirements of the corresponding crime provided in the specific criminal law subrules, but also requires that such offense must be serious enough to warrant criminal punishment. Therefore, any conduct of witness tampering or aiding the destruction or forgery of evidence should be properly assessed on the basis of their circumstances to determine whether it is serious enough for criminal punishment, and in turn determine whether the conduct qualifies as a criminal offense. In so doing, the seriousness of the circumstances of the conduct is one of the major criteria for determining whether a crime is constituted. 2. Correctly Understanding and Applying the Criminalization Standards for the Crime of Witness Tampering and the Standards for Assessing the Seriousness of Circumstances The object violated by the crime of witness tampering is the normal litigation activities of state judicial organs and the citizens’ right to testify in accordance with law. The means employed in the crime of witness tampering include violence, threat, and bribery, among others, which are used to obstruct others from testifying or to instigate others to give false testimony. In particular, witness tampering also involves infringement upon citizens’ personal rights. Therefore, the aforementioned standards must be understood and applied on the basis of the description of the crime and the underlying legislative purpose. (1) Principles to be Observed (a) Proper attention must be paid to the boundary between judicial punishment and criminal punishment. Regardless of the category of legal proceedings, it is always a citizen’s due obligation to give testimony honestly and in accordance with law; however, it is a common occurrence in judicial practice that parties violate the principle of honesty and good faith for various reasons, prevent others from giving testimony and instigate others to give false testimony. If criminal punishment is imposed indiscriminately without proper differentiation, the scope of criminal punishment will be too broad to be desirable. (b) Due attention must be paid to maintaining a proper balance between punishing crimes and protecting litigation rights. Civil proceedings basically follow the principle of debate (Verhandlungsgrundsatz) and the principle of party disposition. The key to the objective existence of crimes of obstructing justice lies in the parties’ litigation rights, disposition and the validity of effective decisions. Therefore, on the one hand, citizens, legal persons and other organizations should be encouraged to safeguard their rights through litigation; on the other hand, it is also necessary to punish conduct obstructing justice in accordance with law. (c) Proper attention should be paid to concurrence between this crime and other crimes. Using violence, threat, bribery and other methods to prevent others from

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testifying or instigating others to commit perjury may also constitute crimes of intentional injury, bribery and fraud, and should thereof be treated as ideal concurrence of offenses. (2) Proper Identification and Application of Criminalization Standards Witness tampering may occur in a wide range of time and space, i.e., it may occur both in criminal, civil and administrative proceedings alike, and may happen in litigation activities both before and after litigation is initiated. The adverse consequences of the crime may vary depending on the stage of litigation in which it is committed. In judicial practice, the factors that the court will consider when determining whether the crime of witness tampering has been committed include the perpetrator’s motivation, the amount claimed, the means adopted, the resultant consequences and the degree of influence on litigation. More specifically: (a) Motivation of the perpetrator’s conduct. The motivation underlying the perpetrator’s conduct—whether the perpetrator subjectively carries out the conduct for the purpose of illegally realizing his/her/its own legal interests, or for the purpose of illegally possessing any other person’s legal property or for any other illegal purpose—reflects differently on the subjective malice of the perpetrator. The situation in which both ends and means are illegal is obviously greater in subjective malignancy than the situation where the ends are legal but the means are illegal. (b) The amount claimed. The greater the amount of the subject matter of the lawsuit, the greater the harm or loss that the conduct of witness tampering may cause to others; the more critical the content of the false testimony that the perpetrator instigates others to give, the greater the adverse impact on the litigation results. In the event that the existing laws and judicial interpretations fail to clearly define the threshold value of subject matter that the crime of witness tampering entails, the amount can be determined according to the local economic development level, cause of action, circumstances of the case, etc. (c) Means adopted. The higher the intensity of and the greater the malice underlying the violence, threat and bribery adopted in perpetrating the crime, the greater the culpability. When evaluating the malice of conduct, appropriate assessment should be carried out according to the evaluation standards under social ethics, as well as the degree of damage and danger involved. (d) The extent of damage to the interests of others. For example, the value of other persons’ property that are sealed up, seized and transferred, the degree of adverse impact on normal production and operation, and whether the decision has resulted in any miscarriage of justice, are all factors that need to be considered when measuring the degree of damage. (e) The degree of interference with and adverse impact on normal judicial activities. The responsibilities of the perpetrators vary depending on whether the litigation

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process has started, whether the judicial process has been impacted and if yes, the degree of such impact. On this basis, the following distinctions can be made: first, the conduct of witness tampering is committed, yet the litigation is yet to be initiated, or such conduct does not render it impossible for the litigation to proceed. Second, the litigation has been initiated, yet the impaired testimony has been uncovered and therefore fails to affect the fairness of the decision. Third, the litigation process has been initiated, the identification and authentication of evidence affected by such conduct result in a great deal of judicial cost. Fourth, the resultant false evidence fails to be uncovered and identified, and hence the judicial organ makes a wrong decision based on it. Fifth, the judicial organ initiates the enforcement procedure according to the wrong decision and completes the enforcement. With the proceeding of the litigation, the greater the resulting waste of litigation resources and the infringement on judicial fairness caused by such conduct of witness tampering are, the more serious the circumstances will be. To sum up, when determining whether a conduct of witness tampering constitutes a crime, assessment may be carried out on the basis of the above factors, so as to comprehensively ascertain whether the conduct of witness tampering committed by the perpetrator is serious, whether the means adopted are malicious, and whether the degree of infringement on the normal litigation activities of the judicial organs and the resulting consequences are serious. If the circumstances are obviously minor and the resultant harm is not significant, such conduct should not be deemed as the crime of witness tampering. 3. Analysis of the Case In the present case, Wang X’s conduct should be deemed to constitute the crime of witness tampering. (1) In terms of motivation and purpose, the perpetrator, Wang X, intended to reduce his liability for indemnity. After signing a supplementary agreement with Anhui Dongdun, Wang X was dissatisfied with the clause requiring Quzhou Andi to indemnify Anhui Dongdun against economic losses sustained by the latter in the amount of RMB5.5 million yuan. Therefore, he deceived Anhui Dongdun into stamping the Contract of Undertaking prepared by him, claiming that it was for the purpose of issuing tax invoice; after that, he instructed another person to add a handwritten clause to the contract, modified the indemnity clause of the contract, and attempted to achieve his purpose through litigation. Although he claimed that the supplementary agreement was obviously unfair in that the collapse of the workshop structure was caused by the other party, he nonetheless failed to provide any evidence for his claims, neither did he prove that he had been forced to sign the agreement. In view of this, it cannot be deemed that Wang X had acted for legitimate or reasonable purposes. (2) In terms of the mode of his conduct, Wang X’s conduct was in essence instigating the co-defendant, Zhang X, to forge a clause in the contract, which is in line

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with the constitutive requirements of instigating others to commit perjury as is provided for under Article 307 of the Criminal Law. (3) In terms of the consequences, Wang X filed a lawsuit and raised an objection to jurisdiction based on the contract that he modified without authorization. In this sense, the resultant false evidence had entered the litigation process; the court accepted the case and rendered a ruling on property preservation or rejecting the objection to jurisdiction, and the bank deposits of Anhui Dongdun were frozen. Although the false evidence was later identified and the court did not render a wrong decision, the Defendant’s conduct had led to a waste of judicial costs and impaired judicial efficiency, and might also have had an impact on the mediation and settlement of the civil case between the parties. In summary, the defendant, Wang X, for the purpose of reducing his liability for indemnity, instigated another person to forge evidence, and filed a lawsuit, which had hindered the normal adjudication order of the courts involved and caused the courts to render rulings. In view of this, the defendant’s conduct crossed the threshold for criminal punishment and constituted the crime of witness tampering. However, in view of the fact the courts did not render a wrong decision on the basis of such conduct and therefore did not cause actual economic losses to the other party in the civil case, such conduct was not deemed as involving “serious circumstances”.

Jinya Wang Master of Laws, senior judge, vice-president of the Case Filing Division of the Supreme People’s Court of the People’s Republic of China. Jianfang Yun Master of Laws, assistant judge (2017-2018), the Fourth Circuit Court of the Supreme People’s Court of the People’s Republic of China; senior judge, the Third Criminal Division of the Higher People’s Court of Hunan Province.

The People v. Yang X and Shi X (Misappropriation of Public Funds): Assessment and Application of the “Special Circumstances” Warranting a Sentence Lesser than the Statutory Penalties Xiaoyang Shang

Rule 1. In order to help other persons to fulfill their tasks to solicit cash deposits, the accused transferred public funds into another bank, which did not constitute a case of misappropriation of public funds to engage in profit-making activities. 2. Discretionary mitigation of punishment stated under Article 63 (2) of the Criminal Law is applicable not only to special cases that involve national interests, but also to ordinary criminal cases that involve “special circumstances”, e.g., social harmfulness and personal danger involved are obviously minor.

Case Information 1. Parties Procuratorial Protest-Lodging Organ (the Original Procuratorial Organ): the People’s Procuratorate of Shunhe Hui Nationality District, Kaifeng City, Henan Province The Accused in the Trial: Yang X The Accused in the Trial: Shi X

Review Panel: Xiaoyang Shang, Linlin Liu and Lusheng Lu (Edited by Xianrong Bao; translated by Zhijian Cao) X. Shang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_12

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2. Procedural History First Instance: No. 68 [2016] Trial, Crim. Division, the People’s Court of Shunhe Hui Nationality District, Kaifeng City, Henan Province (Henan 0203) (Dated Dec. 1 of 2016) Second Instance: No. 372 [2017] Final, Crim. Division, the Intermediate People’s Court of Kaifeng City, Henan Province (Henan 02) (Dated Dec. 1 of 2017) Review: No.41244460 [2018] Review, Crim. Division, the Supreme People’s Court (Dated Nov. 20 of 2018) 3. Cause of Action Review of a sentence lesser than the minimum statutory penalty for the crime of misappropriation of public funds

Essential Facts In January 2013, as part of the project to develop Henan section of the passengerdedicated railway between the cities of Zhengzhou and Xuzhou, which was jointly invested by the People’s Government of Henan Province and the Ministry of Railways under the central government, more than 120 mu of land of Yanlingfu Village, Duliang Township, Xiangfu District, Kaifeng City, Henan Province, was occupied, and as compensation for the land, a total of RMB6,429,540 yuan was paid to the Yanlingfu Village, at the rate of RBM 52,000 yuan per mu of land. On June 9, 2013, the Finance Office of the Duliang Township transferred the compensation for the land so occupied, i.e., RMB6,492,954 yuan, into the bank account opened by Shi X opened with the Rural Credit Co-operative of Duliang Township, specifically designated for receiving the compensation paid for the land of Yanlingfu Village taken up by the Zhengzhou-Xuzhou Passenger-dedicated Railway (as the village does not have an Organization Code Certificate, it cannot open a corporate account with a financial institution; therefore, the designated special account is actually a personal account of Shi X, who is the accountant of the village). After employees of the Branch Office of the Postal Savings Bank of China in Xiangfu District, Kaifeng City, Henan Province, learned that the land compensation for Yanlingfu Village had been paid, they contacted the Accused, Yang X, and requested him to deposit the compensation, which is by nature public funds, into the local Postal Savings Office, so as to help him complete his task to solicit cash deposits. On June 14, 2013, Yang X and Shi X drew RMB3 million yuan in cash from the special account for the compensation funds, and deposited it in Duliang Township Postal Savings Office in the name of Shi X. On September 14 of the same year, Shi X withdrew the RMB3 million yuan and distributed it to the villagers. On June 18, 2013, Yang X and Shi X withdrew RMB3.5 million yuan in cash from the land compensation account, of which, RMB1.8 million yuan was deposited with the Liudian

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Township Postal Savings Office as demand deposit, and the remaining RMB1.7 million yuan was deposited in Yuanfang Township Postal Savings Office as demand deposit in Shi X’s name, so as to help Sun X, Director of Liudian Township Postal Savings Office, and Zhu X, Director of Yuanfang Township Postal Savings Office, to fulfill their respective tasks to solicit cash deposits. Of the RMB1.8 million yuan deposited in Liudian Township Postal Savings Office, Shi X withdrew RMB119,251 yuan on September 19, 2013 and the remaining RMB1,680,749 yuan was withdrawn by January 9, 2014. The two installments had been distributed to the villagers. Of the RMB1.7 million yuan deposited in Yuanfang Township Postal Savings Office, Shi X withdrew RMB829,300 yuan on September 14, 2013 and RMB870,700 yuan on September 19, 2013 respectively. Both installments had also been duly distributed to villagers. During this process, Yang X and Shi X received two cartons of cooking oil, two sacks of rice, one carton of liquor, among others, from the Postal Savings Offices of Duliang Township, Liudian Township and Yuanfang Township, and attended banquets hosted by relevant personnel. After the case was known to the public, Shi X returned RMB5,643 yuan in bank interest generated by the RMB6.5 million yuan deposited with the Postal Savings Offices. On December 1, 2016, the People’s Court of Shunhe Hui Nationality District, Kaifeng City, Henan Province, rendered a criminal decision {No.68 [2016] Trial, Crim. Division, the People’s Court of Shunhe Hui Nationality District, Henan Province (Henan 0203)}, according to which the accused, Yang X and Shi X, were sentenced to two years of fixed-term imprisonment, with a three-year suspension respectively, for the crime of misappropriating public funds, which were lighter than the minimum statutory penalties for the crime. After the sentence was pronounced, the People’s Procuratorate of Shunhe Hui Nationality District, Kaifeng City, Henan Province, lodged a procuratorial protest. The Intermediate People’s Court of Kaifeng City, Henan Province, after a public hearing, rendered a criminal ruling {No. 372 [2017] Final, Crim. Division, the Intermediate People’s Court of Kaifeng City, Henan Province (Henan 02)} on December 1, 2017, rejecting the procuratorial protest, and upheld the decision by the court of first instance. Upon review of the case, the Higher People’s Court of Henan Province upheld the decision and submitted the case to the Supreme People’s Court for review in accordance with law.

Issues 1. If a person deposits public funds into another bank for the purpose of helping another person to fulfil his/her task of soliciting cash deposits, should it be deemed as misappropriating public funds to engage in profit-making activities; 2. The scope of application and standards for properly identifying “special circumstances” under Article 63(2) of the Criminal Law; 3. What are the “special circumstances” warranting the sentences in the present case which were lesser than the statutory penalties for the crime?

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Holding Upon review of the case, the Supreme People’s Court held that the accused, Yang X and Shi X, as employees of a grassroots administrative organization engaged in public affairs according to law, abused their office to misappropriate RMB2,670,700 yuan in public funds for personal use, and the misappropriated funds were not returned until more than three months later. Therefore, the circumstances of the offense were serious, and the conduct of the Defendants constituted the crime of misappropriating public funds. However, in view of the fact the Defendants misappropriated public funds not to seek personal gains, but to help others to fulfil their tasks of soliciting cash deposits, their conduct did not involve serious subjective malice; after the land compensation was transferred from the designated account opened with the local rural credit cooperative into the local Postal Savings Offices, neither the owner of the account or the type of deposit of the funds involved was changed, and the place where the cash was deposited did not affect the control over the funds; the misappropriation of public funds lasted for a relatively short period of time; the misappropriated funds had already been duly distributed to the villagers years before the case was exposed, and hence the resultant social damage was relatively minor; the two defendants had been earnest in their confession and repentance, and the bank interest, in the amount of RMB5,643 yuan, held by Shi X, had been fully refunded. In view of the aforementioned special circumstances, the two Defendants can be sentenced to a penalty lesser than the statutory penalty. The first-instance decision and the second-instance ruling were based on clearly identified facts, valid and sufficient evidence, appropriate conviction, and due process of trial. Therefore, it was decided after proper review to uphold the criminal ruling by the Intermediate People’s Court of Kaifeng City, Henan Province {No. 372 [2017] Final, Crim. Division, the Intermediate People’s Court of Kaifeng City, Henan Province (Henan 02)}, which upheld the sentences meted out by the court of first instance against the accused, Yang X and Shi X for misappropriation of public funds, i.e., a fixed-term imprisonment of two years, suspended for three years.

Comment on Rule 1. Correctly Understanding “Depositing Misappropriated Public Funds in a Bank is in Essence Using Misappropriate Public Funds to Engage in ProfitMaking Activities” According to Article 384 of the Criminal Law and Article 2 of the 1998 Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds, there are three different circumstances in which state functionaries are deemed to misappropriate public funds for personal use by abusing their office. The first is to misappropriate public funds for illegal activities. The second is to misappropriate a large amount of public funds for profit-making

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activities. Third, the amount of misappropriated public funds is relatively large and the misappropriated funds fail to be returned more than three months after such misappropriation occurs. The Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds further clarifies that the appropriation of public funds for profit-making activities is not limited by the period of time during which such appropriation endures or by whether the misappropriated funds are returned or not; misappropriating public funds and depositing the misappropriated funds in a bank, using the misappropriated public funds to raise funds, to purchase stocks, treasury bonds, etc. are also categorized as misappropriation of public funds for profit-making activities. Then how to understand the provision in the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds that “depositing misappropriated public funds in a bank should be categorized as misappropriation of public funds for profit-making activities”? According to one opinion, the personal gains (in the form of bank interests) from the act of misappropriating public funds and depositing the misappropriated public funds in a bank are rather limited, involving relatively insignificant risks that the public funds may be lost; therefore, such act in essence is not a profit-making activity and as such, should not be interpreted as one of the “profit-making activities” under Article 384 of the Criminal Law, and should instead be treated as the third circumstance of misappropriating public funds. Another view is that the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds clearly states that any and all cases of depositing misappropriated public funds in a bank should be deemed as “profit-making activities” as provided under Article 384 of the Criminal Law. We believe that both of the above views are inappropriate. First of all, although compared with such acts as using misappropriated public funds in such investment operation as fund-raising, purchasing stocks or state treasury bonds, depositing misappropriated public funds in a bank is less straightforward in terms of its profitseeking nature, and involving relatively less significant risks that the funds may be lost, the profit generated by such act nonetheless reflects the profit-making nature. The amount of profit therefrom depends on the amount of misappropriated funds and the type of bank deposit that the misappropriated funds are used as, and therefore does not affect the confirmation of the profit-making nature of such act. As for the degree of risks that the misappropriated public funds may be lost, it is difficult to properly identify the standards for assessing the degree, and such risks are not adopted as a criterion for distinguishing the three circumstances involved in misappropriating public funds. More specifically, the first opinion equates “profit-making activities” with investment and business activities, and therefore in essence narrows down the scope of the corresponding provisions in the Criminal Law; in this sense, the first opinion fails to conform to the legislative spirit and relevant provisions in the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds, and may possibly be too lenient on the crime, and may even induce people to deposit public funds into banks repeatedly to earn interest; as

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long as such deposits does not exceed three months, they can avoid being criminalized. Secondly, the provision in the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds that “depositing misappropriated public funds in a bank should be categorized as misappropriation of public funds for profit-making activities” cannot be understood in an over-simplistic and literal way; instead, the provision must be analyzed and assessed from both the subjective and the objective perspectives. The act of misappropriating public funds and depositing such funds in a bank alone, without the subjective intent to make a profit therefrom, cannot be identified as “profit-making activities” that serve as the basis of the crime of misappropriating public funds. The second opinion is generally in line with the spirit of the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds; nonetheless, it adopts an absolute and literal approach to understanding the interpretation, ignoring the complexity of social realities, and failing to adhere to the principle that in identifying culpability, objective factors must be consistent with subjective factors. Therefore, such an opinion may possibly result in over-criminalization or excessive lenience in sentencing. In short, the act of misappropriating public funds and depositing the misappropriated funds into a bank to seek personal gains is essentially in line with the circumstance of “misappropriating public funds to engage in profit-making activities” provided in the Judicial Interpretation on Several Issues about the Specific Application of Law to Cases of Misappropriation of Public Funds. In the present case, the reason why Yang X and Shi X deposited public funds into a personal bank account was that the village does not have an Organization Code Certificate and therefore cannot open a corporate account with a bank. With approval by the township people’s government, they designated the personal account opened by Shi X with the rural credit cooperative in the township as the account for receiving the land compensation paid to the village. Later, upon request by others, the two persons, in the name of Shi X, transferred part of the funds in the designated account into the Postal Savings Offices of the townships. All aspects of the way in which the funds were deposited, except for the bank where they were deposited, remained unchanged. In addition, the two Defendants did so for the purpose of helping others fulfill their tasks to solicit cash deposits and did not harbor any subjective intent to seek profits. Therefore, the conduct of the defendants should not be categorized as profit-making activities. The cooking oil, rice and liquor received from the directors of the Postal Savings Offices of the Duliang Township, Liudian Township and Yuanfang Township were actually gifts given by the bank employees out of their gratitude for the defendants’ help and were not solicited by the two defendants or profits directly generated by the public funds they misappropriated. In view of this, the gifts that the defendants received by helping others fulfill their quotas of cash deposits to be solicited should not be deemed as indicators that the defendants had the subjective intent, or even that their conduct should be categorized as misappropriating public funds to engage in profit-making activities. In this sense, the conduct of the two defendants should be categorized as the third of the three circumstances involved in the crime of misappropriating public funds, and they should not be deemed as having

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appropriated public funds unless such misappropriating lasts for more than three months. On the basis of this, the prosecution accused the two defendants of misappropriating RMB6.5 million yuan in public funds; it was found out through court hearings that only RMB2,670,700 yuan of the public funds failed to be returned after being misappropriated for more than three months. Both the court of first instance and the court of second instance found that the amount of misappropriated public funds had been accurately identified, to which the prosecution raised no objection. 2. Correctly Understanding and Assessing the “Special Circumstances” Provided in Article 63 (2) of the Criminal Law From the perspective of historical evolution of the law, discretionary mitigation of punishment has been embodied in relevant laws and regulations enacted after the founding of the People’s Republic of China in 1949, as has been necessary in judicial practice. Article 59 (2) of the 1979 version of the Criminal Law clarified and standardized discretionary mitigation of punishment, i.e., “in cases where the circumstances of a crime do not warrant a mitigated punishment under the provisions of this Law, however, in the light of the special circumstances of the case, the minimum statutory punishment would be excessive, then upon decision by the adjudication committee of the people’s court, the criminal may still be sentenced to a punishment less than the statutory punishment”. Such a clause provides the legal basis and solution for people’s courts to impose penalties below the statutory penalty according to the specific circumstances of individual cases. However, there have been cases in which such a clause has been subject to misuse, undermining the basic principle of nulla poena sine legea, and causing widespread criticism. When the Criminal Law was amended in 1997, after widely soliciting opinions and holding in-depth discussions, discretionary mitigation of punishment system was retained in principle, but stricter provisions were made in terms of the applicable conditions and decision-making procedures. Article 63 (2) of the 1997 version of the Criminal Law states: “In cases where the circumstances of a crime do not warrant a mitigated punishment under the provisions of this Law, however, in the light of the special circumstances of the case, and upon verification and approval of the Supreme People’s Court, the criminal may still be sentenced to a punishment less than the prescribed punishment.” Through such a clause, the applicable conditions were changed from “specific circumstances” to “special circumstances”, reflecting stricter identification and application standards, which were primarily intended to achieve a balance in sentencing in cases with special circumstances. The decisionmaking procedure was changed “upon decision by the adjudication committee of the people’s court” to “upon verification and approval of the Supreme People’s Court”, reflecting the strengthening of supervision over the procedure, which is intended to prevent misuse of the clause by requiring hierarchical verification and approval. Laws and judicial interpretations do not include any express provisions on how to correctly identify the scope and standards for the application of “special circumstances” in judicial practice. After the revised Criminal Law came into force, there has emerged a prevailing opinion that “special circumstances” are mainly applicable to special cases that affect the interests of the state, such as national defense, foreign

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affairs, ethnic groups, religions, united front, etc., and are not applicable to ordinary criminal cases. One of the main arguments supporting the opinions is that the reason why the clause was retained in the amendment to the Criminal Law was the consideration that the clause is necessary for dealing with the aforementioned special cases. Influenced by such an opinion, for a certain period of time after the amendment, the cases involving sentences lesser than the minimum statutory penalty that were submitted through the court hierarchy to the Supreme People’s Court for review were few and far between. It seems that the discretionary mitigation of punishment had almost been shelved, with the situation moving from one extreme end to the opposite extreme end. However, with the social and economic developments in the past 20 years or so and the need for a balance between crime and punishment in individual cases in judicial practice, among the cases approved by the Supreme People’s Court to impose penalty lesser than the corresponding statutory penalty, there are few special cases related to national interests, with most cases being regular criminal cases with special circumstances, the most typical of which are Xu X’s theft case1 and Zhou X’s bribery case.2 We believe that if there are “special circumstances” in special cases involving national interests, Article 63 (2) of the Criminal Law can be applied as a matter of course, which is not only in line with the intention of relevant legal provisions, but also the very duty of judicial organs. About this, there has been a consensus among both theoretical researchers and practitioners of law. However, in addition to the above-mentioned special cases, ordinary criminal cases involving “special circumstances” may also be covered by the basis and reasons under Article 63 (2) of the Criminal Law. Some people argue that applying Paragraph 2 to ordinary criminal cases would contravene the original legislative purpose. We do not agree with this. First, the socalled “original legislative purpose” is not expressly supported by any law or document. Even if the so-called purpose had been considered in amending the Criminal Law, the judicial system must keep abreast with the social and economic development over the years. The “original legislative purpose” cannot become shackles hindering actual judicial practice. Second, in the absence of clear legal provisions, it is also against the principles of judicial equality and fairness to limit the scope 1 See

No. 18 [2008] Review, Crim. Division, the Supreme People’s Court of the People’s Republic of China. In this case, Xu X used his card to withdraw more than RMB170,000 yuan because he found the automated teller machine had broken down. In 2007, the Intermediate People’s Court of Guangzhou City, Guangdong Province sentence him to life prison for theft. Xu X appealed, the Higher People’s Court reversed the judgment and remand the case for a new trial. The Intermediate People’s Court of Guangzhou City, Guangdong Province sentenced him to five years in prison which was lesser than the statutory penalty after approved by the Supreme People’s Court. 2 See No. 32 [2014] Review, Crim. Division, the Supreme People’s Court of the People’s Republic of China. In this case, Zhou X took bribes of RMB240,000 yuan, and refund bribes due to failure to seek benefits for others. In 2014, the People’s Court of Wanning City, Hainan Province sentenced Zhou X to five years in prison for bribery which was lesser than the statutory penalty after approved by the Supreme People’s Court.

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of application to special cases that affect national interests. Third, ordinary criminal cases with “special circumstances” may also find themselves at the focal point of public opinions. If discretionary mitigation of punishment is not applied, it will obviously lead to incompatibility between crime and punishment, which in turn will cause the public to doubt fairness and justice, and affect the image and authority of state judicial organs. It is precisely to comply with expectations of the public that the Supreme People’s Court approved the application of “special circumstances” in the Xu X Case and Zhou X Case, achieving desirable judicial and social effects. Through reviewing individual cases, the Supreme People’s Court has enriched the interpretation of “special circumstances” and has made it clear that “special circumstances” can be applied to ordinary criminal cases. Of course, in order to prevent the abuse of discretionary mitigation of punishment, the Supreme People’s Court not only requires strict implementation of the procedures for the submission of cases for review, but also requires accurate assessment and strict control of the “special circumstances” involved in individual cases. Then, how should “special circumstances” be properly identified and applied in ordinary criminal cases? In our opinion, in an ordinary criminal case involving “special circumstances”, in contrast to common, frequent and typical criminal cases of the same kind as such ordinary case, the social harmfulness and the personal danger caused by the conduct of the perpetrators are obviously less significant, due to one or more special and exceptional circumstances involved in the case. As a result, a sentence within the range of the statutory penalty would be excessive; instead, proportionality between crime and punishment cannot be achieved in the case unless a sentence lesser than the statutory penalty is imposed. Judging from the approved judicial cases, the “special circumstances” involved in ordinary criminal cases mainly have the following features: Firstly, the subjective malice of the perpetrator in a case involving “special circumstances” is obviously less significant than that of the perpetrator in a typical criminal case, and the mens rea of the perpetrator tends to be accidental and induced. As the conduct perpetrated is incidental and special in nature, the perpetrator (even the majority of the public, for that matter) only has a very vague understanding of whether the conduct constitutes a crime or not and the degree of culpability when the conduct is perpetrated. After being arrested, the perpetrator makes a truthful confession and genuinely repents for his conduct. For example, one of the reasons for the Supreme People’s Court’s approval of the application of “special circumstances” in the Xu X Case is that “seeing that the automatic teller machine was malfunctioning, Xu X, on the spur of the moment, decided to steal from the machine. His behavior was accidental to some extent. Compared with crimes involving premeditated and prepared theft of valuables from financial institutions, the subjective malice on the part of Xu X was relatively minor.” In addition, due to poor management practices of the bank, the ATM malfunctioned, deducting less from the bank account than what had been withdrawn from it, which triggered and induced Xu X’s intent to commit the crime. As an ordinary migrant worker, Xu X believed that he was merely taking advantage of the bank and did not realize that he was committing the crime of larceny against a

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financial institution. Although Xu X was later imposed with a sentence lesser than the statutory penalty, he nonetheless voiced his objection to the sentence and received considerable public support calling for Xu X’s acquittal. Similarly, in the bribery case of Zhou X, the perpetrator, Zhou X, voluntarily returned the bribery because he could not help the people offering such bribery, thus greatly reducing the subjective malice and the risk of recidivism. Secondly, circumstances of the perpetrator’s crime are obviously less significant than those in typical crimes, in that the means adopted by the perpetrator are relatively simple, the crime committed by the perpetrator is mostly one-off crime or phased crime, and the conduct perpetrated is mostly “spontaneous” and are not forceful or destructive. For example, in the theft case of Xu X, the Supreme People’s Court held that “Xu X took advantage of the malfunction of the ATM to steal money from it by inputting instructions. Compared with theft by destructive means, the circumstances of the crime committed by Xu X are relatively minor.” In Zhou X’s bribery case, Zhou X accepted bribery by allowing others to pay for his tea bills; he did not seek any illicit benefit for any other person, and voluntarily returned the bribery. Furthermore, aside from the single instance of bribery, there are no facts supporting that there might be any other instance of bribery accepted by Zhou X. Thirdly, consequences of the perpetrator’s crime are obviously lighter than those in typical crimes, and the perpetrator often actively provides remedy and compensation afterwards to avoid more serious consequences, which is especially true in propertyrelated criminal cases, where in most cases the perpetrator, both prior and after the case is exposed, can voluntarily return the valuables they gain illicitly, thus minimizing the losses of the victims and even avoiding direct losses. In the case of Xu X, the perpetrator, Xu X, was unable to return the stolen money because he had failed in his investment and therefore lacked the financial resources to do so. Therefore, the objective consequences of his crime were serious. If Xu X had returned all the stolen money, he would have been sentenced to a punishment even lesser than the statutory penalty. In the bribery case of Zhou X, the perpetrator did not seek illicit benefits for the bribers and therefore did not cause any direct losses to the interests of the state, the collective or the society. He voluntarily returned the bribery to those who offered it two years before the crime was exposed. Similar circumstances also include the situation where public funds are misappropriated for a relatively short period of time and both the principal and interest are returned before the misappropriation is exposed, and the situation where the perpetrator who commits intentional injury adopts active and effective measures of relief, among others. Fourthly, the perpetrator’s crime involves more special circumstances than typical crimes, including: kinship with the victim, such as theft and injury committed against family members; the victim has obvious faults, e.g., where the victim commits any prior illegal and criminal offense, or the victim intentionally stirs up troubles; the victim voluntarily forgives the perpetrator and demands lenient punishment for the perpetrator; the crime is intertwined with moral issues, and therefore mainstream public opinion demands lenient punishment, which is of positive exemplary significance in guiding people’s behavior; the defendant has a special status, or physical

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and family conditions, e.g., the perpetrator is an atypical subject, or suffers from special diseases, etc. 3. The Present Case Involves a “Special Circumstance” that Warrants a Sentence Lesser than the Statutory Penalty The accused in the present case, Yang X and Shi X, as employees of a grassroots administrative organ engaged in public affairs according to the law, abused their office as managers of land compensation, transferred the land compensation in the special account opened with the local rural credit cooperative to the Postal Savings Offices, for the purpose of helping others to fulfill their tasks of soliciting cash deposits, and the funds so transferred failed to be returned more than three months after they were transferred. Therefore, their conduct constituted the crime of misappropriating public funds, and the circumstances were serious; in view of this, they should be sentenced to a fixed-term imprisonment of not less than five years according to relevant judicial interpretations. However, the three levels of courts in Henan Province as well as the Supreme People’s Court, after the hearing, examination and review of the case, believed that there were “special circumstances” in the present case, and the accused could be sentenced to a punishment lesser than the statutory penalty according to law. In addition to the above-mentioned “special circumstances”, during deliberations over the case, consideration was also given to the fact that the accused were not state functionaries; instead, they were assisting the people’s government in receiving and distributing land compensation for the villagers, which turned them into fictional state functionaries under law. The township government allowed the Defendants to receive land compensation with their personal account, and there was no clear requirement as to when the received land compensation would be paid to the villagers and how to deal with the bank interest on the compensation funds. The ability of the accused to commit the crime of misappropriating public funds was therefore attributable to the relevant government’s failure to supervise and regulate. Based on the “special circumstances” of the case, the Supreme People’s Court ruled in accordance with law to approve the ruling of the Intermediate People’s Court of Kaifeng City, Henan Province {No. 372 [2017] Final, Crim. Division, the Intermediate People’s Court of Kaifeng City, Henan Province (Henan 02)} on upholding the decision by the court of first instance that the accused, Yang X and Shi X, should be sentenced to fixed-term imprisonment of two years with a three-year suspension, which is lesser than the statutory penalty for misappropriation of public funds.

Xiaoyang Shang Juris Master, senior judge, the Second Criminal Division of the Supreme People’s Court of the People’s Republic of China.

Qin X v. Sun X and Zhang X (Dispute over a Sales Contract): A Dispute over the Expropriation Indemnity for Real Estate without an Ownership Certificate is a Civil Dispute Yanchen Li

Rule 1. According to the numerus clausus principle, ownership registration of real property at a registration authority is the statutory basis for acquiring real right. However, in reality, there are inevitably some real property that does not have planning permit and ownership certificate. The real right of such real property could not be registered for creation, change or elimination in accordance with the provisions of the Property Law. Even though such real property is transferred among interested parties, because the ownership could not be transferred, the interested parties could only occupy and use the real property, but could not acquire the right to use the state-owned land under the real property without certificates. 2. During expropriation, the expropriating subject will determine a specific amount of indemnities according to the expropriation plan. After the indemnity is paid, if dispute arose between interested parties over the ownership or distribution of the indemnity, and one party filed a lawsuit with a people’s court, then the people’s court should accept the case as a civil dispute.

Reopening Examination Collegiate Panel: Jijun Wang, Xiaoyun Li and Dan Wang; Collegiate Panel: Yanchen Li, Xiaoyun Li and Dan Wang (Edited by Wenyan Ding; translated by Yanni Wang) Y. Li (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_13

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Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellee in the Second Instance): Qin X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Sun X Third Party in the First Instance: Zhang X 2. Procedural History First Instance: No. 14 [2016] Trial, Civ. Division, the Third Intermediate People’s Court of Chongqing City (Chongqing 03) (dated Sept. 21 of 2016) Second Instance: No. 596 [2016] Final, Civ. Division, the Higher People’s Court of Chongqing City (dated Jan. 17 of 2017) Application for Reopening the Case: No. 556 [2017] Appeal, Civ. Division, the Supreme People’s Court (dated Apr. 27 of 2017) Case-reopening via Certiorari: No. 407 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 28 of 2017) 3. Cause of Action Dispute over a sales contract

Essential Facts On June 3, 2008, Qin X signed the Property Sales Contract with Sun X. After the conclusion of the contract, Qin X performed his obligation of payment, and Sun X performed the obligation of delivering the houses, land and 23 housing property certificates as agreed in the contract. Later, houses involved in this case were expropriated. Dispute arose between Qin X and the third party Zhang X over the expropriation indemnities for the involved real estate. On September 21, 2016, the court of first instance rendered the decision hereunder: (1) Qin X and the third party Zhang X jointly share RMB 58,180,115.5 yuan of expropriation indemnities for the land use right for 18,097 square meters of land located at No. 4 and No. 14, X Street, X District, Chongqing, 15,896.06 square meters of houses and the buildings and decorations of houses on that land, with Qin X enjoying 50% of the above-mentioned indemnities; (2) other claims of Qin X shall be dismissed. Sun X was not satisfied with the decision made by the court of first

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instance and lodged an appeal. On January 17, 2017, the court of second instance rendered its decision: (1) the civil decision (No. 14 [2016] Trial, Civ. Division) made by the Third Intermediate People’s Court shall be vacated; (2) Qin X and Sun X jointly share RMB 47,474,383.18 yuan of expropriation indemnities for the houses with certificates and land use right for the land located at No. 4 and No. 14, X Street, X District, Chongqing. Among which, Qin X enjoys 50% of the above-mentioned sums; (3) Other claims of Qin X shall be dismissed. Qin X, not satisfied with the decision of second instance, applied to the Supreme People’s Court for case reopening. The main grounds for the application for case reopening are: (1) the property right that Sun X transferred to Qin X includes both registered and unregistered real property. There was no such fact as that the real property without certificates was not transferred, which had been clearly found both in the first instance and in the second instance; (2) it was erroneous for the court of second instance to exclude the indemnities for the houses without certificates, to hold that they do not constitute a case that a people’s court should accept, and thus determine that claims of Qin X should be dismissed and be directly handled without trial; (3) there was improper application of law in the decision of the second instance. Article 15 of the Property Law provides that: “a contract concluded by the parties concerned on the creation, change, transfer or elimination of the real right of a real property shall become effective upon the conclusion of the contract, except it is otherwise prescribed by any law; and whether the real right has been registered does not affect the validity of the contract.” The Property Law and the Contract Law shall be applied to the handling of this case simultaneously.

Issues 1. How to deal with a dispute over the expropriation indemnities for real estate without certificates; 2. How to distribute the expropriation indemnities for real estate without certificates?

Holding Upon review, the Supreme People’s Court determined that the case reopening application made by Qin X conforms to Subparagraph 2 and Subparagraph 6 of Article 200 of the Civil Procedure Law, and ruled that the case be reopened. After the case reopening, the Supreme People’s Court holds that the issues of this case include whether a dispute between interested parties over the expropriation indemnities for real estate without certificates could be resolved through civil litigation, and how should the disputed expropriation indemnites for real estate without certificates be distributed among the parties concerned.

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1. About the Issue that Whether a Dispute between Interested Parties over the Expropriation Indemnities for Real Estate without Certificates Could be Resolved through Civil Litigation According to the numerus clausus principle, ownership registration of real property at a registration authority is the statutory basis for acquiring real right. However, in reality, there are inevitably some real property without the planning permit and ownership certificate. The real right of such real property could not be registered for creation, change or elimination in accordance with the provisions of the Property Law. Even though such real property is transferred among interested parties, the interested parties could only occupy and use the real property. Upon expropriation, the expropriating subject will offer an appropriate indemnity for the real property without certificates according to the predetermined expropriation plan. After the indemnity is paid, if dispute arose between interested parties over the ownership or distribution of the expropriation indemnities, and one party filed a lawsuit with a people’s court, then the people’s court should accept the case as a civil dispute. While dealing with such cases of civil dispute, a people’s court mainly adjudicates on the ownership or distribution of the expropriation indemnity among interested parties. Since the expropriating subject had already indemnified the parties subject to expropriation for the real property without certificates, while hearing such cases, the people’s court does not need to confirm the real right for the expropriated real property and determine that the real property is illegal. The decision of the second instance found that the distribution of the disputed expropriation indemnites for real estate without certificates concerns confirmation of real right for illegal buildings, and thus dismissing the claims of Qin X concerning the real property without certificates. It was erroneous in the application of law and should be corrected. 2. About the Issue How Should the Disputed Expropriation Indemnities for Real Estate without Certificates be Distributed among the Interested Parties Both Sun X and Qin X recognized the Property Sales Contract signed between them and had no controversy over the premises with property certificates delivered according to the contract. The issue of this case is the ownership of indemnities for the involved real property without certificates which had been expropriated by the Government. The real property without certificates involved in the Property Sales Contract is the asset that belongs to the former Meat Packer of Nanchuan Food Company. On July 2, 2009, four parties, Sun X, Qin X, the third party, Zhang X, and the person not a party to this case, Shi X, entered into the Agreement, which stipulated that Sun X would transfer all the land and his share of the houses in the assets of the Meat Packer of Nanchuan Food Company to Qin X on June 3, 2008; Zhang X and Qin X would each own 50% of the land and houses in the Meat Packer’s assets; Sun X enjoys no further right in and assumes no further obligation for the Meat Packer’s assets, and Qin X and Zhang X would each own 50% of the interests from the rent of the houses and land. Though the above-mentioned Property Sales Contract and Agreement did not clearly state that whether the assets of the former Meat Packer of

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Nanchuan Food Company transferred by Sun X include the disputed real property without certificate, the fact was that after the delivery to Qin X, Sun X did not occupy, use, manage or maintain any of the houses and land of the Meat Packer of Nanchuan Food Company. Therefore, it should be found that Sun X and Qin X had the manifestation of intention of transferring and acquiring the real property without certificates, and the delivery has already been completed. Since 2009, Qin X and the third party, Zhang X, have actually occupied and used the real property without certificates. The decision of first instance found and handled this issue in conformity with the provision of law, and thus should be sustained. In general, Qin X’s claim in the reopening of the case that the expropriation indemnities should be jointly owned by Qin X and the third party Zhang X with Qin X enjoying 50% of the indemnities was based on both facts and law, and should be sustained. Subject to Article 207 and Article 170 (1)(2) of the Civil Procedure Law, this court rendered the decision hereunder: (1) the civil decision No. 596 [2016] Final, Civ. Division rendered by the Higher People’s Court of Chongqing City shall be vacated; (2) the civil decision No. 14 [2016] Trial, Civ. Division rendered by the Third Intermediate People’s Court of Chongqing City shall be sustained.

Comment on Rule 1. Real Property with No Certificates in the Sense of Property Law According to the numerus clausus principle, ownership registration of real property at a registration authority is the statutory basis for acquiring real rights. However, in reality, there are inevitably some real property without the planning permit and ownership certificate. The real right of such real property could not be registered for creation, change or elimination in accordance with the provisions of the Property Law. Some of the real property without certificates exist due to historical reasons. For instance, in the urban planning area, some factory buildings, temporary houses or residences are built by enterprises, organizations or individuals for private use without a planning permit; in reality, some of the real property do not have real property right certificates because they are not recognized by the state-owned land planning authority or real property right administration. Some of the real property do not have property right certificates due to the deficiency of law and relevant policies. For instance, the parking space and garage in urban residential compounds are also real property without certificates because property certificates are unattainable for them; some collectively-owned rural lands surrounding the cities are altered into state-owned land according to the urban development plan in the process of planned urban expansion, but the properties thereon are sometimes not altered in a timely manner. Thus they become urban property that could not be freely traded on the real estate market; some real property are houses with limited property rights which are self-built houses on collectively-owned lands surrounding cities. Such houses were built under the circumstance that the collectively-owned lands had not been altered to state-owned lands through the expropriation procedure.

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While dealing with the legal issues involving the above-mentioned real property without certificates, such as determination of the ownership of such properties, the transfer of such properties among interested parties and tort damages, a people’s court should adhere to the principle of being down-to-earth, and solve practical problems in accordance with the most relevant provisions of the Property Law. For instance, while dealing with the issue of ownership of the real property without certificates, the ownership should be determined according to the provisions about possession in the Property Law, and in consideration of the actual possession and use of the real property without certificates. While enjoying the right to possess and use the real property, does the subject of the right have the right to enjoy the incomes from and dispose the real property? This is controversial in trial practice. The adjudication of this case determined the following rules: the right to enjoy interests from and dispose the real property without certificates enjoyed by the subject of the right should not be entirely denied but limited. Generally speaking, as long as the subject of the right does not violate laws, prohibitive provisions or mandatory provisions of administrative regulations while he/she gets incomes from and disposes the real property without certificates, then the validity of the right should be recognized for the sake of maintaining the order and stability of people’s life and protecting transaction safety. Under some circumstances, even though the action or agreement should be found as invalid, the agreement should be executed. For entities or individuals who obtained the above-mentioned real property without certificates for objective reasons, they may transfer the real property without certificates to others under the circumstance that their own production and living needs have been satisfied. While being transferred, the real property without certificates could not undergo formalities for the registration of transfer, thus the interested parties could only occupy and use the real property without certificate, and will not be entitled to use the state-owned land under the real property without certificates. 2. Relevant Legal Issues in the Expropriation of Real Property without Certificates In expropriation, should the people’s government concerned offer an appropriate indemnity for a real property without certificates? Subject to Article 24 (2) of the Regulations on the Expropriation of Buildings and Compensation on State-owned Land, before making an expropriation decision, a people’s government should ask relevant administrative authorities to duly investigate, determine and dispose those unregistered buildings in the expropriation area. For the lawful buildings and temporary buildings within the approved time limit, indemnities should be offered. For unlawful buildings and the overdue temporary buildings, no indemnification should be made. The determination and disposal of the above-mentioned types of real property without certificates are conducted by the people’s government and relevant administrative authorities after their investigation of the unregistered buildings in the expropriation area, and therefore are specific administrative actions. A party not satisfied with the determination of the people’s government concerned could apply for an administrative reconsideration or resolve the issue through administrative proceeding rather than civil litigation. If the owners of the expropriated buildings (hereinafter

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referred to as the owners) were not satisfied with the indemnification decision, or the owners could not reach a supplementary agreement with the housing expropriation authority within the period determined by the expropriation and indemnification plan, then the owners filed a civil lawsuit with a people’s court on the ground of dispute over damages, the people’s court should decide not to accept the case, and at the same time, inform the owners of their right to apply for administrative reconsideration by law or file an administrative litigation by law. In the expropriation, the expropriating subject will determine a specific amount of indemnity according to the expropriation plan and the supplementary agreement signed with the owner. If dispute arose between or among the interested parties over the ownership or distribution of the expropriation indemnity, and one party filed a lawsuit with a people’s court, the court should accept the case as a civil dispute. The expropriation indemnity should be deemed as the consideration for expropriation of the real property without certificates, which should be shared by the interested parties who actually possess the real property without certificates and the transfer assignee. While determining which party should have the expropriation indemnity for the real property without certificates, a people’s court does not determine the nature of the property. The housing expropriation authority had already granted the expropriation indemnities according to the expropriation plan, which means that the expropriating subject had already found and disposed the real property without certificates as lawful buildings or temporary buildings within the approved time limit. If the expropriating subject holds that the real property without certificates is unlawful or is an overdue temporary building, then no indemnity shall be granted according to the provisions of relevant regulations. In trial practice, the hearing of such cases may involve confirmation of the nature of the real property without certificates. Generally, disputes over the issue whether the housing expropriation authority should indemnify the parties subject to expropriation for a real property without certificates and over the amount of the indemnity concern specific administrative actions conducted by expropriating subjects by their administrative authority and the nature of such administrative actions is similar to that of public law. This kind of disputes do not fall into the scope of civil litigation. However, if relevant government authorities have indemnified the parties subject to expropriation for the real property without certificates in the process of expropriation and indemnification, and the interested parties hold no objection to the amount of the indemnity but only have dispute over the ownership of the indemnity, then this type of cases do not involve administrative actions of relevant government authorities or constitute confirmation of the real right of unlawful buildings in disguise of civil trial. For a dispute over the ownership of the indemnity, a people’s court should accept the case as a civil dispute.

Yanchen Li Juris Master, senior judge, the Fifth Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Lhasa Makye Ame Catering Chain Co., Ltd. v. Land and Resources Bureau of Lhasa City (Dispute over the Contract for the Assignment of Construction Land Use Right): A Judicial Determination of Liquidated Damages for Overdue Payment at a per diem Rate of 1‰ Stipulated in a Contract for the Assignment of Construction Land Use Right Xiaoyun Li

Rule When entering into a contract, parties to a contract for the assignment of construction land use right should have a clear idea about the default payment for overdue payment at a per diem rate of 1‰. If a party refuses, without any justifiable cause, to pay fees for the grant of construction land use rights for a long time, yet later expressly promises to pay unduly excessive liquidated damages to get the land use right certificate, it is against the principles of equity and good faith to have discretionary reduction on default payment.

Collegiate Panel: Xiaoyun Li, Zaiyu Guo and Dan Wang (Edited by Ming Li; translated by Yanni Wang) X. Li (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_14

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Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Plaintiff in the Counterclaim, Appellee in the Second Instance): Land and Resources Bureau of Lhasa City Appellee in the Reopening of the Case (Plaintiff in the First Instance, Defendant in the Counterclaim, Appellant in the Second Instance): Lhasa Makye Ame Catering Chain Co., Ltd. (hereinafter referred to as Lhasa Makye Ame Catering Company) 2. Procedural History First Instance: No. 16 [2017] Trial, Civ. Division, the Intermediate People’s Court of Lhasa City, Tibet Autonomous Region (Tibet 01) (dated May 23 of 2017) Second Instance: No. 34 [2017] Final, Civ. Division, the Higher People’s Court of Tibet Autonomous Region (dated Oct. 25 of 2017) Case Reopening: No. 303 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Nov. 7 of 2018) 3. Cause of Action Dispute over the contract for the assignment of construction land use right

Essential Facts On April 26, 2011, Lhasa Land and Resources Bureau was about to assign the right to use a parcel of state-owned land in Lhasa City by means of bid invitation, auction and quotation. The land category indicated that it was a commercial land with the assignment term of 40 years. In an official reply, Lhasa City People’s Government agreed to change the nature of the land involved in this case to commercial and residential land. Later, Lhasa Makye Ame Catering Company bid RMB 49.89 million yuan for the land parcel, and became the bid winner. On October, 30, 2013, Land and Resources Bureau of Lhasa City signed the Contract for the Assignment of the Right to Use State-owned Construction Land (hereinafter referred to as Contract for the Assignment of Land) with Lhasa Makye Ame Catering Company, which stipulated that: fees for the assignment of the right to use state-owned construction land involved in this case is RMB 49.89 million yuan, including a deposit of RMB 10 million yuan; the assignment fees should be paid off in a lump sum within 30 days from the conclusion of the contract. Where the assignee could not pay the assignment fees on time, liquidated damages should be paid to the assignor at the rate of 1‰ for each day in arrears from the date when the assignment fees were in default. After the conclusion of the contract, Lhasa Makye Ame Catering Company paid a deposit of RMB 10 million yuan. On September 2015, the Urban and Rural Planning Bureau

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of Lhasa City reassessed the nature of the land as residential land. On November 11, 2015, Lhasa Makye Ame Catering Company signed an Agreement of Alteration of Contract for the Assignment of the Right to Use State-owned Construction Land with the Land and Resources Bureau of Lhasa City, agreeing to change the nature of the land involved in the original contract into residential land, with the 70-year term of assignment starting from the date when the Contract for the Assignment of Land was concluded, under which the issue of retroactive payment of assignment fee was not covered. After the said agreement of alteration had been concluded, the Land and Resources Bureau of Lhasa City sent several notices to Lhasa Makye Ame Catering Company, asking the latter to pay the remaining RMB 39.89 million yuan of assignment fees. Later, on December 30 and 31, 2015, Lhasa Makye Ame Catering Company paid the remaining assignment fees in full amount. On October 19, 2016, Lhasa Makye Ame Catering Company entered into an agreement with the Land and Resources Bureau of Lhasa City, which stipulated that Lhasa Makye Ame Catering Company should pay RMB 30,356,290 yuan of liquidated damages for overdue payment to the Land and Resources Bureau of Lhasa City before January 19, 2017. If the liquidated damages could not be paid in a timely manner, the Land and Resources Bureau of Lhasa City was entitled to terminate the Contract for the Assignment of Land, with Lhasa Makye Ame Catering Company liable for breach of contract, and put the latter on the blacklist of enterprises with serious dishonest acts. The Agreement also stipulated that after the conclusion of the contract, the Land and Resources Bureau of Lhasa City would go through formalities for the Stateowned Land Use Certificate and deliver a duplicate of the Certificate to Lhasa Makye Ame Catering Company so that the latter could undergo formalities for the project planning. During the period starting upon the conclusion of the agreement till this case was heard, Lhasa Makye Ame Catering Company did not pay the agreed liquidated damages to the Land and Resources Bureau of Lhasa City. Lhasa Makye Ame Catering Company filed a lawsuit with the court, requesting that, the Agreement about liquidated damages for land assignment fees entered between Lhasa Makye Ame Catering Company and the Land and Resources Bureau of Lhasa City on October 19, 2016 should be dismissed; the RMB 30,356,290 yuan of liquidated damages agreed in the Agreement should be reduced pursuant to the law; and Lhasa Makye Ame Catering Company would, for its misperformance, pay 30% of the assignment fees as liquidated damages or the sum of RMB 11.967 million yuan, to the Land and Resources Bureau of Lhasa City so as to compensate the latter’s loss of interest, and etc. The court of first instance adjudicated that: (1) Lhasa Makye Ame Catering Company shall pay RMB 30,356,290 yuan of liquidated damages for the overdue payment of land assignment fees to the Land and Resources Bureau of Lhasa City within 30 days after the judgment came into force; (2) other claims of Lhasa Makye Ame Catering Company should be dismissed; (3) other claims of the Land and Resources Bureau of Lhasa City should be dismissed. The court of second instance adjudicated that: (1) item (2) of the decision made in the first instance should be affirmed; (2) item (1) of the decision of first instance should be dismissed; (3) Lhasa Makye Ame Catering Company should pay the Land and Resources Bureau of Lhasa City RMB 11,967,000 yuan of liquidated damages

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for the overdue payment of land assignment fees within 30 days after the decision has been served; (4) other claims in the appeal made by Lhasa Makye Ame Catering Company should be dismissed. After the decision came into force, the Land and Resources Bureau of Lhasa City applied to the Supreme People’s Court for a case reopening.

Issues 1. Whether the liquidated damages for overdue payment at 1‰ per diem rate stipulated in a contract for the assignment of the right to use state-owned construction land is unduly excessive; 2. Whether the breaching party could ask the court to reduce the default payment.

Holding As the rusult of the case reopening, the Supreme People’s Court holds that, though in the Official Reply to Adjust the Nature of Construction Land of Housing and Urban– Rural Development Bureau (No. 63 [2011] Official Reply, Lhasa City Government), the nature of the land involved in this case which was about to be assigned by means of bid invitation, auction and quotation was adjusted to commercial and residential land, when the Land and Resources Bureau of Lhasa City issued the Contract for the Assignment of the Right to Use State-owned Construction Land by the Means of Quotation on August 26, 2013, it expressed clearly in the assignment notice that the land involved in this case was for commercial purpose. Article 5 of the Contract for the Assignment of Land signed between Lhasa Makye Ame Catering Company and the Land and Resources Bureau of Lhasa City after the former won the bid stated that the land assigned under the contract was for commercial purpose. Therefore, although the bidder may expect that the official reply made by Lhasa city government in 2011 would adjust the nature of the land to commercial and residential land, the official reply was made privately by the government and had no direct influence on the land that had been identified expressly as commercial land in the assignment notice and the assignment contract when it was assigned in 2013. While participating in the bidding of the land and signing the Contract for the Assignment of Land with the Land and Resources Bureau of Lhasa City, Lhasa Makye Ame Catering Company should have a clear idea about the nature of the land. The Company’s claims in the first instance were based on the promise made by the Land and Resources Bureau of Lhasa City that the nature of the land could be adjusted from commercial land to commercial and residential land. However, no evidence could prove that the Land and Resources Bureau of Lhasa City had made the above-mentioned promise. After the conclusion of the Contract for the Assignment of Land, the Land and Resources Bureau of Lhasa City did not change the nature of the land from commercial land to commercial and residential land,

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which could not be held by Lhasa Makye Ame Catering Company as the ground for its refusal to pay the remaining assignment fees according to the Contract for the Assignment of Land. In September, 2015, based on the application made by Lhasa Makye Ame Catering Company, the Urban and Rural Planning Bureau of Lhasa City reassessed the nature of the land as residential land. Still based on the application of Lhasa Makye Ame Catering Company, in November, 2015, Lhasa Makye Ame Catering Company signed an Agreement of Alteration with the Land and Resources Bureau of Lhasa City, agreeing to change the nature of the land into residential land with a 70-year term of assignment, under which the issue of retroactive payment of assignment fee was not covered. However, Lhasa Makye Ame Catering Company did not assess and make supplementary payment for the balance of the assignment fees in accordance with Article 18 of the Contract for the Assignment of Land, and could not, on the ground of the actual change of the nature of land, refuse to pay the assignment fees stipulated in the Contract for the Assignment of Land. In October, 2016, Lhasa Makye Ame Catering Company entered into an Agreement with the Land and Resources Bureau of Lhasa City, which stated that Lhasa Makye Ame Catering Company should pay RMB 30,356,290 yuan of liquidated damages for overdue payment. Although the Agreement provided that the Land and Resources Bureau of Lhasa City would not undergo formalities for State-owned Land Use Certificate if Lhasa Makye Ame Catering Company did not promise to pay liquidated damages or default payment, the fundamental reason for the liquidated damages to be as high as RMB 30,356,290 yuan as in the Contract for the Assignment of Land was that Lhasa Makye Ame Catering Company did not pay for a long time the outstanding assignment fee. The court could not determine that, while signing the Agreement, whether the Land and Resources Bureau of Lhasa City committed fraud, coercion or unconscionability. In the first instance, it is just for the court to dismiss Lhasa Makye Ame Catering Company’s claim of revoking the Agreement. While signing the Agreement, Lhasa Makye Ame Catering Company had already expressed clearly that it would pay, within three months, the RMB 30,356,290 yuan of liquidated damages calculated from November 30, 2013 to December 30, 2015. Therefore, it was clearly aware of the amount of liquidated damages. The calculation of the amount of liquidated damages was not only based on the express provisions of the Contract for the Assignment of Land, but also in conformity with the requirement of the Notice on Regulating the Management of Incomes from and Expenses for the Assignment of the Right to Use State-owned Land. There was no violation of the compulsiveness and effectiveness of law and administrative regulations. Article 114 of the Contract Law states that, “where the amount of liquidated damages or default payment agreed upon is significantly higher than the damages incurred, a party may petition the People’s Court or an arbitration institution to make an appropriate reduction.” Article 29 of the Judicial Interpretation of the Supreme People’s Court on Several Issues about the Application of the Contract Law of the People’s Republic of China (II) states that “Where a relevant party asserts that the agreed liquidated damages or default payment is unduly excessive and petitions for a reasonable adjustment, the people’s court shall rule on the basis of the actual losses, taking into consideration such comprehensive factors as the performance of the contract, the degree of fault

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of the relevant party, and the anticipated benefits etc., and adjust in accordance with the principles of equity and good faith. Where the liquidated damages or default payment agreed upon by the relevant parties exceeds the actual losses by 30%, then in general it may be found that the liquidated damages are ‘excessively higher than the actual losses’ as stipulated in Article 114(2) of the Contract Law.” Although abovementioned provisions confer the people’s courts the discretion to reduce liquidated damages, under the circumstance in this case, it is against the principles of equity and good faith for the court to make appropriate reduction on liquidated damages, because Lhasa Makye Ame Catering Company refused to pay the land assignment fees for a long time without any justifiable cause, which resulted in a huge amount of liquidated damages, and later expressly promised to pay the unduly excessive liquidated damages so that the Land and Resources Bureau of Lhasa City would continue to go through formalities for the State-owned Land Use Certificate. The court of second instance adjudicated that the reduction of default payment from RMB 30,356,290 yuan to RMB 11,967,000 yuan which should be paid by Lhasa Makye Ame Catering Company to the Land and Resources Bureau of Lhasa City has not taken into consideration such factors as the performance of the contract, the fault of the relevant party, and the anticipated benefits etc. Therefore, the decision of the court of second instance should be corrected. Above all, the application for case reopening made by the Land and Resources Bureau of Lhasa City is tenable. Pursuant to Article 207 (1) and Article 170 (1) (2) of the Civil Procedure Law of the People’s Republic of China, the Court makes the following decision: (1) the decision (No. 34 [2017] Final, Civ. Division, the Higher People’s Court of Tibet Autonomous Region) rendered by the Higher People’s Court of Tibet Autonomous Region shall be reversed; (2) Lhasa Makye Ame Catering Company shall pay the Land and Resources Bureau of Lhasa City RMB 30,356,290 yuan of liquidated damages for the overdue payment of land assignment fees within 30 days after this decision comes into force; (3) other claims of Lhasa Makye Ame Catering Company shall be dismissed; (4) other claims of the Land and Resources Bureau of Lhasa City shall be dismissed.

Comment on Rule The key issue of this case is that, in the assignment contract, Lhasa Makye Ame Catering Company and the Land and Resources Bureau of Lhasa City agreed on a 1‰ per diem rate for the liquidated damages for overdue payment, which is based on the standard set in the Notice on Regulating the Management of Incomes from and Expenses for the Assignment of the Right to Use State-owned Land and the Measures for the Management of Income and Expenditure from the Assignment of the Right to Use State-Owned Land. Since 2013, after the bidding and the conclusion of the Contract for the Assignment of Land, Lhasa Makye Ame Catering Company did not pay the remaining RMB 39.89 million yuan of land assignment fees. Not until October, 2016, did Lhasa Makye Ame Catering Company sign an Agreement with the Land and Resources Bureau of Lhasa City, which stipulated that

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Lhasa Makye Ame Catering Company should pay RMB 30,356,290 yuan of liquidated damages for overdue payment. At this moment, Lhasa Makye Ame Catering Company claimed that the liquidated damages was too high and asked the court that whether the liquidated damages could be reduced. 1. The Function of Liquidated Damages Pursuant to Article 114(1) of the Contract Law, the parties may agree that if one party breaches the contract, it shall pay a certain amount of liquidated damages to the other party in light of the circumstances of the breach, and may also agree on a method for the calculation of the amount of compensation for the damage incurred as a result of the breach. This article seeks to deal with liquidated damages under the Contract Law. From the perspective of historical development, it is a progress of legal institution that parties may “determine beforehand through negotiation” the amount of liquidated damages. At the beginning of the establishment of the legal institution, liquidated damages are mostly statutory. As a legal term, “liquidated damages” first appeared in the 1981 Economic Contract Law of the People’s Republic of China (Repealed in 1999), which stipulated in Article 35 that, if a party breaches an economic contract, it shall pay liquidated damages to the other party for the breach. If the breach of contract has already caused the other party to suffer losses that exceed the amount of the damages, the breaching party shall make compensation for the amount exceeding the breach of contract damages. In 1984, the Regulations on the Purchases and Sales Contracts of Industrial and Mineral Products (Repealed in 2001) and the Regulations on the Purchases and Sales Contracts of Agricultural and Sideline Products (Repealed in 2001) not only provided that the breaching party should pay liquidated damages, but also provided for the amount of liquidated damages. For instance, Article 17 of the Regulations on the Purchases and Sales Contracts of Agricultural and Sideline Products (Repealed in 2001) provided that if one party fails to perform the contract due to self-marketing that breaches the contract or due to the swindling of money from the price markup for excess purchase, the breaching party should pay the purchasing party liquidated damages at 5%–25% of the total value of the goods suffering the non-performance under the contract, which means that the party’s autonomy of will was limited to the choice of rate at the above stipulated range. In 1985, Article 20 of the Law on Economic Contracts Involving Foreign Interest (Repealed in 1999) provided that the parties may agree in a contract that, if one party breaches the contract, it shall pay a certain amount of liquidated damages to the other party; they may also agree upon the method for calculating the damages resulting from such a breach. Later, through the development of Article 17 of the 1987 Law of Technology Contracts (Repealed in 1999) and established by Article 114 of the Contract Law, a basic pattern that agreed upon liquidated damages as the main form with only a small part of statutory liquidated damages,1 had been determined. Which one, statutory or agreed, is the main form of liquidated damages would directly affect its function. The Soviet Mode took statutory liquidated damages as the 1 参见王利明、 崔建远:《合同法新论· 总则》(修订版), 中国政法大学出版社 2000 年版, 第 687

页。

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main form, seeing it as an “important measure to ensure the performance of contract and the implementation of plan”.2 It even proposed that liquidated damages was not civil liability damages, but administrative liability damages with the veiling civil liability.3 The civil law of Soviet Union directly provided for the rate of liquidated damages that a debtor should pay, and even clearly provided for the amount of liquidated damages. Taking statutory liquidated damages as the main form makes it difficult for liquidated damages to serve as a guaranty according to the agreement between the parties. Rather, it is mainly a form of liability for the punishment of the breaching party.4 Correspondingly, if the liquidated damages are agreed upon between the parties, then besides being a form of liability, it has also been endowed with the function of guaranty, because the parties have already known beforehand the legal consequence of breach of contract. It amounts to “exerting pressure through liquidated damages, so that the debtor would perform in accordance with the nature of the debt, and thus prevent future violation of obligations. Under the circumstance that the debtor violates his/her obligations, punishment would be inflicted on the debtor.”5 2. The Theoretical Basis for the Adjustment of Liquidated Damages Because in most instances of legislation, liquidated damages are normally agreed upon with some exceptions of statutory liquidated damages. Therefore, liquidated damages is featured with the function of guaranty besides being a form of liability. In fact, both the Civil Law System and the Anglo-America Legal System confer the right to adjust liquidated damages on judges. For example, in the United States contract law, it holds that remedies for breach of contract should not be unreasonable. The standard of “being unreasonable” is that the remedy is seriously out of balance with the cost and related interests of the contract.6 Article 1152 of the French Civil Code (Rev. 1975) authorizes the judge to alter the clause of punishment for breach of contract even though the right is greatly limited. The French Supreme Court not only limits the adjustment to an amount not less than the losses, but also asks the judge to state his/her reasons for altering the clause of punishment for breach of contract.7 Similarly, pursuant to Article 114(2) of the Contract Law in our country, where the amount of liquidated damages agreed upon is lower than the damages incurred, a party may petition the people’s court or an arbitration institution for an increase; where the amount of liquidated damages agreed upon are significantly higher than the damages incurred, a party may petition the people’s court or an arbitration institution for an appropriate reduction. This means that the Contract Law in our country also authorizes the judge to adjust liquidated damages. However, the basis of private law 2 陈林林:《合同法上违约金制度检讨及其改进》 , 载《江海学刊》1999

年第 1 期。

3 参见夏国强:《合同上的违约条款》 , 载《政法教学》 1958 年第 2 期, 转引自王家福主编:《民法

债权》 , 法律出版社 1991 年版, 第 248 页。

4 参见王利明、 崔建远: 《合同法新论· 总则》 (修订版), 中国政法大学出版社 2000 年版, 第 686

~ 687 页。

5 王洪亮: 《违约金功能定位的反思》 ,载 《法律科学

(西北政法大学学报)》 2014 年第 2 期。 [加] 本森主编: 《合同法理论》 , 易继明译, 北京大学出版社 2004 年版, 第 119 页。 7 参见尹田: 《法国现代合同法: 契约自由与社会公正的冲突与平衡》 , 法律出版社 2009 年 版, 第 381 页。 6 参见

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lies in the principle of party autonomy. Especially in the development of contract law, it respects the party autonomy “from their identity to agreement”.8 Therefore, Article 4 of the Contract Law expressly provides that “The parties have the right to lawfully enter into a contract out of their own free will in accordance with the law, and no unit or individual may illegally interfere therewith.” However, the adjustment of liquidated damages obviously limits and interferes the freedom of contract, assuming that “compared with the parties, judges have a better idea about what is good and just, which is inconsistent with the idea of freedom of contract”.9 Therefore, the adjustment of liquidated damages must base on fully justified grounds. It is generally believed that the theoretical basis for the adjustment of liquidated damages is rooted in the nature and function of liquidated damages. The nature of liquidated damages is the secondary liability which is set to guarantee the performance of the primary liability. It is the secondary liability with conditions for suspension under the prerequisite that the promisor did not perform or misperformed the duty.10 Because liquidated damages are negotiated and determined beforehand, besides being a form of liability, it serves as a guaranty. Except as otherwise agreed by the parties, the payment of liquidated damages could not substitute the performance of the contract, which means that, besides paying liquidated damages, the party still has to pay the independent primary liability.11 However, liquidated damages may deviate from its nature of being a secondary liability due to inappropriate agreement. If liquidated damages is not the secondary liability agreed beforehand to safeguard the performance of the primary liability, but only serves as a form of liability and did not function as a guaranty, then judicial adjustment of liquidated damages would lose its legitimate ground. Judicial adjustment of liquidated damages is not simply based on the principle of equality or a mere pursuit of “substantive justice” in the thinking of sociology of law, but a realization of the institutional return of liquidated damages. That’s why in Article 114(2) of the Contract Law, it stipulates that petition could be filed with the court for the adjustment of “agreed liquidated damages”. The standard for the increase of liquidated damages is that it is “less” than the damages incurred, and the standard for the reduction of liquidated damages is that it is “significantly more” than the damages incurred. 3. Liquidated Damages for Overdue Payment at 1‰ per diem Rate in a Contract for the Assignment of Land Contract for the assignment of construction land use right has its own particularity, not only because that land resources naturally has its absolute scarcity, but also because that China has a distinctive socialist public ownership of land. Before 1988, the Constitution provided that “no organization or individual may appropriate, buy, sell or lease land, or unlawfully transfer land in other ways.” The 1988 Amendment to the Constitution of the People’s Republic of China added a provision that “the 梅因: 《古代法》 , 商务印书馆 1959 年版, 第 97 页。 年第 3 期。 10 参见王利明: 《合同法研究》 (修订版· 第 2 卷), 中国人民大学出版社 2011 年版, 第 701 页。 11 参见王利明、崔建远:《合同法新论· 总则》 (修订版), 中国政法大学出版社 2000 年版, 第 685 页。 8 [英]

9 王洪亮: 《违约金酌减规则论》 ,载 《法学家》2015

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right to the use of land may be transferred pursuant to law”, then there arose the issue concerning an assignment contract for the land use right. From the perspective of specific institutions and regulations, after the amendment to the Constitution in 1988, the earliest provisions about the contract for the assignment of land12 included two administrative regulations: the 1990 Interim Regulations of the People’s Republic of China on the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas and Interim Measures for the Administration of the ForeignInvested Development and Management of Tracts of Land (Repealed in 2008). The provisions in administrative regulations in fact make the empowering provision in the Constitution: “may be transferred pursuant to law” become concrete, turning it into possible contract for the assignment of land use right. Later, provisions concerning the land use right in the two above mentioned administrative regulations were made into law, i.e. Article 14 of the Urban Real Estate Administration Law: “A written contract for the assignment shall be signed on the assignment of the right to use land. The contract for the assignment of the right to use land shall be signed between the land administration department of a city or county people’s government and land users.” Though written contract for the assignment of land has already been prescribed by the law in our country and has become a common form of contract, various issues concerning the contract for the assignment of land are never solved in a fundamental manner. Particularly, in 2006, General Office of the State Council issued the Notice on Regulating the Management of Incomes from and Expenses for the Assignment of the Right to Use State-owned Land. Article 7 of the Notice provides that “land users who do not pay the full amount of land assignment fees on time, liquidated damages at 1‰ per diem rate should be charged.” Article 34 of the Measures for the Management of Income and Expenditure from the Assignment of the Right to Use State-Owned Land provides that “for users of state-owned land who do not pay the full amount of land assignment fees on time according to the contract for the assignment of land and the provisions of the approval documents for land allocation, liquidated damages at 1‰ per diem rate should be charged.” Whether the liquidated damages for overdue payment in a contract for the assignment of land is significantly more than the damages incurred is an issue frequently seen in judicial practice. In accordance with the provisions of the Urban Real Estate Administration Law, one party to the contract for the assignment of land must be “the land administration department of a city or county people’s government”. The contract for the assignment of land is standard form contract provided by “the land administration department of a city or county people’s government” as the assignor. Therefore, without exception, nearly all contracts for the assignment of land stipulates that “since the day the assignment fees were in default, the assignee should pay liquidated damages to the assignor at the rate of 1‰ for each day in arrears. If the deferral exceeded 60 days, the assignee still can not pay the fees for the assignment of the right to use state-owned construction 12 Because land is state-owned or collectively-owned in China, the assignment of land refers to the assignment of land use right. Therefore, there’s no need to deliberately differentiate the contract for the assignment of land and the contract for the assignment of land use right.

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land after the assignor has urged the former to do so, then the assignor is entitled to rescind the contract, and the assignee has not right to ask for the refund of deposit. The assignor can claim damages from the assignee.”13 4. Whether the People’s Court Could Reduce Liquidated Damages for Overdue Payment in the Contract for the Assignment of Land Once there is an overdue payment for the land assignment fees which constitutes breach of contract, whether a 1‰ per diem rate a or 36.5% annual rate is too high, whether and how it could be reduced through judicial measures. In this aspect, cases with conflicting outcomes are not rare in judicial practice. One is the kind of cases in which liquidated damages should be reduced. For instance, the dispute over the contract for the assignment of construction land use right between the Land and Resources Bureau of Changchun City and Liangpinbohong Real Estate Development Company of Jilin Province. As to the dispute over the contract for the assignment of construction land use right between the Land and Resources Bureau of the Autonomous County of Buyi and Miao and Zhansuo Real Estate Development Company of Zhenning County, the Supreme People’s Court adjudicated (No. 92 [2013] Final, Civ. Division, the Supreme People’s Court) that the 1‰ per diem rate for liquidated damages should be adjusted to the double of the loan interest rate stipulated by the People’s Bank of China for the same period and the same type of loans; In respect of the dispute over the contract for the assignment of construction land use right between the Xiangzhou Branch Office of the Land and Resources Bureau of the Xiangyang City and Xiangyang Water Supply Company, the Higher People’s Court of Guizhou Province adjudicated (No.5 [2015] Final, Civ. Division, the Higher People’s Court of Guizhou Province) that the rate for liquidated damages should be adjusted to 30% higher than the loan interest rate stipulated by the People’s Bank of China for the same period and the same type of loans; The Intermediate People’s Court of Xiangyang City adjudicated {No.92 [2017] Final, Civ. Division, the Intermediate People’s Court of Xiangyang City, Hubei Province (Hubei 06)} that the rate for liquidated damages should be adjusted to the loan interest rate stipulated by the People’s Bank of China for the same period and the same type of loans. There are cases in which liquidated damages should not be reduced. For instance, The Adjudication Committee of the Supreme People’s Court discussed and rendered the decision (No.561 [2017] Final, Civ. Division, the Supreme People’s Court)14 for the case concerning the dispute over the contract for the assignment of construction land use right between the Land and Resources Bureau of the Kunming City and 13 In 2008, the Ministry of Land and Resources and the State Administration for Industry and Commerce issued the model text for the Contract for the Assignment of the Right to Use Stateowned Construction Land. Though the 1‰ per diem rate for liquidated damages is an item that could be filled by the parties, land administration department of local government often observes the 1‰ per diem rate provision due to the above-mentioned notice issued by the General Office of the State Council and the regulations of relevant administrative departments. 14 参见李玉林、吴学文: 《土地出让合同中违约金的调整规则——兼论行政规范性文件在民 事 诉讼中的司法审查》 , 载《法律适用(司法案例)》2018 年第 16 期。

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Renze Real Estate Development Company of Yunnan Province. In this case, the court of second instance amended the decision made by the court of first instance, altering the rate for liquidated damages from the loan interest rate stipulated by the People’s Bank of China for the same period and the same type of loans back to the 1‰ per diem rate.15 The judgment says that liquidated damages “should not be reduced where there is no special circumstance”; upon the dispute over the contract for the assignment of construction land use right between Xingye Real Estate Development Company of Gansu Province and the Land and Resources Bureau of Lanzhou City, the Supreme People’s Court rendered the ruling (No.1451 [2019] Appeal, Civ. Division, the Supreme People’s Court) to dismiss the application for case reopening, which states that “this case concerns a dispute over construction land use right, not the legal relations of private lending. The agreement on liquidated damages made by the two parties serves to urge the parties to observe the agreement and to punish the act that breaches the contract. At the same time, it reflects the country’s will to maintain the market order for the assignment of state-owned land. Therefore, it is proper for the court of second instance to decide that liquidated damages should not be adjusted.” Is it true that the court should not reduce the 1‰ per diem rate for liquidated damages stipulated in the contract for the assignment of land? This issue usually concerns the nature of the contract for the assignment of land. Because, clearly, the provision in Article 114 of the Contract Law refers to civil contract, and thus administrative contract does not subject to the adjustment of the Contract Law. The arguement about whether a contract for the assignment of land is a civil contract or an administrative contract never stops both in the theoretical community and in practice. Pursuant to the Civil Procedure Law (Rev. 2012) and the previous edition of Administrative Procedure Law before May 1, 2015, most cases concerning the contract for the assignment of land were subject to civil procedure. However, since May 1, 2015, justiciable administrative conduct was added to Article 12 of the Administrative Procedure Law. Subparagraph 11 of Article 12 states that justiciable administrative conduct includes circumstances like “an administrative agency has failed to perform pursuant to the law or as agreed upon, or illegally modified or rescinded, an agreement, such as a government concession agreement or a land and building expropriation compensation agreement, etc.”. Though the provision does not expressly mention the land assignment contract, the last word “etc.” in the provision leaves certain institutional possibility for the land assignment contract to be heard by courts as administrative contract. In addition, Article 61 of the Administrative Procedure Law provides that “Where, in administrative action that involves administrative licensing, registration, collection or expropriation or the ruling rendered by an administrative on a civil dispute, a party applies for concurrent settlement of relevant civil disputes, the people’s court may handle the civil disputes concurrently.” Thus, contract for the assignment of land fell under the category of administrative procedure as administrative contract, which was more prominent after the new Administrative Procedure Law came into force. To be realistic, there are certain rationalities to consider the contract for the assignment of land as administrative contract. In terms of the subject, 15 The deadline for the collection of liquidated damages is the date that all the sums are paid off, which is adjusted to the date the court of first instance accepted the case. It amounts to a reduction of liquidated damages in terms of the length for the calculation of liquidated damages.

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one party to the contract is an administrative subject. In terms of the purpose, there is the management needs that the country, with its authority, allocates land resources according to market customs and practices. In terms of the content, the assignee should get approval before changing the nature of the land and the assignor has the right to examine and oversee the performance of the contract. If the land is not used according to the agreement, the assignor is entitled to correct, warn, fine or even recover the right to use the land without any payment.16 More importantly, whether the conclusion or the performance of the contract for the assignment of land, both of them reflect the administrative advantages of the assignor’s status,17 which is distinctively different from the provision of Article 2 of the General Rules of the Civil Law: “Civil law regulates the personal relationships and property relationships among natural persons, legal persons, and organizations without judicial personality, as equal parties.” Though there are still arguments about the nature of the contract for the assignment of land, the reduction of liquidated damages for overdue payment is certainly one form of civil relationship, which is subject to the adjustment of the Contract Law. When the land administration department files a lawsuit against the assignee and asks the assignee to pay the overdue assignment fees and assume the liability for breach of contract, it could only be a civil litigation. Therefore, if the assignee claims that the liquidated damages for overdue payment is too high and requests the court to reduce it, still, it could only be a civil litigation. Since the later part of Article 114(2) of the Contract Law expressly provides that where the amount of liquidated damages agreed upon is significantly more than the damages incurred, a party may petition the people’s court to make an appropriate reduction. The people’s court could reduce liquidated damages if the liquidated damages for overdue payment in the contract for the assignment of land is too high. Therefore, it is a misinterpretation of the ruling that “the court should not reduce the liquidated damages at a per diem rate of 1‰ for the overdue payment of land assignment fees”. In practice, if the standard of liquidated damages at a 1‰ per diem rate is not adjusted, the total amount of liquidated damages could be reduced by adjusting the period of performance. “Under the circumstance that the calculation standard for liquidated damages remains unchanged, adjusting the period of performance is also a way for the court to adjust liquidated damages in accordance with its authority.”18

Xiaoyun Li Doctor of Laws, senior judge, Office of State Compensation Commission of the Supreme People’s Court of the People’s Republic of China.

16 参见张瑚、张福林: 《行政, 民事, 出让合同你属谁?—从判例看国有土地使用权出让合 同的

性质》 ,载 《中国土地》 2006 年第 5 期。

17 钟澄: 《土地出让合同争议解决新思路—新修改

行政诉讼法 关于土地出让合同争议解 决 分析》 , 载《中国土地》 2016 年第 4 期。 18 李玉林、 吴学文:《土地出让合同中违约金的调整规则—兼论行政规范性文件在民事诉讼 中的司法审查》 , 载《法律适用》2018 年第 16 期。

Dongguan Licheng Electronic Industrial Co., Ltd. and Baoyuan Real Estate Development Co., Ltd. in Yuancheng District of Heyuan City v. Dongguan Jinglong Industrial Development Co., Ltd. and Jinghe Industrial Group Co., Ltd. (Dispute over Project Transfer Contract): A Judicial Determination that for a Foreseeable Failure of Contract Performance, No Claims Shall be Made for the Loss of Expected Benefits Xiaohong Qian and Zhifeng Wang

Rule 1. When a contract could not be actually performed, though the parties thereto do not file for the rescission of the contract, if their claims are based on the rescission of the contract and imply the party’s intention of rescinding the contract, a people’s court could, in accordance with Article 94 of the Contract Law, determine that whether the contract is in conformity with the conditions of statutory rescission. 2. Where one party has foreseen great performance obstacles of the contract while entering into the contract, it has no right to claim for the expected benefits from the other party.

Collegiate Panel for the Second Instance Trial: Xiaohong Qian, Xiangyang Xi and Gang Cao (Edited by Ming Li; translated by Yanni Wang) X. Qian (B) · Z. Wang The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_15

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Case Information 1. Parties Appellant (Plaintiff in the First Instance): Dongguan Licheng Electronic Industrial Co., Ltd. (hereinafter referred to as Dongguan Licheng Electronic Company) Appellant (Plaintiff in the First Instance): Baoyuan Real Estate Development Co., Ltd. in Yuancheng District of Heyuan City (hereinafter referred to as Baoyuan Real Estate Development Company of Heyuan City) Appellant (Defendant in the First Instance): Dongguan Jinglong Industrial Development Co., Ltd. (hereinafter referred to as Dongguan Jinglong Industrial Company) Appellee (Defendant in the First Instance): Jinghe Industrial Group Co., Ltd. (hereinafter referred to as Jinghe Industrial Group) Appellee (Defendant in the First Instance): Li X 2. Procedural History First Instance: No. 1 [2014] Trial, Civ. Division, the Higher People’s Court of Guangdong Province (dated Jun. 28 of 2016) Second Instance: No. 711 [2016] Final, Civ. Division, the Supreme People’s Court (dated Aug. 16 of 2017) 3. Cause of Action Dispute over project transfer contract

Essential Facts Dongguan Jinglong Industrial Company was established on May 15, 2002. Mai X owns 90% of the shares, and Cai X (Mai X’s wife) owns 10% of the shares. On August 6, 2006, Mai X, the legal representative of Dongguan Jinglong Industrial Company, signed an agreement with Li X, which stipulates that: Dongguan Jinglong Industrial Company shall transfer all of its shares and its “Lianhu Villa” project to Li X at the price of RMB 130 million yuan. On the same day, Mai X signed a Handover Agreement with Li X, which stipulates the transfer of the corporate seal and the financial chop of Dongguan Jinglong Industrial Company and the signet of its legal representative. On March 29, 2007, Mai X announced in Dongguan Daily Newspaper that the duplicate of the business license of Dongguan Jinglong Industrial Company, a corporate seal, and a financial chop were lost, claiming to invalidate the lost business license duplicate, corporate seal and financial chop and applying for a replacement. On the same day, Mai X submitted the corporate seal and financial chop again to the registration authority for the record.

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On April 24, 2007, Cai X filed a lawsuit with the Intermediate People’s Court of Dongguan City, Guangdong Province, requesting the court to invalidate the Agreement signed between Cai X and Li X. The Court rendered the civil decision (No. 156 [2007] Trial, Civ. Division, the Intermediate People’s Court of Dongguan City, Guangdong Province) that the contents thereunder about Mai X transferring the shares of Cai X are null and void, and Cai X has the preferential right to purchase the 90% shares held by Mai X. The written decision was served upon Cai X and Mai X on January 18, 2008. Li X was not satisfied with the court decision and appealed to the Higher People’s Court of Guangdong Province. On June 4, 2008, the Higher People’s Court rendered its civil decision (No. 86 [2008] Final, Civ. Division, the Higher People’s Court of Guangdong Province): the decision of the first instance shall be vacated; the claims of Cai X shall be dismissed; Mai X and Cai X shall transfer their equity of Dongguan Jinglong Industrial Company to Li X. Cai X was not satisfied with the decision and applied for case reopening by the Supreme People’s Court. On February 26, 2009, the Supreme People’s Court rendered a civil ruling (No. 677 [2008] Appeal, Civ. Division, the Supreme People’s Court): this Court shall reject Cai X’s application for case reopening. On January 25, 2008, Mai X and Cai X signed an Equity Transfer Agreement, agreeing to the transfer of the 90% shares owned by Mai X to Cai X. On March 26, 2008, on behalf of Dongguan Jinglong Industrial Company, Mai X signed the Project Transfer Contract with Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City, which stipulated that Dongguan Jinglong Industrial Company will transfer the “Lianhu Villa” project and the land use right of 11 land parcels under the project to Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City at the price of RMB 150 million yuan. On April 21, 2008 and May 26, 2008, Dongguan Licheng Electronic Company paid two sums for project transfer: RMB 10 million yuan and RMB 20 million yuan, to Dongguan Jinglong Industrial Company. On June 6, 2008, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City filed a lawsuit against Dongguan Jinglong Industrial Company with the People’s Court of Yuancheng District, Heyuan City of Guangdong Province, requesting the Court to affirm the validity of the Project Transfer Contract and order Dongguan Jinglong Industrial Company to transfer the “Lianhu Villa” project and the land use right of 11 land parcels to Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City. On behalf of Dongguan Jinglong Industrial Company, Mai X received the litigation document by signature and responded to the action. Both parties reached a Mediation Agreement on June 12, 2008, agreeing to continue the performance of the Project Transfer Contract. The People’s Court of Yuancheng District, Heyuan City of Guangdong Province rendered a civil mediation order (No. 443 [2008] Mediation, Civ. Division, the People’s Court of Yuancheng District, Heyuan City, Guangdong Province) to affirm the parties’ Mediation Agreement. On June 18, 2008, Dongguan Licheng Electronic Company paid RMB 30 million yuan to Dongguan Jinglong Industrial Company. After reopening the case, the People’s Court of Yuancheng District, Heyuan City of Guangdong Province held that the civil mediation order (No. 443 [2008] Mediation,

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Civ. Division, the People’s Court of Yuancheng District, Heyuan City, Guangdong Province) is in violation of the provisions of exclusive jurisdiction over real estate. The Court adjudicated that the civil mediation order shall be vacated, and the case shall be transferred to the Intermediate People’s Court of Dongguan City, Guangdong Province. On December 17, 2008, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City brought a lawsuit to the Intermediate People’s Court of Dongguan City, Guangdong Province, requesting the Court to affirm the validity of the Project Transfer Contract and the Mediation Agreement, uphold the validity of the Civil Mediation Agreement (No. 443 [2008] Mediation, Civ. Division, the People’s Court of Yuancheng District, Heyuan City, Guangdong Province), and order Dongguan Jinglong Industrial Company to transfer the project land to Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City. The Supreme People’s Court rendered a civil decision (No. 122 [2012] Reopening via Certiorari, Civ. Division, the Supreme People’s Court): this Court affirms that the Project Transfer Contract is valid and dismisses other claims raised by Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City. Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City filed a lawsuit, requesting that: (1) Dongguan Jinglong Industrial Company shall reimburse the payment for project transfer, a sum of RMB 60 million yuan; (2) Dongguan Jinglong Industrial Company shall compensate for the loss of interests from the project transfer payment (the amount of the interest should be calculated from the date when Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City made the project transfer payment to the date when Dongguan Jinglong Industrial Company reimburse in full the payment at the loan interest rate stipulated by the People’s Bank of China for the same period); (3) Dongguan Jinglong Industrial Company shall compensate for the loss of expected benefits of RMB 1003,964,600 yuan; (4) Li X and Jinghe Industrial Group shall bear the joint and several liability for the above mentioned debts of Dongguan Jinglong Industrial Company. On June, 28, 2016, the Higher People’s Court of Guangdong Province rendered a civil decision (No. 1 [2014] Trial, Civ. Division, the Higher People’s Court of Guangdong Province): (1) Dongguan Jinglong Industrial Company shall compensate Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City for the loss of RMB 112,032,976 yuan; (2) Dongguan Jinglong Industrial Company shall reimburse RMB 30 million yuan to Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City and pay the interest calculated from June 18, 2008 to the reimbursement date determined in this decision(at the loan interest rate stipulated by the People’s Bank of China for the same period and the same type of loans); (3) other claims of Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City shall be dismissed. After the announcement of the decision, the three parties, Dongguan Licheng Electronic Company, Baoyuan Real Estate Development Company of Heyuan City and Dongguan Jinglong Industrial Company, were not satisfied with the adjudication, and applied to the Supreme People’s Court for case reopening.

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Issues 1. Whether the Project Transfer Contract should be rescinded; 2. Whether Dongguan Jinglong Industrial Company should compensate Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City for the loss of expected benefits.

Holding After hearing the case, the Supreme People’s Court holds that: 1. The Determination of Whether a Contract Should be Rescinded Should Not be Confined to the Fact Whether the Parties Thereto Had Clearly Made the Claim, But be Made in Combination with the Merits of the Case After the conclusion of the Project Transfer Contract, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City paid RMB 60 million yuan for the transfer of the project. However, in accordance with the Agreement signed between Li X and Dongguan Jinglong Industrial Company, Li X had lawfully possessed the land involved in the case in advance, paid in advance part of the price, and started development and construction. While Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City did not actually possess the land involved in the case. On June 4, 2008, the Higher People’s Court of Guangdong Province rendered a civil decision (No. 86 [2008] Final, Civ. Division, the Higher People’s Court of Guangdong Province), affirming that the Agreement is valid and ordering Mai X and Cai X to transfer all of their equity of Dongguan Jinglong Industrial Company to Li X. At this point, it was in fact impossible for the Project Transfer Contract to be performed. On December 17, 2008, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City filed a lawsuit, requesting the court to affirm that the Project Transfer Contract is valid and the performance of the contract should be continued. The Supreme People’s Court rendered a civil decision (No. 122 [2012] Reopening via Certiorari, Civ. Division, the Supreme People’s Court), which affirmed that the Project Transfer Contract is valid, but could not be actually performed. Therefore, it is proper for the court of first instance to determine that the contract should be rescinded on the ground that the purpose of the contract could not be achieved, and thus the judgment should be upheld.

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2. The Project Transfer Contract Has been Rescinded. Pursuant to Article 97 of the Contract Law, Dongguan Jinglong Industrial Company Should Reimburse the RMB 60 Million Yuan of Project Transfer Payment and the Interest Thereon to Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City In consideration of the fact that Dongguan Jinglong Industrial Company had occupied the payment for a long time, the interest shall be calculated from the date of the payment for project transfer to the reimbursement date determined in this decision at the benchmark loan interest rate for loans with a term of no less than five years as stipulated by the People’s Bank of China for the same period. On March 26, 2008, while signing the Project Transfer Contract with Dongguan Jinglong Industrial Company, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City knew that Mai X had, on behalf of Dongguan Jinglong Industrial Company, concluded the Agreement with Li X to transfer all the equity of Dongguan Jinglong Industrial Company and the “Lianhu Villa” project to Li X, and that Cai X filed a lawsuit, requesting the court to affirm that the Agreement was null and void. At the time the Project Transfer Contract was concluded, though the Intermediate People’s Court of Dongguan city, Guangdong Province had already rendered a civil decision (No. 156 [2007] Trial, Civ. Division, the Intermediate People’s Court of Guangdong Province) to affirm that the contents under the Agreement about Mai X transferring the shares of Cai X are null and void, the decision did not take effect because Li X filed an appeal. Therefore, when signing the Project Transfer Contract, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City took a great business risk that the contract purpose may not be achieved, and should have foreseen the results of nonperformance of the Project Transfer Contract. On June 4, 2008, the Higher People’s Court rendered its civil decision (No. 86 [2008] Final, Civ. Division, the Higher People’s Court of Guangdong Province), which affirmed that the Agreement was valid and ordered Mai X and Cai X to transfer all of their equity of Dongguan Jinglong Industrial Company to Li X. At this point, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City had already known or should have known that the Project Transfer Contract could not be actually performed. Under the circumstance, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City should adopt measures to stop further loss or negotiate with Dongguan Jinglong Industrial Company about the rescission of the contract, the reimbursement of the sums paid and the compensation of their losses. However they did not take any further measures. Rather, they filed a lawsuit with the court, requested the court to affirm the validity of the Project Transfer Contract, requested to continue with the performance of the contract, and signed the Mediation Agreement for the continued performance of the Project Transfer Contract within 10 days with Dongguan Jinglong Industrial Company represented by Mai X. Their behaviors aggravated the controversy and violated the principle of good faith. To sum up, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan

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City were at fault for the nonperformance of the Project Transfer Contract. While signing the contract, they were aware of the fact that Dongguan Jinglong Industrial Company had previously concluded the Agreement with Li X, and should have foreseen the results of nonperformance of the contract. Therefore, their claim for the loss of expected benefits should not be supported. On August 16, 2017, the Supreme People’s Court rendered a civil decision (No. 711 [2016] Final, Civ. Division, the Supreme People’s Court): (1) the civil decision (No. 1 [2014] Trial, Civ. Division, the Higher People’s Court of Guangdong Province shall be vacated; (2) Dongguan Jinglong Industrial Company shall reimburse the project transfer payment, a sum of RMB 60 million yuan, to Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City (the interest shall be calculated from the date when each project transfer payment was made to the reimbursement date determined in this decision at the benchmark loan interest rate for loans with a term of no less than five years stipulated by the People’s Bank of China for the same period); (3) other claims of Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City shall be dismissed.

Comment on Rule 1. The Determination of Whether a Contract Should be Rescinded Should Not be Confined to the Fact that Whether the Parties Thereto Had Clearly Made the Claim, But be Made in Combination with the Merits of the Case The right of rescission of a contract means that contractual parties have the right to rescind a contract in accordance with the agreement in the contract or with the provisions of law. (1) Agreed rescission. Article 93 of the Contract Law provides that “The parties may rescind a contract if they have so agreed. The parties may prescribe a condition under which one party is entitled to rescind the contract. Upon satisfaction of the condition for rescission of the contract, the party with the rescission right may rescind the contract.” (2) Statutory rescission. Article 94 of the Contract Law provides that “The parties may rescind a contract if: (1) force majeure frustrated the purpose of the contract; (2) prior to the expiration of the period of performance, the other party expressly states, or indicates through its conduct, that it will not perform its main obligation; (3) the other party delays performance of its main obligation after such performance has been demand, and fails to perform within a reasonable period; (4) the other party delays performance of its obligations, or breaches the contract in some other manner, rendering it impossible to achieve the purpose of the contract; (5) other circumstance as provided by law.” In terms of the legal nature, the right of rescission of a contract is a right of formation. Contracting parties with the right of rescission could rescind the contract on unilateral manifestation of intention. Article 13 of the Civil Procedure Law (Rev. 2012) provides that “In civil litigation, the principle of good faith shall be adhered to. The parties shall be entitled to dispose of their respective civil rights and procedural

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rights within the extent as permitted by law.” Since the right of rescission is a right of formation that could be exercised on unilateral manifestation of intention of the contracting parties, then, under the circumstance that neither of the contractual parties claim for the rescission of the contract, and in accordance with the principle of “no trial without complaint”, a people’s court should not rescind the contract by its authority. However, where a contract could not be actually performed, though the parties thereto do not expressly claim for the rescission of the contract, if their claim is based on the rescission of the contract and has the implied manifestation of intention of rescinding the contract, a people’s court as an adjudicative authority to settle the dispute and stop the conflicts has the obligation as well as the right to resolve the dispute once and for all, so as to ease the burden of litigation for the parties. Under the circumstance, the people’s court could, by its powers and functions and pursuant to Article 94 of the Contract Law, determine whether the contract is in conformity with the conditions of statutory rescission. Therefore, in this case, under the circumstance that the Project Transfer Contract indeed could not be performed, it is proper for the court of first instance to determine by its powers and functions that the contract should be rescinded. 2. If a Contract is Made with Great Foreseeable Obstacles for Contract Performance, the Contracting Parties Have No Right to Claim for the Expected Benefits Provisions about expected benefits could be found in the Contract Law and in judicial interpretations and relevant judicial policies like, the Judicial Interpretation of the Supreme People’s Court on Issues about the Application of Law to Sales Contract Disputes and the Guidance of the Supreme People’s Court on Several Issues about the Trial of Civil and Commercial Contract Cases under the Current Situation. These provisions concern the principle of foreseeability, the mitigation of damages doctrine, the rule of contributory negligence and the rule of gains offsetting losses and other rules in connection with expected benefits. Expected benefits refer to the benefits that the contracting parties could gain once the contract is established and valid and has been fully performed. It mainly consists of the profits gained from production, operation and resale, etc. The compensation for the loss of expected benefits shall follow the principle of full compensation, which means that the breaching party shall compensate for all the losses, including the actual losses and the loss of expected benefits, suffered by the non-breaching party due to the former’s breach of contract. Article 10 of the Guidance of the Supreme People’s Court on Several Issues about the Trial of Civil and Commercial Contract Cases under the Current Situation stipulates that “In the calculation and determination of the loss of expected benefits, the people’s court should comprehensively apply the principle of foreseeability, the mitigation of damages doctrine, the rule of contributory negligence and the rule of gains offsetting losses, and deduct from the total loss of expected benefits claimed by the non-breaching party the losses unforeseeable for the breaching party, the further losses caused by the improper conduct of the non-breaching party, the benefits gained by the non-breaching party from the breach of contract, the losses caused by the fault of the non-breaching party and the necessary transaction costs. The compensation

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rule for the loss of expected benefits should not be applied to situations where there are default activities as provided in Article 113 of the Contract Law and where parties agree on a method for the calculation of the amount of compensation for the damages as provided in Article 114 of Contract Law, and to situations where personal injury, death or emotional distress arises from the breach of contract.” Article 29 of the Judicial Interpretation of the Supreme People’s Court on Issues about the Application of Law to Sales Contract Disputes states that “Where one party to a sales contract causes losses to the other party due to a breach of contract and the latter claims compensation for the loss of expected benefits, the people’s court shall determine the losses according to the claim and pursuant to Article 113 and Article 119 of the Contract Law and Article 30 and Article 31 of this Interpretation.” In this case, according to the verified merits, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City made part of the project transfer payment, while Dongguan Jinglong Industrial Company did not fulfil its contractual obligation of transferring the project, which led to the fact that Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City did not take over the project. From the viewpoint of Article 113 (1) of the Contract Law, it seems that Dongguan Jinglong Industrial Company should compensate Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City for the expected benefits that the later should have gained after taking over the project. However, this case has its own particularity. It is improper for the court to simply apply the provision to the case and support the claim for the loss of expected benefits put forward by Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City. First, while signing the Project Transfer Contract, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City took a great business risk that the contract purpose may not be achieved, and should foresee the results of nonperformance of the Project Transfer Contract. Expected benefits are the benefits gained from the performance of the contract. While signing the contract, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City were aware of the fact that Dongguan Jinglong Industrial Company had previously entered into the Agreement with Li X, and should foresee the results of nonperformance of the contract. But they insisted on concluding the contract. In this situation, the principle that a volunteer does not have the right to claim for damages should be applied. Thus, they were not entitled to claim the expected benefits from Dongguan Jinglong Industrial Company. This conforms to the principle of fairness in civil law. Second, Article 119 (1) of the Contract Law stipulates that “Where a party breached the contract, the other party shall take the appropriate measures to prevent further losses; where the other party’s failure to take appropriate measures results in additional losses, the failing party cannot demand compensation for the additional losses.” This provision embodies the mitigation of damages doctrine. When a party breaches the contract, the observant party should not be completely indifferent to the increase of losses. Rather, it should positively adopt measures to prevent further

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losses. Where the observant party could have adopted effective measures to prevent further losses, but did not do so, the breaching party does not assume the liability for the compensation for additional losses. Article 119 of the Contract Law does not contain specific differentiation of losses. Therefore, the provision should be applied to all the losses of the observant party, not only the direct losses, but also the consequential losses of expected benefits. Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City were clearly aware of the fact that the Project Transfer Contract could not be performed, but did not, under the circumstance, take measures to prevent the increase of losses. They should have negotiated with Dongguan Jinglong Industrial Company to rescind the contract and demand the reimbursement of the sums paid and the compensation of losses. Instead, they chose to file a lawsuit, requested the court to affirm the validity of the Project Transfer Contract, demanded to continue with the performance of the contract, and signed the Mediation Agreement within 10 days with Dongguan Jinglong Industrial Company represented by Mai X, which aggravated the controversy among parties. According to the mitigation of damages doctrine, Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City were not entitled to claim for the expected benefits from Dongguan Jinglong Industrial Company. Third, Article 30 of the Judicial Interpretation of the Supreme People’s Court on Issues about the Application of Law to Sales Contract Cases states that “Where one party to a sales contract causes losses to the other party due to a breach of contract and the latter is also at fault for the occurrence of such losses, if the breaching party claims a reduction to the corresponding amount of compensation for losses, the people’s court shall support such claims.” This provision embodies the rule of contributory negligence. Though this provision is specifically applied to sales contracts, pursuant to Article 177 of the General Rules of the Civil Law, “where two or more parties should bear proportionate liability according to law, if the liability of each party can be determined, they shall each bear their liability accordingly”, and in reference to the principle of fairness in civil law, it should also be applied to general contract disputes. Dongguan Licheng Electronic Company and Baoyuan Real Estate Development Company of Heyuan City were at fault for the nonperformance of the contract for the reason that they clearly knew that the Project Transfer Contract could not be performed, but still insisted on entering into the contract. According to the rule of contributory negligence, their claim for the loss of expected benefits should not be supported.

Xiaohong Qian Master of Laws, senior judge, the Third Civil Division of the Supreme People’s Court of the People’s Republic of China. Zhifeng Wang Master of Laws, assistant judge, the First Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Hainan Zhonghe Group Co., Ltd. v. Hainan Meihao Real Estate Development Co., Ltd. (Dispute over Project Transfer Contract): Commitment Could be Found as a Modification of the Original Contract Gang Cao

Rule In performing a contract, where a party made a new and different commitment to the discharge obligation specified in the contract, and the commitment has been accepted by the other party, it constitutes a modification to the original contract. For a failure of performing the discharge obligation in accordance with the new commitment, where the other party raises a plea of breach of contract, the claim shall be supported by law.

Case Information 1. Parties Appellant (Defendant in the First Instance): Hainan Zhonghe Group Co., Ltd. (hereinafter referred to as Hainan Zhonghe Group) Appellee (Plaintiff in the First Instance): Hainan Meihao Real Estate Development Co., Ltd. (hereinafter referred to as Hainan Meihao Real Estate Development Company)

Collegiate Panel for the Second Instance Trial: Gang Cao, Yingxin Zhang and Yuying Wang (Edited by Ming Li; translated by Yanni Wang) G. Cao (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_16

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Third Party in the First Instance: Hainan Meihaozhonghe Real Estate Development Co., Ltd. (hereinafter referred to as Hainan Meihaozhonghe Real Estate Development Company) 2. Procedural History First Instance: No. 56 [2015] Trial, Civ. Division, the Higher People’s Court of Hainan Province (dated Sept. 5 of 2016) Second Instance: No. 680 [2017] Final, Civ. Division, the Supreme People’s Court (dated Dec. 22 of 2017) 3. Cause of Action Dispute over project transfer contract

Essential Facts It has been established through the hearing of the case that: on September 12, 2012, Hainan Meihao Real Estate Development Company signed a Project Transfer Contract with Hainan Zhonghe Group, under which both parties agreed on the steps of transferring the project. Later, Hainan Meihao Real Estate Development Company had sent several coordination letters and letter of commitment to Hainan Zhonghe Group, promising to pay off the sums of transfer owed to Hainan Zhonghe Group after the former party’s success of financing. With the new commitment made by Hainan Meihao Real Estate Development Company, Hainan Zhonghe Group underwent mortgage formalities for the land involved in this case. Yet, Hainan Meihao Real Estate Development Company did not duly pay the account payable as promised. Then, Hainan Zhonghe Group refused to help transfer two parcels of land and the project. There arose a dispute between the two parties. Hainan Meihao Real Estate Development Company claimed that: (1) a court decision shall be made to order Hainan Zhonghe Group to perform the Project Transfer Contract, transferring the land parcel for the project of “Longmuwan·Meihao Haian” with the parcel numbers as B3-4 (No. 08[2011] State Land Use, Jianfeng) and B4-4 (No. 11[2012] State Land Use, Jianfeng). The combined area of the two parcels of land is 524.5881 mu. Hainan Zhonghe Group shall duly undergo alteration registration formalities within 30 days for the land parcels along with the underground pipe network and aboveground structures in accordance with the price and steps agreed on in Clause 2 and Clause 3 of the Porject Transfer Contract, and transfer the land parcels to Hainan Meihao Real Estate Development Company. (2) Hainan Zhonghe Group shall pay the litigation fees. Hainan Zhonghe Group pleaded that: (1) all the correspondence, the overdue payment reminder letters and letter of commitment are lawful and valid, and are the true manifestation of intention between Hainan Meihao Real Estate Development Company and Hainan Zhonghe Group. (2) Hainan Meihao Real Estate Development

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Company bears the liability for the failure to transfer the two land parcels and project in dispute in this case. (3) the transfer of the land use right for land parcel B4-4 has already been released under the law, thus there is no issue as to transferring. Therefore, the defendant asked the court to dismiss the claims of Hainan Meihao Real Estate Development Company. On September 5, 2016, the Higher People’s Court of Hainan Province adjudicated (No. 56[2015] Trial, Civ. Division, the Higher People’s Court of Hainan Province) that: (1) Hainan Zhonghe Group shall, within three months after the judgment becomes effective, transfer the two parcels of land: B3-4 (No. 08[2011] State Land Use, Jianfeng) and B4-4 (No. 11[2012] State Land Use, Jianfeng) to Hainan Meihaozhonghe Real Estate Development Company; (2) other claims of Hainan Meihao Real Estate Development Company should be dismissed. Hainan Zhonghe Group shall pay the court filing fees, a total of RMB 2,664,740.50 yuan. After the pronouncement of the decision, Hainan Zhonghe Group was not satisfied with the decision of the first instance and appealed to the Supreme People’s Court.

Issue Whether the Letter of Commitment sent by Hainan Meihao Real Estate Development Company to Hainan Zhonghe Group on January 15, 2015 which was then presented before the court of second instance by the latter is an admissible evidence.

Holding On December 22, 2017, the Supreme People’s Court rendered a decision (No. 680 [2017] Final, Civ. Division, the Supreme People’s Court), holding that the first instance decision was erroneous both in the fact-finding and in the application of law, and should be duly corrected. Pursuant to Articles 67 and 77 of the Contract Law, and Article 170 (1) (2) of the Civil Procedure Law, the Court holds that: (1) Item (1) of the civil decision (No. 56 [2015] Trial, Civ. Division, the Higher People’s Court of Hainan Province) made by the Higher People’s Court of Hainan Province should be altered: Hainan Zhonghe Group shall, within three months after the decision becomes effective, transfer the land parcel B3-4 (No. 08[2011] State Land Use, Jianfeng) to Hainan Meihaozhonghe Real Estate Development Company. (2) Item (2) of the civil decision (No. 56 [2015] Trial, Civ. Division, the Higher People’s Court of Hainan Province) made by the Higher People’s Court of Hainan Province should be upheld: other claims of Hainan Meihao Real Estate Development Company should be dismissed.

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(3) Other claims in the appeal made by Hainan Zhonghe Group should be dismissed. The court filing fees for the first and second instances are RMB 2,664,740.50 yuan for each, which should be evenly borne by Hainan Zhonghe Group and Hainan Meihao Real Estate Development Company.

Comment on Rule Generally speaking, the term “debt discharge” indicates the completion of the performance of the obligations by the party under the contract. Discharge commitment is an act taken by the debtor, promising to fulfil its duties under certain conditions, so as to realize the creditor’s rights. Discharge commitment could be a result of negotiation between the two parties, or an unilateral manifestation of intention. In judicial practice, an issue that is frequently encounterd and difficult to define is whether a discharge commitment to the contractual debt made by the debtor after the contract has been concluded constitutes a modification to the contract. Under Contract Law, the conclusion and modification of a contract should be based on consensus. As for a contract in writing, the modification of the contract based on friendly negotiation between the parties should also be rendered in writing. Therefore, under a lawful and valid contractual relationship, an unilateral commitment separately made by one party does not certainly have the legal effect resulting in the modification to the contract. However, there is a tremendous difference in economic activities in the market, and a wide variation in contractual behaviors in real life. While investigating a party’s true manifestation of intention, practical and realistic analysis and judgment should be made in accordance with the specific facts of the case. Where one party makes a unilateral discharge commitment, the other party cooperates with positive acts, even the latter does not manifest its assent in writing, it should be deemed as an acceptance of the commitment. Both parties have reached a new mutual consent as to their contractual relationship, which constitutes a modification to the original contract. The rights and obligations of contractual parties should be defined pursuant to the altered contract. Where a promisor fails to perform the contract in accordance with the new commitment, the breach of contract has occurred. Where one party promises but fails to fulfil his discharge obligation, the other party is entitled to refuse his own obligation of performance. When the promisor, under the agreement of the original contract, requests the performance by the other party, the other party could defend in accordance with the altered contract that the promisor commited breach of contract. The other party’s defense should be supported. In this case, though the Project Transfer Contract stipulated specific steps for the transfer, both parties did not actually and strictly perform the contract pursuant to the relevant contract clauses. Later, to conduct mortgage financing, Hainan Meihao Real Estate Development Company made several commitments to Hainan Zhonghe Group that the former would pay the owed sums of land transfer to the later once the former succeeded in financing. Based on the commitments, Hainan Zhonghe

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Group guaranteed for the financing with all the land parcels involved in this case. The above acts had shown that the both parties had reached a new mutual consent as to the performance order stipulated in the Project Transfer Contract. The contract should be perfomed pursuant to the modified agreements made on the basis of mutual consent. Hainan Meihao Real Estate Development Company did not duly pay the account payable as promised after the financing. Hainan Zhonghe Group had the right to refuse to transfer the land parcels. The court of first instance did not consider the objective fact that Hainan Zhonghe Group did not undergo transfer formalities for the land parcels because it had cooperated with Hainan Meihao Real Estate Development Company in its mortgage financing, and neglected that, to have mortgage financing, Hainan Meihao Real Estate Development Company had made several discharge commitments. The court of first instance still determined the order and conditions for parties to perform contractual duties in accordance with the original agreements in the Project Transfer Contract. It was erroneous both in the fact-finding and in the application of law. Under the original agreements in the Project Transfer Contract, Hainan Meihao Real Estate Development Company filed a lawsuit, claiming that a court decision should be rendered to order Hainan Zhonghe Group to undergo prior transfer formalities for the land parcels. The claims of Hainan Meihao Real Estate Development Company should not be supported by law.

Gang Cao Doctor of Laws, senior judge, the Third Civil Division of the Supreme People’s Court of the People’s Republic of China.

Jinshang Bank Co., Ltd. East Street Sub-branch, Yingze District, Taiyuan City v. Jiexiu City Mianshan Mountain Scenic Area Development Co., Ltd., Shanxi Sanjia New Energy Group Co., Ltd., et al. (Dispute over Loan Contract): Whether the Mortgage Created on the Original Mining Right Continues to be Valid If the Mining Permit Has Not been Renewed upon Its Expiry Fang Mei and Yiqian Fan

Rule In China, a permitting system is in place for the exploitation of mineral resources, whereby a mining right holder shall exploit the mineral resources within such time and scope as indicated on the mining permit obtained in accordance with the law. If the mining permit expires without renewal of registration, the mining permit is automatically revoked pursuant to Article 7 of the Measures for the Administration of the Registration of Exploitation of Mineral Resources. The consequence of the revocation of the mining permit is that the original mining right holder is no longer allowed to exploit the mineral resources and no longer enjoys the right to possess, use and benefit from the mineral resources, which means that the mining right will be lost upon the expiration of the mining permit. As the mortgage is based on the collateral and will extinguish by the loss of the collateral, the mortgage created on the original mining right will also extinguish by the loss of the mining right, a situation falling under “other circumstances in which the law provides for the extinguishment Collegiate Panel for the Second Instance Trial: Fang Mei, Lichu Yang and Baojun Dong (Edited by Jing Pan; translated by Xia Liu) F. Mei (B) · Y. Fan The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_17

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of the security right in rem” as provided in Subparagraph 4 of Article 177 of the Property Law.

Case Information 1. Parties Appellant (Plaintiff in the First Instance): Jinshang Bank Co., Ltd. East Street Subbranch, Yingze District, Taiyuan City (hereinafter referred to as Yingze Sub-branch of Jinshang Bank) Appellee (Defendant in the First Instance): Siziwang Banner Jiahui Silicon Industry Co., Ltd. (hereinafter referred to as Jiahui Silicon) Defendant in the First Instance: Jiexiu Mianshan Mountain Scenic Area Development Co., Ltd (hereinafter referred to as Mianshan Scenic Area Development) Defendant in the First Instance: Shanxi Sanjia New Energy Technology Group Co., Ltd. (hereinafter referred to as Sanjia New Energy) Defendant in the First Instance: Shanxi Luxin Energy Group Co., Ltd. (hereinafter referred to as Luxin Energy) Defendant in the First Instance: Cao X Defendant in the First Instance: Yan X (A) Defendant in the First Instance: Yan X (B) Defendant in the First Instance: Yan X (C) Defendant in the First Instance: Yan X (D) Defendant in the First Instance: Bu X Defendant in the First Instance: Yan X (E) Defendant in the First Instance: Guo X (A) Defendant in the First Instance: Guo X (B) Defendant in the First Instance: Wang X Defendant in the First Instance: Guo X (C) 2. Procedural History First Instance: No. 47 [2016] Trial, Civ. Division, the Higher People’s Court of Shanxi Province (dated Dec. 7 of 2017) Second Instance: No. 292 [2018] Final, Civ. Division, the Supreme People’s Court (dated Jun. 25 of 2018)

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3. Cause of Action Dispute over loan contract

Essential Facts Yingze Sub-branch of Jinshang Bank and Mianshan Scenic Area Development signed a Bank Acceptance Contract for Commercial Draft respectively on January 15, 2015 and February 3, 2015. On August 2, 2013, Jiahui Silicon and Jinshang Bank Co., Ltd. Jianshe North Road Sub-branch of Taiyuan City (former name of Yingze Subbranch of Jinshang Bank, hereinafter referred to as Jianshe North Road Sub-branch of Jinshang Bank) signed a Maximum Amount Mortgage Contract, providing that the mining right of the silica mine owned by Jiahui Silicon in Halahushao Township would be used as mortgage security up to the limit of RMB 220 million yuan for the borrowings of Mianshan Scenic Area Development from Jianshe North Road Sub-branch of Jinshang Bank from August 8, 2013 to August 1, 2015. After signing the contract, the parties filed with the Bureau of Land and Resources of Ulanqab City in the Inner Mongolia Autonomous Region for mortgage registration, with the mortgage term expiring on August 1, 2015. The mining permit of Jiahui Silicon is valid from January 4, 2013 to January 4, 2016. After the expiration of the mining permit, Jiahui Silicon for various reasons did not renew the mining permit with the relevant administrative department. On August 2, 2013, Sanjia New Energy and Jianshe North Road Sub-branch of Jinshang Bank signed a Maximum Amount Pledge Contract and on the same day completed the registration of the pledge with the Administration for Industry and Commerce of Siziwang Banner in the Inner Mongolia Autonomous Region. On August 2, 2013, Yan X (F), Guo X (A), Yan X (D) and Jianshe North Road Sub-branch of Jinshang Bank signed the Maximum Amount Pledge Contract and on the same day registered the pledge with the Administration for Industry and Commerce of Siziwang Banner in the Inner Mongolia Autonomous Region. On July 17, 2014, Yingze Sub-branch of Jinshang Bank and Luxin Energy signed a Maximum Amount Guarantee Contract. On July 17, 2014, Yingze Sub-branch of Jinshang Bank signed a Maximum Amount Special Guarantee Contract with Yan X (F), Guo X (A), Yan X (D), Bu X, Guo X (B) and Wang X respectively. After the above-mentioned acceptance draft expired, Mianshan Scenic Area Development failed to pay the draft as scheduled to Yingze Sub-branch of Jinshang Bank, which, however, accepted the draft upon the request of the bearer, resulting in an advance payment principal of RMB 199,917,075 yuan. Yingze Sub-branch of Jinshang Bank filed a lawsuit with the court, requesting that: (1) Mianshan Scenic Area Development shall repay Yingze Sub-branch of Jinshang Bank the principal of RMB 199,917,075 yuan, and interest accrued thereon in the amount of RMB 23,492, 675.12 yuan (as of March 14, 2016, interest including penalties, compound interest, liquidated damages, etc., same below), totalling RMB 223,409,750.12 yuan, as well as the interest accrued thereon to the date of repayment of all outstanding amounts; (2) Yingze Sub-branch of Jinshang Bank shall have mortgage on the mining right

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to the Halahushao silica mine owned by Sanjia New Energy (mining license No. C1509002013017130129096) and a right of priority to be paid from the proceeds of auction and sale of the mining right; (3) Yingze Sub-branch of Jinshang Bank shall have pledge on the shares of Jiahui Silicon held by Sanjia New Energy, Guo X (A) and Yan X (D) (50%, 10% and 10% respectively) and the right of priority to be paid from the proceeds of auction and sale of the correpsonding shares; (4) Yingze Sub-branch of Jinshang Bank shall have pledge on the 30% shares of Jiahui Silicon inherited by Cao X, Yan X (D), Yan X (E), Yan X (A), Yan X (B), Yan X (C), Guo X (A), Guo X (B) and Guo X (C) and currently registered under the name of Yan X (F) and the right of priority to be paid from the proceeds of auction and sale of the corresponding shares; (5) Luxin Energy, Guo X (A), Yan X (D), Bu X, Guo X (B) and Wang X shall assume joint and several liability for the principal and interest of the above-mentioned first loan; (6) Cao X, Yan X (D), Yan X (E), Yan X (A), Yan X (B), Yan X (C), Guo X (A), Guo X (B) and Guo X (C) shall assume joint and several liability for the principal and interest of the above-mentioned first loan to the extent of the property inherited from Yan X (F); (7) the litigation costs of the case shall be assumed by all defendants. The court of first instance rendered a judgment on December 7, 2017: (1) Mianshan Scenic Area Development shall return Yingze Sub-branch of Jinshang Bank the principal of the advance payment for acceptance of draft of RMB 199,917,075 yuan and interest of RMB 23,492,675.12 yuan (as of March 14, 2016), as well as the interest calculated from March 15, 2016 to the date when all the acceptance draft advances are repaid pursuant to the Bank Acceptance Contract for Commercial Draft, to be paid within ten days from the date of entry into force of the judgment; (2) Luxin Energy, Guo X (A), Yan X (D), Bu X, Guo X (B) and Wang X shall assume joint and several liability for the debts under Item (1) above to Yingze Subbranch of Jinshang Bank, and, after assuming the guarantee liability, have the right to recover from Mianshan Scenic Area Development; (3) Jiahui Silicon shall assume joint and several liability for the guaranteed debt to Yingze Sub-branch of Jinshang Bank within the scope of the guarantee; (4) Yingze Sub-branch of Jinshang Bank shall have pledge on the shares of Jiahui Silicon held by Sanjia New Energy, Guo X (A), Yan X (D) and Yan X (F) (50%, 10%, 10% and 30% respectively) and the right of priority to be paid from the proceeds of discount, auction and sale of the correpsonding shares; (5) The other claims of Yingze Sub-branch of Jinshang Bank are dismissed. Dissatisfied with the judgment of the court of the first instance, Yingze Sub-branch of Jinshang Bank appealed to the Supreme People’s Court, and the Supreme People’s Court rendered a judgment on June 25, 2018 to dismiss the appeal and uphold the original judgment.

Issues 1. Whether the mortgage created on the mining right at issue was extinguished;

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2. Whether the original mortgagee’s claim of right of priority to be paid from the proceeds of auction and sale of the mining right can be supported.

Holding The Supreme People’s Court holds that: the court of the first instance has found that the Maximum Amount Mortgage Contract signed by Jiahui Silicon and Jianshe North Road Sub-branch of Jinshang Bank on August 2, 2013 provides that Jiahui Silicon may use the mining right of the silica mine owned thereby in Halahushao Township as mortgage security up to the limit of RMB 220 million yuan for the borrowings of Mianshan Scenic Area Development from Jianshe North Road Subbranch of Jinshang Bank from August 8, 2013 to August 1, 2015. The contract is lawful and valid for it is the true manifestation of the intentions of the parties and is not in violation of any prohibitive rules of the law and administrative regulations. After signing the contract, the parties lawfully established the mortgage by mortgage registration of the mining right. The claim of Yingze Sub-branch of Jinshang Bank that the mortgage was legally established should be supported on factual and legal basis. However, with regard to the claim of Yingze Sub-branch of Jinshang Bank that failure of the judgment of the first instance court to find that the mortgage was established constitutes wrongful application of law, the Supreme People’s Court holds that there was no wrongful application of law because, despite of no explicit statement in the first instance judgment, indicating that the parties had mortgage registration of the mining right suggests that they also agree that the mortgage had been established. Mortgage is a kind of security right in rem whereby, after lawful establishment, the creditor has the priority to be paid from proceeds of the discount, auction or sale of the mortgage if the debtor fails to repay the debt, or may lawfully extinguish due to loss of collateral, extinguishment of the principal creditor’s right, realization of the security right in rem, waiver of the security right in rem by the creditor, or other circumstances provided by law. This is specified in Article 58 of the Guarantee Law and Article 177 of the Property Law. In this case, the issues in dispute are whether the mortgage established on the mining right is extinguished, and whether Yingze Sub-branch of Jinshang Bank can exercise the priority claim. The determination of the above issues depends on whether the mining right in question is still in existence and whether there exists statutory extinguishment of the mortgage. It is found by the court of first instance that the mining permit held by Jiahui Silicon would expire on January 4, 2016, and, since the company did not renew the registration before the expiration, the mining permit was automatically revoked pursuant to Article 7 of the Measures for the Administration of the Registration of Exploitation of Mineral Resources. Pursuant to Article 3(3) of the Mineral Resources Law, which stipulates that “(a)nyone who wishes to explore or exploit mineral resources shall apply for, obtain upon approval and register the right of exploration or right of exploitation separately”, and Articles 5 and 6(2) of the

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Rules for the Implementation of the Mineral Resources Law, which stipulates that “(t)he State shall adopt a permitting system for the exploration and exploitation of the mineral resources…. Anyone who intends to exploit mineral resources shall apply for registration, receive a mining permit, and obtain the mining right…. ‘Mining right’ means the right to exploit the mineral resources and own the products within the scope provided by the mining permit which is lawfully obtained”, automatic revocation of the mining permit means that Jiahui Silicon is not allowed to exploit the Halahushao silica mine, and no longer has the right to possess, use and benefit from the mineral resources. In other words, Jiahui Silicon’s mining right extinguished upon the expiration of the mining permit. As the mortgage is based on the collateral and will extinguish by the loss of the collateral, the mortgage already enjoyed by Jinshang Bank Yingze East Street Branch falls under both the circumstance that “the mortgage will extinguish by the loss of the collateral” as stipulated in Article 58 of the Guarantee Law, and “any other circumstances as prescribed by law under which the security right in rem extinguishes” as stipulated in Subparagraph 4 of Article 177 of the Property Law. Under such circumstances, the priority claim of Yingze Subbranch of Jinshang Bank to be paid from proceeds of auction and sale of the mining right in question cannot be supported because the mining right was lost and could not be realized. Pursuant to the agreement of the parties and provisions of the law, the court of first instance ruled that Jiahui Silicon shall assume joint and several liability for the guaranteed debt with Mianshan Scenic Area Development as the debtor to the extent of the guarantee as stipulated in the contract on the ground that the mortgage could not be effectively realized by Yingze Sub-branch of Jinshang Bank due to such reason as attributable to Jiahui Silicon. The holding is upheld because Jiahui Silicon did not file an appeal against it despite of its objection in the second instance. As for the issue raised in the appeal by Yingze Sub-branch of Jinshang Bank that the land and resources department did not cancel the expired mining permit, nor did it take any administrative measures against Jiahui Silicon, it shall be disregarded because it has nothing to do with the dispute in this case.

Comment on Rule Whether the mortgage created on the mining right in question is extinguished and whether relevant right holders can exercise their priority claim depends on whether the mining right in question is still in existence and whether there exists statutory extinguishment of the mortgage. 1. Acquisition of Mining Right Article 81 (2) of the General Principles of the Civil Law stipulates that “(m)ineral deposits owned by the State may be exploited pursuant to law by units under ownership by the whole people and units under collective ownership, or by citizens. The State protects legitimate mining rights.” This clarifies the property attribute of mining rights. Article 123 of the Property Law stipulates that “(t)he prospecting right, mining

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right, water extraction right and the right to use waters and tidal flats for breeding and fishing obtained pursuant to law shall be protected.” This clarifies the right-inrem attribute of mining rights. In China, one who wished to obtain the mining right needs to obtain a mining right permit issued by the relevant administrative authority. Article 3(3) of the Mineral Resources Law stipulates that “(a)nyone who wishes to explore or exploit mineral resources shall apply for, obtain upon approval and register the right of exploration or right of exploitation separately”. It is further clarified by Articles 5 and 6(2) of the Rules for the Implementation of the Mineral Resources Law, which stipulates that “(t)he State shall adopt a permitting system for the exploration and exploitation of the mineral resources…. Anyone who intends to exploit mineral resources shall apply for registration, receive a mining permit, and obtain the mining right…. ‘Mining right’ means the right to exploit the mineral resources and own the products within the scope provided by the mining permit which is lawfully obtained”. Article 5(1) of the Measures for the Administration of the Registration of Exploitation of Mineral Resources stipulates that “(w)hen applying for a mining permit, a mining right applicant shall submit to the registration department: (1) an application for registration and a map of the mining area; (2) proof of the qualifications of the mining right applicant; (3) the development and utilization plan of the mineral resources; (4) the approval documents for lawful establishment of the mining enterprise; (5) an environmental impact appraisal report for the exploitation of the mineral resources; and (6) other materials required to be presented by competent department of the State Council in charge of geology and mineral resources. This lists in detail the materials to be submitted to the administrative authority by a mining right applicant in applying for a mining right permit. The mining right holder may, after obtaining a mining right permit, exploit the mineral resources within such scope and term as indicated on the mining right permit. In this case, Jiahui Silicon obtained upon application the mining right of the Halahushao silica mine. 2. Impact of the Revocation of the Mining Permit on Mining Right As the mining permit explicitly indicates the term of exploitation, the impact of the expiration of the mining permit on mining right is an issue that requires further consideration. Article 7(1) of the Measures for the Administration of the Registration of Exploitation of Mineral Resources stipulates that “(t)he term of a mining permit is to be determined in light of the construction scale of the mine: a maximum term of 30 years for a large-sized one or above; a maximum term of 20 years for a mediumsized one; a maximum term of 10 years for a small-sized one. If it is necessary to continue exploitation upon the expiration of the mining permit, the mining right holder shall renew registation with the registration authority 30 days before the expiration of the mining permit.” Paragraph 2 stipulates that “(i)f the mining right holder fails to complete the formalities for renewal of registration, the mining permit will be automatically revoked.” Pursuant to the above-mentioned provisions, if the mining right holder fails to complete the formalities for the renewal of registration, the mining permit will be automatically revoked and the mining right holder will no longer have the right to possess, use and benefit from the mineral resources.

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3. Impact of the Loss of a Mining Right on the Exercise of a Mortgage Created Thereon Mortgage, as a type of security right in rem, may extinguish under statutory circumstances after its lawful establishment. Article 177 of the Property Law stipulates that “(t)he security right in rem extinguishes if: (1) the principal creditor’s right extinguishes; (2) security right in rem is realized; (3) the creditor waives the security right in rem; or (4) any other circumstances as prescribed by law under which the security right in rem extinguishes.” Since the mortgage is based on the collateral and extinguishes when the collateral is lost, Article 58 of the Guarantee Law also provides that “(t)he mortgage extinguishes as a result of the loss of the collateral. The compensation for the loss is to be treated as the mortgaged property.” Specifically in this case, Yingze Sub-branch of Jinshang Bank lost the priority claim to be repaid from the proceeds of the auction or sale of the mining right. Of course, there are many reasons for the loss of mining right, including, in addition to the failure to renew the mining right permit involved in this case, loss of mining right by the mortgagor due to merger or reorganization of the mining enterprise as mortgagor, revocation of license by competent department in charge of mineral resources due to mining area being overlaid, or mining enterprises being revoked of its license for violation of laws and administrative regulations. Then, the creditor will have low possibility and practicability of being paid. But particular attention needs to be given to the fact that loss of collateral does not mean that the mortgagor’s guarantee liability will be exempted as a matter of course, rather the mortgagee can seek in rem subrogation against the mineral right to protect its rights and interests. For example, the court shall support the mortgagee’s priority claim based on in rem subrogation for compensation obtained by the mortgagor from merger or reorganization, or payment obtained by the mortgagor in the nature of insurance benefits and compensation from liability accident.

Fang Mei Master of Laws, senior judge, the Fourth Circuit Court of the Supreme People’s Court of the People’s Republic of China. Yiqian Fan Master of Laws, assistant judge, Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China.

Meizhou Mediterranean Hotel Co., Ltd. v. Shanghai Pudong Development Bank Co., Ltd. Shenzhen Branch, Shenzhen Zirui Real Estate Development Co., Ltd. (Dispute over Loan Contract): Definitive Analysis of the Nature of the Entrusted Loan Contract Hongyu Chen and Suheng Xie

Rule 1. Entrusted loans on the one hand have been integrated under national financial regulation, with financial institutions acting as lenders and performing corresponding duties, and on the other hand reflect the characteristics of financial loan and private lending respectively in different aspects due to such shared features with private lending as the source of funds. In the absence of clear regulations on entrusted loans in the current laws and judicial interpretations, we can analyze whether relevant issues involved in entrusted loans are more characteristic of financial loan or private lending, and then determine the rules that can be referred to. In view that the entrusted loan is based on the principal’s will to determine to whom the loan is granted, the amount, period, interest rate and other main terms of the contract, and the principal enjoys the main rights such as loan interest income, and at the same time, taking into account the fact that entrusted loans and private lending have the same source of funds and presumably roughly the same cost of funds, the people’s court should take reference of relevant rules on private lending when fixing the interest rate ceiling for entrusted loan contracts. 2. In adjudicating a dispute over financial loan contract, the people’s court should, subject to Article 29 of the Judicial Interpretation on Several Issues about the Application of the Contract Law (II), adjust the interest, compound interest, Collegiate Panel: Hongyu Chen, Yingxin Zhang and Yuying Wang (Edited by Yi Yang; translated by Xia Liu) H. Chen (B) · S. Xie The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_18

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penalty interest, liquidated damages and other charges to 24% per annum as a protection ceiling under usually circumstances.

Case Information 1. Parties Applicant in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Meizhou Mediterranean Hotel Co., Ltd. (hereinafter referred to as Meizhou Mediterranean Hotel) Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellee in the Second Instance): Shanghai Pudong Development Bank Co., Ltd. Shenzhen Branch (hereinafter referred to as Pudong Development Bank) Appellant in the Second Instance (Defendant in the First Instance): Shenzhen Zirui Real Estate Development Co., Ltd. (hereinafter referred to as Shenzhen Zirui Real Estate) Appellant in the Second Instance (Defendant in the First Instance): Sun Century Real Estate Group Co., Ltd. (hereinafter referred to as Sun Century Real Estate) Appellant in the Second Instance (Defendant in the First Instance): Meizhou Lizhen Industrial Co., Ltd. (hereinafter referred to as Meizhou Lizhen Industrial) Defendant in the First Instance: Huang X Defendant in the First Instance: Wang X Defendant in the First Instance: Li X Third Party in the First Instance: Hou X 2. Procedural History First Instance: No. 50 [2012] Trial, Civ. Division, the Intermediate People’s Court of Shenzhen City, Guangdong Province (dated Dec. 29 of 2014) Second Instance: No. 170 [2015] Final, Civ. Division, the Higher People’s Court of Guangdong Province (dated Mar. 10 of 2017) Case Reopening: No. 54 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 13 of 2018) 3. Cause of Action Dispute over loan contract

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Essential Facts On October 18, 2011, Pudong Development Bank, Meizhou Mediterranean Hotel and Hou X signed the Entrusted Loan Contract, agreeing that Hou X entrusted Pudong Development Bank to lend RMB 120 million yuan to Meizhou Mediterranean Hotel at the interest rate of 24% per annum (2% per month), to be paid on a month to month basis on the 20th day of each month, for a term of 6 months until April 25, 2012; that the Lender has the right to add the penalty interest for deferred payment if the Borrower did not pay the interest on the loan on time during the loan period; and that the Lender has the right to add 50% of the contractual interest rate as penalty interest for the overdue loan if the Borrower fails to repay the loan principal and interest as agreed. Meizhou Lizhen Industrial took a piece of land under its name to provide mortgage security for the debt of the Meizhou Mediterranean Hotel in the aforementioned Entrusted Loan Contract and registered the mortgage, and undertook to assume joint and several liability for the difference between the proceeds from auction or sale of the mortgaged property and the claim. Shenzhen Zirui Real Estate, Sun Century Real Estate, Huang X, Wang X, Li X, by issuing a Loan Guarantee Undertaking to Hou X respectively, explicitly undertook to assume joint and several liability guarantee for the debt of Meizhou Mediterranean Hotel under the Entrusted Loan Contract. Based on the above-mentioned mortgage guarantee and guarantee, on October 25 and 26, 2011, Pudong Development Bank granted a loan in three installments to Meizhou Mediterranean Hotel for a principal amount of RMB 120 million yuan. The interest of the loan in question before November 20, 2011 (inclusive) has been paid, but the principal and interest thereafter have not been repaid. Upon the maturity of the loan, Pudong Development Bank filed a lawsuit with the court of first instance, requesting to confirm the legality and validity of the Entrusted Loan Contract; Meizhou Mediterranean Hotel to repay the principal of the loan in the amount of RMB 120 million yuan to Pudong Development Bank and the related interest and penalty interest on the loan (RMB 16,237,208.73 yuan for the interest due as at June 6, 2012, the interest after June 6, 2012 to be calculated as agreed in the Entrusted Loan Contract); and relevant mortgagees and guarantors to assume joint and several liability. The court of first instance found that, the entrusted loan being not a private lending, the Borrower’s claim that the total amount of interest and penalty interest should be within the limit of four times of the interest rate of the same period for the same type of loans announced by the People’s Bank of China shall not be supported because the People’s Bank of China has stipulated that commercial bank loan interest rates were no longer subject to the provisions on ceiling, and that the Borrower shall assume the corresponding liability for breach of contract. On December 29, 2014, the court entered into a civil decision (No. 50 [2012], Trial, Civ. Division, Foreign, the Intermediate People’s Court of Shenzhen City, Guangdong Province): (1) to confirm the legality and validity of the Entrustment Loan Contract in question; (2) that Meizhou Mediterranean Hotel shall within 15 days from the date of the effective date of the Decision pay Pudong Development Bank RMB

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120 million yuan and the interest rate and penalty interest thereon [becasue the interest rate before November 20, 2011 has been paid in full, the interest should be calculated from November 21, 2011 to April 25, 2012 (both inclusive) at the loan interest rate of 24% per annum, and thereafter the penalty interest at 50% above the loan interest should be calculated, and paid on the 20th day of each month as agreed in the Entrusted Loan Contract, with the compound interest calculated for the overdue interest at the penalty interest rate mentioned above from December 21, 2011 (inclusive)]; (3) Pudong Development Bank has priority over the mortgaged property in question to the extent of the creditor’s right mentioned in Item (2) above, and if, upon lawful disposal of the mortgaged property, the mortgaged property is insufficient to satisfy the debt of Meizhou Mediterranean Hotel mentioned in Item (2) above, Meizhou Lizhen Industrial shall be jointly and severally liable for the unsatisfied debt, and, upon assumption of guarantee liability, has a right of recourse against Meizhou Mediterranean Hotel; (4) Shenzhen Zirui Real Estate, Sun Century Real Estate, Huang X, Wang X and Li X shall be jointly and severally liable to the debt of Meizhou Mediterranean Hotel mentioned above, and, upon assumption of guarantee liability, has a right of recourse against Meizhou Mediterranean Hotel. On March 10, 2017, the court of second instance rendered a civil decision (No. 170 [2015], Final, Civ. Division, the Higher People’s Court of Guangdong Province) to dismiss the appeal and uphold the first instance decision. After the decision has taken effect, Meizhou Mediterranean Hotel applied to the Supreme People’s Court for reopening of the case, requesting to revoke Item (2) of the first instance decision and amend it to read as follows: Meizhou Mediterranean Hotel shall within 15 days from the effective date of the Decision pay Pudong Development Bank RMB 120 million yuan and relevant interest and penalty interest in an aggregate amount of no more than 24% per annum.

Issue How to determine the loan interest rate in question?

Holding Upon review, the Supreme People’s Court holds that: Hou X’s entrustment with Pudong Development Bank for a loan granted to Meizhou Mediterranean Hotel falls unde the legal relationship of an entrusted loan. Filing of this lawsuit by the Lender Pudong Development Bank in the capacity of Plaintiff pursuant to the relevant judicial interpretations does not affect the fixing of the interest rate ceiling of the entrusted loan in question pursuant to relevant rules on private lending. Puraunt to the Entrusted Loan Contract in question signed on October 18, 2011, Pudong Development Bank granted a loan of RMB 120 million yuan in question on September 25 and 26 to

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Meizhou Mediterranean Hotel. When the Rules on Several Issues about the Application of Law to Private Lending Cases came into force on September 1, 2015, the second instance has yet concluded, so reference should be taken not to the Rules on Several Issues about the Application of Law to Private Lending Cases, but to the Several Opinions of the Supreme People’s Court on the Trial of Lending Cases by the People’s Courts, which were in effect at the time of the loan in question (repealed, hereinafter referred to as the Several Opinions on the Trial of Lending Cases by the People’s Courts). Article 7 thereof stipulates that the interest rate on private lending must not exceed four times the bank’s interest rate on similar loans. The Opinions does not impose limitation on whether the lender can concurrently claim interest, penalty interest and compound interest and the limits thereof, but both the “four times the interest rate for the same type of loans” in the Several Opinions on the Trial of Lending Cases by the People’s Courts and “24% per annum” in the Rules on Several Issues about the Application of Law to Private Lending Cases are the upper limit for judicial protection concerning the interest rate of private lending as determined by the people’s court at different times, which has the same normative function. Given that the Rules on Several Issues about the Application of Law to Private Lending Cases establishes the rule that the annual interest rate of 24% is the ceiling for judicial protection when interest, compound interest, penalty interest and other costs co-exist, in judicial practice, pursuant to Article 29 of the Judicial Interpretation on Several Issues about the Application of the Contract Law (II), if the interest, penalty interest, compound interest in private lending prior to the implementation of the Rules on Several Issues about the Application of Law to Private Lending Cases is manifestly excessive and the parties claim adequate reduction, it is appropriate the the sum of interest and other costs during the same period be no more than four times of the interest rate for the same type of loans, and the excessive part not be protected. In the decisions of the first instance and second instance, fixing the sum of interest, penalty interest and compound interest as claimed by Pudong Development Bank to be exceeding four times of the bank’s interest rate for the same type of loans is actually in violation of the above-mentioned judicial interpretation on provate lending and should be adjusted. By taking full consideration of the provisions and performance of the contract, it is determined that the sume of the above-mentioned interest, penalty interest and compound interest should be calculated at four times of the bank’s interest rate for the same type of loans, with the excessive part not protected. Therefore, it is ruled to revoke the second instance decision, uphold Items (1), (3) and (4) of the first instance decision, and amend Item (2) of the first instance decision to read as follows: Meizhou Mediterranean Hotel shall within 15 days from the effective date of the Decision pay Pudong Development Bank RMB 120 million yuan and the interest thereon (with RMB 120 million yuan as the basis, the interest shall be calculated at four times of the interest rate for the same type of loans announced by the People’s Bank of China from November 21, 2011 to the date of full satisfaction); and dismiss other claims of Pudong Development Bank.

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Comment on Rule The core issue of this case is, through the determination of the nature of the entrusted loans, to determine the rules governing interest rate ceiling in the legal relations of entrusted loans. 1. Determination of the Nature of Entrusted Loans Pursuant to Article 7 of the General Rules for Loans (1996), “entrusted loans” means loans funded by principals, such as government departments, enterprises, public institutions and individuals, provided and supervised by lenders (trustees) for the principals according to the recipient, purpose, amount, term, interest rate, and other matters of loans as determined by the principals, and recovered with the assistance of lenders. Lenders (trustees) only charges a handling fee without assumption of loan risks. On the nature of entrusted loans, there are different views in practice. Some hold that, although the specific content of an entrusted loan agreement is actually determined by the principal and the borrower through negotiation in advance, once the form of an entrusted loan is adopted, the legal relationship, due to participation of the bank will be included under national financial regulation, with its nature being no long a lending relationship between the parties. Entrusted loans being one of the lending business of banks, banks shall without any doubt comply with the provisions of competent state authorities on financial lending business. Another viewpoint is that the entrusted loan as an intermediate business or entrusted agency business of commercial banks, does not constitute balance sheet assets or liabilities of the commercial bank. When dealing with entrusted loan business, the bank only charges handling fees based on the principal-agent relationship, without bearing an loan risk, nor enjoying any loan rights. The entrusted loan is in essence a private loan between the principal and the borrower, which should be governed by relevant rules on private lending. The above views have their rationality, but none of them comprehensively define the nature of entrusted loans. The Measures for the Administration of Entrusted Loans of Commercial Banks issued by the China Banking Regulatory Commission on January 5, 2018 reflects the idea of comprehensive and systematic regulation of entrusted loan business so as to prevent the systemic risk that entrusted loans bring to the entire financial system. The entrusted commercial banks assume the obligations of examining the qulifications of the principal and the borrower, sources of funds and purpose of the loan, final flow of the funds, etc. It follows that entrusted loans have been included under state financial regulation, in which legal relationship the lender is a financial institution approved by the state financial regulatory authorities to engage in loan business, imposed with many examination obligations and the duties of issuing, supervising the use of and assisting in recovering the loan on behalf of the principal, resembling to some extent a financial loan contract. But on the other hand, entrusted loans also bear similarities to private lending. First, although banks and other financial institutions are lenders, they do not independently decide the loan matters, and the determination of loan

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receivers, purpose, amount, term, interest rate and other main rights and obligations of the loan contract still reflects the will of the principal. Second, the Supreme People’s Court has ruled that the relationship among the principal, trustee and borrower in an entrusted loan contract is governed by Article 402 of the Contract Law on indirect agency, that is, the bank upon acceptance of the entrutment engages as a trustee in leding business with the borrower, thus rendering entrusted loan essentially a legal relationship between the principal and the borrower. Third, from the actual assumption of rights and obligations, it is the principal rather than the lender that enjoys the loan interest income and other contractual rights, and actually assumes the risk of non-repayment or late repayment by the borrower. Finally, unlike the funds raised by financial institutions through legal channels, entrusted loans come directly from the principal’s own funds, which is no different from the lender’s own funds for private lending. Thus, an entrusted loan embodying the characteristics of financial loan and private lending in different aspects is in essence neither financial loan nor private lending, but a mode of lending with its own independent characteristics. 2. Application of Law for Entrusted Loan Interest Rate Although the General Rules for Loans, the Measures for the Administration of Entrusted Loans of Commercial Banks and the relevant circulars issued by the People’s Bank of China have made provisions on the relevant issues of entrusted loans from the perspective of financial regulation, in the areas sbsent regulation by the existing laws and judicial interpretations for entrusted loans, the relevant rules for reference can be ascertained by analyzing whether the relevant issues are more characteristic of a financial loan or private lending. Now that the current laws and judicial interpretations aren silent on the interest rate ceiling of entrusted loans, the following factors should be considered in determining whether the interest rate of entrusted loans should refer to the corresponding rules on financial loans or private lending. (1) Source of funds. The funds for the financial loans are raised by financial institutions through such legal means as deposit taking, while the funds for private lending are mainly from the lender’s own funds. In entrusted loans, although the loan contracts are signed by banks and other financial institutions as lenders, the funds are not raised by financial institutions, but from the principal’s own funds, which is no different from private lending. (2) Cost of funds. As the funds for financial loans are raised through legal means, the borrowing interest rate should be fixed by taking into account the interest paid to the depositors and other right-holders, operating costs and other related expenses. On the other hand, funds for entrusted loans and private lending are the principal or lender’s own funds, the cost of which, in addition to the agent fees paid by the principal to the bank as trustee, is roughly the same. (3) Fixing of loan interest rate, attribution of interest, and risk assumption. Although the entrusted loan contract is signed by the financial institution in the name of the lender, the determination of the loan interest rate and other major rights and obligations in the contract still reflects the will of the principal rather than the

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bank or other trustees; and the principal rather than the bank enjoys such major contractual rights as charging interest, and bears such risks as late payment. This is no different from the practice in private lending where the owner of the selfowned funds sets the interest rate at his will, and enjoys the benefits and bears the risks. In summary, after reopening of the case, the court, upon considering the fact that entrusted loans and private lending have the same source of funds and presumably the same cost of funds, and that it is the principal rather than the financial institution as the lender that determines the entrusted loan interest rate and other main terms of the contract and actually charges interest, concludes that the entrusted loan interest is more characteristic of private lending, and then make clear that the relevant rules on private lending should be refered to in fixing the entrusted loan interest rate ceiling. 3. Determination of Interest under Financial Loan Contracts In practice, pursuant to the Several Opinions on the Trial of Lending Cases by the People’s Courts and the Rules on Several Issues about the Applcation of Law to Private Lending Cases, the people’s courts have set the interest rate ceiling for private lending at “four times the interest rate for the same type of loans” and later at “24% per annum”. However, in the case of financial loans, the view was expressed that, pursuant to Article 2 (1) of the Notice of the People’s Bank of China on Adjusting the Deposit and Loan Interest Rates of Financial Institutions, which stipulates that “the interest rates on loans of financial institutions (except for urban and rural credit cooperatives) are no longer subject to any ceilings. The interest rates of commercial bank loans and loans of policy banks under commercialized management are no longer subject to any ceilings, with the range of interest rate cut remaining unchanged, the parties’ agreement should be respected in judicial practice, and no restrictions should be placed on the interest rate of financial loan contracts. It is from this point of view that the decision of the court of second instance was rendered solely pursuant to the agreement of the parties on interest and penalty interest. So much so that, with regard to the loan of RMB 120 million yuan issued in October 2011, the borrower’s property should be seized for up to RMB 807 million yuan by July 2017 when the enforcement was seeking. Although we do not rule out the possibility of any fault in calculation involved in the enforcement, it is not unrelated to the apparent imbalance between the borrower and the lender as a result of the determination of interest and penalty interest by the court of second instance. Although the provision of the Several Opinions on Further Strengthening Financial Trials, which stipulates that “(t)he request of a borrower to the financial lending contract should be supported that because the interest, compound interest, penalty interest, liquidated damages and other costs the lender demands are excessively high and conspicuously deviate from the actual loss, the part exceeding the total amount calculated at the annual interest rate of 24% should be reduced”, is not a judicial interpretation, the people’s court should adhere to the concept of “finance should serve for the real economy” and adjust on the basis of actual losses the interest, compound interest, penalty interest, liquidated damages and other costs of financial loan contracts pursuant to Article 29

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of the Judicial Interpretation on Several Issues about the Application of the Contract Law (II) on the adjustment of liquidated damages. In line with the spirit of the above Opinions, a protection ceiling can under usual circumstances be set at 4 times the interest rate for the same type of loans or 24% per annum. Therefore, even if the entrusted loan in question is characterized as a financial loan contract, the People’s Court should nonetheless follow the above rules to adjust the sum of interest, penalty interest and other fees.

Hongyu Chen Master of Laws, senior judge, the Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China. Suheng Xie Master of Laws, senior judge, the First Civil Division of the Higher People’s Court of Guangxi Zhuang Autonomous Region.

Bank of Communications Co., Ltd. Guizhou Branch v. Guizhou Jinchi Hongye Trading Co., Ltd., Guizhou Yinyuan Financing Guarantee Co., Ltd., Guizhou Zhiyi Real Estate Development Co., Ltd., and Lin X (Dispute over Financial Loan Contract): The Creditor Not Entitled to Claim Guarantee Liability Directly against the Sub-guarantor Zaiyu Guo

Rule The sub-guarantor does not directly guarantee the performance of the principal debt, but guarantees the performance of the guarantor’s guarantee obligation, so the creditor has no right to claim guarantee obligation directly from the sub-guarantor. The creditor who claims assumption of guarantee obligation by the guarantor and whose claim is not discharged has the right to hold the sub-guarantor liable to the extent that the guarantor has not performed the guarantee obligation. The sub-guarantor, after assumption of obligation, has a right of recourse against the guarantor.

Collegiate Panel: Zaiyu Guo, Chun Zhang and Dan Wang (Edited by Xu Han; translated by Xia Liu) Z. Guo (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_19

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Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Bank of Communications Co., Ltd. Guizhou Branch (hereinafter referred to as Bank of Communications Guizhou Branch) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Guizhou Jinchi Hongye Trading Co., Ltd. (hereinafter referred to as Hongye Trading) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Guizhou Yinyuan Financing Guarantee Co., Ltd. (hereinafter referred to as Yinyuan Guarantee) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Guizhou Zhiyi Real Estate Development Co., Ltd. (hereinafter referred to as Zhiyi Real Estate) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Lin X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Du X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Shi X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Feng X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Xia X 2. Procedural History First Instance: No. 526 [2015] Trial, Civ. Division, the Intermediate People’s Court of Guiyang City, Guizhou Province (dated Dec. 25 of 2015) Second Instance: No. 561 [2016] Final, Civ. Division, the Higher People’s Court of Guizhou Province (dated Dec. 23 of 2016) Case Reopening: No. 279 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 27 of 2017) 3. Cause of Action Dispute over loan contract

Essential Facts On May 15, 2013, the Bank of Communications Guizhou Branch and Hongye Trading signed the Small Enterprise Liquidity Loan Contract (No.

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2013C004660821M3), agreeing that the Bank of Communications Guizhou Branch provides a loan of RMB 10 million yuan to Hongye Trading at an interest rate of 25% above the base rate with maturity date on May 14, 2014, and signed a corresponding guarantee contract. On the same day, the Bank of Communications Guizhou Branch granted a loan of RMB 10 million yuan to Hongye Trading. In May 2014, Hongye Trading repaid RMB 1.5 million yuan of the loan principal to the Bank of Communications Guizhou Branch. On June 28, 2013, Yinyuan Guarantee held a shareholders’ meeting (shareholders being Feng X, Xia X, Shi X and Hu X) and formed a resolution for renewal of the Guarantee Cooperation Agreement by Yinyuan Guarantee with the Bank of Communications Guizhou Branch. On the same day, Yinyuan Guarantee and its shareholders issued a power of attorney to the Bank of Communications Guizhou Branch, stating that “Our Company is hereby entrusting the legal representative and general manager of our Company to enter into various contracts with your Bank on guarantee cooperation business. All the contracts signed by Feng X with your Bank are the manifestation of the true intention of all the Company’s shareholders, who shall be jointly and severally liable therefor.” Yingyuan Guarantee and its shareholders Feng X, Xia X, Shi X and Hu X affixed their signatures and seals on the power of attorney. On September 26, 2013, the Bank of Communications Guizhou Branch and Yinyuan Guarantee signed the Guarantee Cooperation Agreement (No. 2013521119001D1), Article 2 of which stipulates that Yinyuan Guarantee agrees to open a deposit account and guarantee deposit account in the Bank of Communications Guizhou Branch, and shall, for each guarantee business that occurs, deposit not less than 20% of the total amount of guaranteed creditor’s rights into the guarantee deposit account. The guarantee deposit and its interest are used to secure the principal and interest under the master contract. The Bank of Communications Guizhou Branch possesses the guarantee deposit from the date of deposit, and has the right to directly debit the deposit and interest from the guarantee deposit account should Yinyuan Guarantee assume the guarantee liability, otherwise the guarantee deposit and interest cannot be utilized before the release of the guarantee liability. This Article also specifies the guarantee deposit account number. Thereafter, Yingyuan Guarantee deposited RMB 2 million yuan into the aforementioned guarantee deposit account for the loan in question, which was in the possession and control of the Bank of Communications Guizhou Branch. On the same day, the Bank of Communications Guizhou Branch also signed the Guarantee Cooperation Agreement (No. 2013521119001D1B1) with Zhiyi Real Estate, stipulating that: Zhiyi Real Estate shall provide guarantee in the form of joint and several guarantee liability for the credit granting contracts signed by the debtors under the Guarantee Cooperation Agreement (No. 2013521119001D1) signed by the Bank of Communications Guizhou Branch and Yinyuan Guarantee, the scope of which includes the principal, interest and penalty interest under each credit granting contract. On November 28, 2013, Guiyang National Public Notary Office issued a notarial certificate, which indicates that Shi X, Xia X, Hu X and Feng X are the legal shareholders of Yinyuan Guarantee, enjoying 100% of its shares; Yinyuan Guarantee applies to the Bank of Communications Guizhou Branch for loan guarantee business, with all shareholders voluntarily assuming joint and several guarantee liability for the guarantee business; and Yinyuan Guarantee’s shareholders fully entrust Feng

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X as their legal agent to sign within his scope of authority all legal instruments and documents, and handle guarantee formalities for all shareholders with regard to the loan guarantee business until all the matters are completed. On May 13, 2014, the Bank of Communications Guizhou Branch, Hongye Trading and Yinyuan Guarantee signed the Extension Contract (No. 2013C004660821M4), agreeing, among other things, that this Contract corresponds to the Small Enterprise Liquidity Loan Contract (No. 2013C004660821M3); the debt in the amount of RMB 8.5 million yuan is extended to October 13, 2014, with Yingyuan Guarantee providing guarantee for the extended debt. The Bank of Communications Guizhou Branch, Hongye Trading and Yinyuan Guarantee affixed their signatures and seals to the Extension Contract. On October 11, 2014, the Bank of Communications Guizhou Branch, Hongye Trading and Yinyuan Guarantee signed the Extension Contract (No. 2013C004660821M5), agreeing, among other things, that this Contract corresponds to the Small Business Liquidity Borrowing Contract (No. 2013C004660821M3) and the Extension Contract (No. 2013C004660821M4); the debt in the amount of RMB 8.5 million yuan is extended to April 10, 2015 at the interest rate of 50% above the base interest rate, with Yinyuan Guarantee continuously providing guarantee for the extended loan. The Bank of Communications Guizhou Branch, Hongye Trading and Yinyuan Guarantee affixed their signatures and seals to the Extension Contract. On the same day, the Bank of Communications Guizhou Branch and Yinyuan Guarantee signed the Guarantee Contract (No. 2013C004660821M5B1), agreeing that YinYuan Guarantee shall provide guarantee in the form of joint and several guarantee liability for the debt under the Extension Contract (No. 2013C004660821M5), covering the principal, interest, penalty interest and compound interest; and agreeing in Article 7.3 that “(t)his Contract takes effect when it is: (1) signed (or sealed) by the legal representative (or person in charge) or authorized representative of the guarantor and affixed with its official seal; or by the guarantor, if the guarantor is a natural person; and (2) signed (or sealed) by the person in charge or authorized representative of the creditor and affixed with its official seal.” On the same day, Zhiyi Real Estate issued a Guarantee Confirmation Letter to the Bank of Communications Guizhou Branch, confirming that Zhiyi Real Estate is willing to provide guarantee in the form of joint and several guarantee liability for the Extension Contract (No. 2013C004660821M5) signed by the Bank of Communications Guizhou Branch, Hongye Trading and Yingyuan Guarantee. In addition, on the same day, the Bank of Communications Guizhou Branch and Lin X signed a Guarantee Contract (No. 2013C004660821M5B2), agreeing, among other things, that Lin X shall provide guarantee in the form of joint and several guarantee liability for the loan under the Extension Contract (No. 2013C004660821M5), covering the principal, interest, penalty interest, and compound interest. In the Guarantee Contract signed by Lin X, Du X signed as a co-owner, agreeing that Lin X provides guarantee to the creditor and the debt will be discharged by community property. In December 2014, the Bank of Communications Guizhou Branch debited from the guarantee deposit account opened by Yinyuan Guarantee at the Bank of Communications Guizhou Branch the guarantee deposit in the amount of RMB 2 million yuan provided by Yinyuan Guarantee for the loan of Hongye Trading to repay the guarantee debt.

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The Intermediate People’s Court of Guiyang, Guizhou Province ruled in the first instance that Hongye Trading shall, within 10 days from the effective date of the decision, repay the Bank of Communications Guizhou Branch RMB 6.5 million yuan, and interest and penalty interest thereon; and Yingyuan Guarantee, Zhiyi Real Estate, Lin X and Du X shall be jointly and severally liable for the above-mentioned amount. Dissatisfied with the first instance decision, the Bank of Communications Guizhou Branch appealed. On December 23, 2016, the Higher People’s Court of Guizhou Province rendered a decision, rejecting the appeal and upholding the first instance decision. The Bank of Communications Guizhou Branch then applied to the Supreme People’s Court for reopening of the case.

Holding Upon review, the Supreme People’s Court holds that: 1. Whether the Debited RMB 2,000,000 Yuan Should be Deducted from RMB 8,500,000 Yuan First, pursuant to the literal meaning of Article 2 of the Guarantee Cooperation Agreement dated September 26, 2013, which specifies that Yinyuan Guarantee shall, for each guarantee business, deposit not less than 20% of the total amount of the guaranteed creditor’s rights into the guarantee deposit account, the deposit of each guarantee deposit correspondents to certain extent to every guarantee business that occurs. When the guarantee deposit involved in the case is deposited into the agreed guarantee deposit account, the guarantee deposit thus has the characteristic of being identified. Second, the expression used in Article 9.2 of the Guarantee Cooperation Agreement is that, upon the fulfillment of relevant agreed conditions, the Bank of Communications Guizhou Branch, without the authorization of Yinyuan Guarantee, has the right to immediately debit funds from any account opened by the Yinyuan Guarantee in the Bank of Communications Guizhou Branch for repaying the debt, not that the Bank of Communications Guizhou Branch has the right to debit the guarantee deposit of Yinyuan Guarantee for repaying any debt due earlier. Because, as agreed by the parties, Yinyuan Guarantee shall deposit guarantee deposit for each guarantee business, absent any clearer agreement between the Bank of Communications Guizhou Branch and Yinyuan Guarantee and other evidence to prove the contrary, it is not inappropriate for the the courts of first instance and second instance to find the RMB 2 million yuan debited by the Bank of Communications Guizhou Branch in December 2014 as being used for the repayment of the guarantee debt and deducted from the loan principal of RMB 8.5 million yuan. 2. Whether Feng X and Shi X as Shareholders of Yingyuan Guarantee Shall be Liable for the Loan in Question

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First, the power of attorney submitted by Yinyuan Guarantee to the Bank of Communications Guizhou Branch on June 28, 2013 specifies that all the contracts signed by Feng X entrusted by Yinyuan Guarantee in his capacity as the legal representative and general manager with the Bank of Communications Guizhou Branch on guarantee cooperation business are the manifestation of the true intention of all the shareholders of Yinyuan Guarantee, and all the shareholders shall be jointly and severally liable therefor. As Yinyuan Guarantee affixed its signature and seal on the power of attorney, its shareholders, including Shi X and Feng X, also signed to confirm that the guarantee was for “various contracts” signed with Feng X on the guarantee cooperation business. Article 6 of the Guarantee Cooperation Agreement signed by Yinyuan Guarantee and the Bank of Communications Guizhou Branch on September 26, 2013 specifies that the sharesholders of Yinyuan Guarantee shall be jointly and severally liable for the loan guarantee business in question. In the subsequent Notarial Certificate dated November 28, 2013, Shi X and Feng X, as joint applicants for handling notary matters, confirmed before the notary public that they “voluntarily assume joint and several guarantee liability for the guarantee business… fully entrust Feng X as their legal agent to sign within his scope of authority all legal instruments and documents, and handle guarantee formalities for all shareholders with regard to the loan guarantee business until all the matters are completed.” The phrasing “all shareholders”, “various contracts”, “guarantee formalities for all shareholders” as used in the Power of Attorney and Notarial Certificate, as well as Article 6 of the Guarantee Cooperation Agreement, all indicate that Shi X and Feng X have clearly manifested their intent for providing guarantee. Second, seeing from Article 7.3 of the Guarantee Contract (No. 2013C004660821M5B1), the provision involving “signed by the guarantor, if the guarantor is a natural person” is phrased in its entirety as “(t)his Contract takes effect when it is: (1) signed (or sealed) by the legal representative (or person in charge) or authorized representative of the guarantor and affixed with its official seal; or by the guarantor, if the guarantor is a natural person”. The parties to the Guarantee Contract being Yinyuan Guarantee and the Bank of Communications Guizhou Branch, with no natural person being a party to the Guarantee Contract, the substance of Article 7.3 is an agreement with regard to the entry into force of the contract, it is agreed that the Contract takes effect when it is signed by both parties. Now that Shi X and Feng X provide no evidence to prove that this clause has amended relevant content in the previous Power of Attorney, Notarial Certificate and Article 6 of the Guarantee Cooperation Agreement, it cannot be found that the guarantee liability voluntarily assumed by Shi X and Feng X through the Power of Attorney and Notarial Certificate is extinguished only by the agreement on the effectiveness of contract. The court of second instance went wrong on the finding of facts and application of law, so the court in reopening of the case makes corrections thereof. Regarding the type of guarantee liability assumed by Shi X and Feng X, the court in reopening of the case notes that the wording of the Power of Attorney is that they agree to be jointly and severally liable for various contracts signed for the guarantee cooperation business, and the wording of the Notarial Certificate is that they shall

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assume unlimited joint and several guarantee liability for the loan guarantee business of Yinyuan Guarantee. In this case, Yinyuan Guarantee is providing guarantee liability for the main debt in question, and from the face of the Power of Attorney and Notarial Certificate, Shi X and Feng X, as shareholders of Yinyuan Guarantee, are assuming guarantee liability for the guarantee liability of Yinyuan Guarantee, not the main debt in question, i.e., assuming guarantee liability for the guarantee liability of Yinyuan Guarantee to the creditor the Bank of Communications Guizhou Branch on the basis that Yinyuan Guarantee has assume guarantee for the principal debt, so the guarantee assumed by Shi X and Feng X is sub-guarantee. In this case, becasue the debtor Hongye Trading has not yet paid off the debt to the creditor the Bank of Communications Guizhou Branch, Yinyuan Guarantee, Zhiyi Real Estate, Lin X and Du X, as guarantors with joint and several guarantee liability, should be jointly and severally liable for paying off the debt in question to the Bank of Communications Guizhou Branch. After assuming the repayment liability, Yinyuan Guarantee, Zhiyi Real Estate, Lin X and Du X have a right of recourse against the debtor Hongye Trading pursuant to Article 3 of the Guarantee Law. Pursuant to Article 20 (2) of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law, the guarantor who has assumed the guarantee liability is entitled to require other guarantors who have not assumed guarantee liability to assume the corresponding liability. Since Shi X and Feng X do not directly guarantee the performance of the principal debt, but guarantees the performance of the guarantee liability by Yinyuan Guarantee, the creditor the Bank of Communications Guizhou Branch has no right to claim that Shi X and Feng X shall assume guarantee liability directly to it. If the creditor the Bank of Communications Guizhou Branch claims that Yinyuan Guarantee shall assume the guarantee liability but has not been paid, it has the right to demand sub-guarantors Shi X and Feng X to assume liability to the extent that Yinyuan Guarantee has not performed the guarantee liability. After assuming the liability, Shi X and Feng X have a right of recourse against the guarantor Yinyuan Guarantee. In summary, pursuant to Articles 207 (1) and 170 (1) (2) of the Civil Procedure Law, Articles 205, 206 and 207 of the Contract Law, Articles 18 and 31 of the Guarantee Law, and Article 42 (1) of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law, the Supreme People’s Court rules (1) to revoke the civil decision of the Higher People’s Court of Guizhou Province (No. 561 [2016] Final, Civ. Division, the Higher People’s Court of Guizhou Province); (2) to revoke Item (3) of the civil decision of the Intermediate People’s Court of Guiyang City, Guizhou Province (No. 526 [2015] Trial, Civ. Division, the Intermediate People’s Court of Guiyang City, Guizhou Province); (3) to maintain Items (1) and (3) of the civil decision of the Intermediate People’s Court of Guizhou, Guizhou Province (No. 526 [2015] Trial, Civ. Division); (4) that after assuming the liability, Yinyuan Guarantee, Zhiyi Real Estate, Lin X and Du X have a right of recourse against the Hongye Trading; (5) Feng X and Shi X shall be jointly and severally liable for the debt in question to the extent of guarantee liability by Yinyuan Guaratee. Feng X and Shi X, after assuming the liability, have a right of recourse against Yinyuan Guarantee; (6) to dismiss others claims of the Bank of Communications Guizhou Branch.

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Comment on Rule 1. Nature of the Guarantee Liability Assumed by Feng X and Shi X By taking full consideration of the Power of Attorney, Notarial Certificate and Article 6 of the Guarantee Cooperation Agreement, Feng X and Shi X have manifested clear intention to assume guarantee liability, and examination of the specific wording shows that Feng X and Shi X are voluntarily assuming unlimited joint and several guarantee liability for the loan guarantee business as guarantor, not providing joint and several guarantee for the principal debt as guarantor. In terms of jurisprudence, such guarantee is the guarantee of guarantee liability, i.e., sub-guarantee. There is no factual basis for the creditor the Bank of Communications Guizhou Branch to request Feng X and Shi X to assume joint and several guarantee liability for the debt in question, as other joint and several guarantors. Based on erroneous finding of facts, the courts of first instance and second instance ruled that Feng X and Shi X shall not assume guarantee liability for the debt in question for the reason that Shi X and Feng X did not enter into any guarantee contract with the Bank of Communications Guizhou Branch despite that the Power of Attorney authorizes Feng X to sign various documents on behalf of Shi X and Xia X, and Feng X and Shi X shall be jointly liable therefor. Accurate understanding of the substance of the parties’ agreement is the basis for determining whether the defendant in this case shall be liable and how to assume liability. 2. Legal Characteristics of Sub-Guarantee As used in the Guarantee Law currently in force and relevant judicial interpretations thereof, “guarantee” means a promise by the guarantor to the creditor that the guarantor will perform the obligation or assume the liability as agreed, if the debtor defaults. Under the law currently in force, guarantee is for the principal debt rather than the contingent liability of guarantee liability, with no explicit provisions on the issue of sub-guarantee. However, the legislation of many countries contains provisions on sub-guarantee, such as Article 2014 (2) of the French Civil Code, which stipulates that “(a) person may also become security, not only for the principal debtor, but also for the party who has secured him”, Article 498 (2) of the Swiss Code of Obligations, which stipulates that “(a) collateral surety who stands surety to the creditor for performance of the obligation assumed by the primary surety is liable together with the latter in the same way as a simple surety is liable with the principal debtor”, Article 1940 of the Italian Civil Code, which stipulates that “(t)he guarantor may, as he provides guarantee for the principal debtor, provide guarantee for another guarantor,” and Article 948 thereof, which stipulates that “(i)f neither the creditor’s principal debtor and all the guarantors are insolvent, nor they are all discharged of their liability for incapacity, the sub-guarantor shall not be liable to the creditor.” In general, “sub-guarantee” means, in cases where guarantee is created on the principal debt, promise by the guarantor to the creditor or principal creditor for the creation of guarantee on the existing guarantee, i.e., guarantee for the existing guarantee, with the former guarantee called primary guarantee. If the prior guarantor

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defaults, the sub-guarantor will satisfy the debt to the extent the primary guarantor fails to fulfill the guarantee liability. Sub-guarantee is premised on the existence of the primary guarantee. Because it is meaningless for the debtor himself to create another guarantee to the creditor, the sub-guarantee to be created against the primary guarantee is generally guarantee provided by a third party other than the primary guarantor. There are obvious differences between sub-guarantee and joint guarantee. Joint guarantee is guarantee provided by multiple guarantors for the same creditor’s right. Each guarantee, as a component of the joint guarantee, is created on the same debt, and directly guarantees the realization of the principal debt. If the debtor defaults, the creditor has right to directly demand joint guarantors to be liable for the debt in the case of general guarantee; or demand the debtor and joint guarantors to be liable for the debt in the case of joint and several guarantee. The sub-guarantee is for the primary guarantee, where the guarantor in the sub-guarantee does not directly guarantee the performance of the principal debt, but guarantees the performance of the guarantee liability, i.e., indirectly guarantee the realization of the debt. Therefore, the sub-guarantor must be inferior to the primary guarantor, and, before the primary guarantor assumes the guarantee liability, the creditor has no right to directly demand the sub-guarantor to assume the guarantee liability. In addition, the creation of the sub-guarantee must be based on the express agreement between the parties. If there is no agreement or the agreement is not clear, it should be presumed to be joint guarantee. In practice, there is a form of guarantee under the name of “sub-guarantee” business, namely, in the sub-guarantee contract signed by the guarantee company and sub-guarantee agency, the sub-guarantee agency will assume corresponding liability in such proportion as agreed after the guarantee company assumes its guarantee liability. This kind of guarantee is not guarantee in the legal sense. The parties to such legal relationship is not the principal creditor and sub-guarantor, but the guarantor and sub-guarantor, and the purpose is not to directly guarantee the realization of the principal debt, but to share the guarantee risk of the guarantee agency as the primary guarantor and to maintain the solvency of the guarantee agency. In this case, Yinyuan Guarantee, Zhiyi Real Estate, Lin X and Du X assume joint and several guarantee liability for the debt in question, whereby the Bank of Communications Guizhou Branch has the right to claim against some or all of the aforementioned joint and several guarantors, and, although Shi X and Feng X agree to assume joint and several guarantee liability for the guarantee liability of Yinyuan Guarantee, they still cannot be treated the same as the primary guarantor. If the prior guarantor Yinyuan Guarantee cannot satisfy the principal debt in question, Shi X and Feng X shall be liable to the extent that Yinyuan Guarantee cannot fulfill the guarantee liability. 3. Sub-Guarantor’s Right of Recourse There is no doubt that Feng X and Shi X, after assuming the guarantee liability, have the right of recourse against their debtor, i.e., the guarantor Yinyuan Guarantee. The sub-guarantor’s right of recourse after assuming the guarantee liability

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is more complicated, rendering it necessary to distinguish various circumstances. If the principal debt in question is satisfied because any guarantor other than Yinyuan Guarantee in this case has assumed the guarantee liability, even if Yinyuan Guarantee did not assume the guarantee liability to the Bank of Communications Guizhou Branch, the fact that the principal debt is satisfied will make the basis for Shi X and Feng X to assume sub-guarantee liability to the Bank of Communications Guizhou Branch no longer exist. In addition, because Shi X and Feng X are assuming subguarantee liability to the Bank of Communications Guizhou Branch for the guarantee liability of Yinyuan Guarantee, guarantors other than Yinyuan Guarantee, after satisfying the principal debt in question, have the right of recourse against the primary debtor Hongye Trading pursuant to Article 31 of the Guarantee Law, and, for the part that cannot be recovered from the primary debtor Hongye Trading, have the right to require other guarantors who did not assume the guarantee liability to assume the corresponding liability pursuant to Article 20 (2) of the Judicial Interpretation on Several Issues about the Application of the Guarantee Law, but have no right to require Shi X and Feng X to assume the corresponding liability. What Shi X and Feng X guarantee is the guarantee liability of Yinyuan Guarantee to the Bank of Communications Guizhou Branch rather than the guarantee liability of Yinyuan Guarantee to other guarantors. If the satisfaction of the principal debt results from assumption of guarantee liability by Yinyuan Guarantee, the dual facts of satisfaction of the principal debt and assumption of guarantee liability by the guarantor also make the basis for Shi X and Feng X to be liable to the Bank of Communications Guizhou Branch no longer exist. It also represents the basic legal principle of the guarantee law that Yinyuan Guarantee, after assumption of guarantee liability, has no right to demand Shi X and Feng X to assume the guarantee liability. As to whether the sub-guarantor has the right of recourse directly against the debtor, there are views that the guarantor has the right of recourse directly against the debtor to avoid the trouble of recourse by the sub-guarantor against the guarantor, and the guarantor against the debtor. Such practice can admittedly facilitate litigation and promote litigation economy, but it should not be generalized. From the point of view of the privity of contract, the sub-guarantor’s debtor is the primary guarantor rather than the principal debtor, and only when the sub-guarantor’s right is infringed due to the primary guarantor’s reluctance to fulfill its right of recourse against the principal debtor, may the sub-guarantor claim against the principal debtor by exercise of the right of subrogation.

Zaiyu Guo Doctor of Laws, senior judge, the Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China.

Zhejiang Kunlun Construction Group Co., Ltd. v. Anhui Wenyue Investment & Real Estate Co., Ltd. and Department of Culture and Tourism of Anhui Province, et al. (Dispute over Contract on Undertaking Construction Project): Determination of Whether Government Agency and the Enterprise Established Thereby Shall Jointly Assume Civil Liability and Allocation of the Burden of Proof Huizhuo Liu

Rule 1. Where the parties agree in the agreement that they are joint debtors for the project payment, if one debtor withdraws from debt payment by the transfer of debt, the creditor’s express consent is required for the exemption of such debtor’s payment obligation. 2. The shareholder of a single member limited liability company shall be jointly and severally liable for the company’s debt if it cannot prove that the company’s property is independent of the shareholder’s own property. If the creditor claims that the debtor is merely an alter ego of the shareholder, requiring the shareholder to assume joint and several liability for the debt of the single member limited liability company, the principle of reverse burden of proof shall be followed so that the company shall prove that the company’s property is independent of the shareholder’s own property. Collegiate Panel for the Second Instance Trial: Huizhuo Liu, Fang Mei and Jingchuan Liu (Edited by Yi Yang; translated by Benlin Niu) H. Liu (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_20

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Case Information 1. Parties Appellant (Plaintiff in the First Instance, Defendant in the Counterclaim): Zhejiang Kunlun Construction Group Co., Ltd. (hereinafter referred to as Zhejiang Kunlun Construction) Appellant (Defendant in the First Instance, Plaintiff in the Counterclaim): Anhui Wenyue Investment and Real Estate Co., Ltd. (hereinafter referred to as Anhui Wenyue Real Estate) Appellant (Defendant in the First Instance, Plaintiff in the Counterclaim): Department of Culture and Tourism of Anhui Province (hereinafter referred to as Department of Culture and Tourism) Appellee (Defendant in the First Instance): Internal Service Center of the Department of Culture and Tourism (hereinafter referred to as Internal Service Center) 2. Procedural History First Instance: No. 00014 [2013] Trial, Civ. Division, the Higher People’s Court of Anhui Province (dated Sept. 5 of 2017) Second Instance: No. 207 [2018] Final, Civ. Division, the Supreme People’s Court (dated Dec. 28 of 2018) 3. Cause of Action Dispute over construction contract

Essential Facts On November 8, 1999, the Unified Housing Construction Office of the Department of Culture and Tourism signed an agreement with Changwan Real Estate Co., Ltd. (hereinafter referred to as Changwan Real Estate), agreeing that they shall cooperate in building a housing project on the parcel of land (located at No. 349 Tuixi Road of Hefei City) provided by the Department of Culture and Tourism, with Changwan Real Estate making the capital contribution thereto, and that upon completion they will share the project by the construction area. During the construction, continuous contradictions between the parties have rendered the project basically in a state of semi-shutdown since May 2008. Upon litigation, an effective decision was rendered, ordering termination of the relevant agreements signed between the two parties, and transfer of state-owned land use rights over the three parcels of land involved in the project by Changwan Real Estate to the name of the Department of Culture and Tourism. The Department of Culture and Tourism caused its Internal Service Center to establish Anhui Wenyue Real Estate as a sole proprietorship on August 10, 2009,

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and the land use right certificate was transferred to the name of Anhui Wenyue Real Estate, which continued to develop the project. On November 10, 2009, the Department of Culture and Tourism, Anhui Wenyue Real Estate and Zhejiang Kunlun Construction and its Anhui Branch Company signed a Memorandum, agreeing: (1) to transfer by means of creditor’s rights transfer the claim of RMB 15 million yuan paid by Zhejiang Kunlun Construction to Changwan Real Estate as project performance bond to the name of the Department of Culture and Tourism and Anhui Wenyue Real Estate, with the latter two recognizing the labor wage security of RMB 900,000 yuan and fixed measurement fee of RMB 216,000 yuan paid by Zhejiang Kunlun Construction to the relevant departments for the project in question; (2) to settle the project payment in the following way: ➀ for the project payment of the phase under the charge of Changwan Real Estate, by the original contract between Zhejiang Kunlun Construction and Changwan Real Estate; ➁ for the project payment of the phase below ±0.000 under the charge of Hefei Construction Committee and the Department of Culture and Tourism, by relevant documents of Hefei Construction Committee; and ➂ for the project payment of the phase above ±0.000 to be constructed pursuant to an agreement separately signed by Anhui Wenyue Real Estate and Zhejiang Kunlun Construction and its Anhui Branch Company, by the agreement so signed; (3) that the Department of Culture and Tourism and Anhui Wenyue Real Estate acknowledge that the image progress of the project up to now has almost reached ±0.000, with advance payment fully made by Zhejiang Kunlun Construction and its Anhui Branch Company; (4) that the Department of Culture and Tourism and Anhui Wenyue Real Estate acknowledge that the adjustment of plans, revision of drawings, litigation, etc. have prolonged the construction period up to 26 months by now, resulting in Zhejiang Kunlun Construction and its Anhui Branch Company incurring abnormal construction losses, costs for cramped construction site, work stopage losses, and the ensuing increase in financial costs, rental costs for construction personnel, which should be addressed and resolved soon. On November 12, 2009, the Department of Culture and Tourism, Anhui Wenyue Real Estate and Zhejiang Kunlun Construction and its Anhui Branch Company signed a Supplementary Memorandum, providing that the sums agreed upon in Articles 1, 2 and 4 of the Memorandum shall be paid by the Department of Culture and Tourism and Anhui Wenyue Real Estate to Zhejiang Kunlun Construction Anhui Branch Company, and that the Department of Culture and Tourism and Anhui Wenyue Real Estate agreed to use the City Culture Square Project as a guarantee for the payment of the above-mentioned amount. On April 6, 2010, Anhui Wenyue Real Estate and Zhejiang Kunlun Construction signed a Contract on Undertaking Construction Project, agreeing that the project, named Lanting Apartment located at No. 349 Tunxi Road Hefei City, is a general contracting project of above ±0.000, covering all civil works, decoration, fire protection (note: the words “fire protection” is blacked out), and installation within the scope of the construction drawings. On April 16, 2010, Anhui Wenyue Real Estate and Zhejiang Kunlun Construction signed a Supplementary Agreement, agreeing on the transfer and return of claims for project deposit and workers’ wage security, compensation for abnormal construction losses, and payment for project under

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±0.000. The two parties agreed that the payment for the completed and pending construction under ±0.000 of the project shall be under audit and final accounting by Anhui Huajian Cost Engineering Firm, based on the final results of which the parties will make settlement (at the same time, the parties reserve the right to apply for judicial audit). At the time of acceptance of the project as a whole, such audit results will be final, with no separate final accounting to be organized for payment for project under ±0.000. In the Supplementary Agreement, the parties also agreed that in the event of any conflict between this Agreement and the general provisions of the Contract on Undertaking Construction Project, this Agreement shall prevail. After the signing of the aforesaid Agreement, Zhejiang Kunlun Construction organized personnel to continue construction of the project in question. During the construction, Anhui Wenyue Real Estate subcontracted the stainless steel railings, shop stairs and entrance doors of the Lanting Apartment Project to other entities. As for the fire protection engineering, the two parties signed a Memorandum on November 4, 2011 and May 7, 2012, agreeing inter alia that the fire protection engineering of Lanting Apartment shall be undertaken by Zhejiang Kunlun Construction, which needs to be handled with other engineering of Lanting Apartment within the scope of its general contracting simultaneously. Afterwards, Zhejiang Kunlun Construction organized the construction of the fire-fighting engineering, but multiple design changes and additional modifications to the works below ±0.000 and above ±0.000 have increased work volumes, and, upon completion acceptance, Zhejiang Kunlun Construction sued to request the Department of Culture and Tourism, its Internal Service Center, and Anhui Wenyue Real Estate to make the construction payment. The court of first instance rendered a civil decision on September 5, 2017 (No. 00014 [2013] Trial, Civ. Division, the Higher People’s Court of Anhui Province), ordering: (1) Anhui Wenyue Real Estate to pay Zhejiang Kunlun Construction the construction payment in the amount of RMB 40,104,461.24 yuan within 20 days after the effective date of this decision; (2) Anhui Wenyue Real Estate to pay Zhejiang Kunlun Construction the increase in finance costs for the paid project payment in the amount of RMB 4,068,110 yuan and the increase in finance costs for the outstanding project payment within 20 days after the effective date of this decision (calculated at the interest rate for loans of the same type for the same period issued by the People’s Bank of China, with the base number being RMB 33,738,852.17 yuan from 5 November 2013 to 26 December 2013; RMB 37,982, 591.55 yuan from 27 December 2013 to 26 December 2014; and RMB 40,104,461.24 yuan from December 27, 2014 to the date of full payment); (3) Zhejiang Kunlun Construction to compensate Anhui Wenyue Real Estate RMB 1,305,780 yuan for the loss of liquidated damages for postponing the processing of the real estate ownership certificate, RMB 309,675 yuan for loss of resettlement expenses for the demolished and relocated households, and RMB 24,822 yuan for the loss of office rental expenses; (4) dismiss of the other claims of Zhejiang Kunlun Construction; (5) dismiss of the other counterclaims of Anhui Wenyue Real Estate; and (6) dismiss of the counterclaims of the Department of Culture and Tourism.

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Dissatisfied with the aforesaid decision, Zhejiang Kunlun Construction filed an appeal, requesting to: (1) revoke Items (3) and (4) of the trial decision; (2) amend Item (1) of the trial decision to read: “(T)he Department of Culture and Tourism, Anhui Wenyue Real Estate and the Internal Service Center shall pay Zhejiang Kunlun Construction within 20 days from the date of this decision the construction payment of RMB 40,104,461.24 yuan”; (3) amend Item (2) of the trial decision to read: “(T)he Department of Culture and Tourism, Anhui Wenyue Real Estate and the Internal Service Center shall pay Zhejiang Kunlun Construction within 20 days from the date of this decision RMB 4,068,110 yuan as the increase in finance costs for the paid project payment and the increase in finance costs for the outstanding project payment (calculated subject to the proportion of payment as agreed in the contract on the basis of the outstanding construction payment at the rate of 5‱ per day in periods from 27 December 2012 until the date of full payment)”; (4) maintain Items (5) and (6) of the trial decision; and (5) order the Appellee to bear the case acceptance fee of the first and second instances.

Issue Whether the Department of Culture and Tourism and its Internal Service Center should be jointly and severally liable for the sums due from Anhui Wenyue Real Estate.

Holding Upon review, the Supreme People’s Court holds that: 1. Regarding Whether the Department of Culture and Tourism and Its Internal Service Center Should be Jointly and Severally Liable for the Sums Due from Anhui Wenyue Real Estate The Department of Culture and Tourism, Anhui Wenyue Real Estate and Zhejiang Kunlun Construction signed a Memorandum and a Supplementary Memorandum on November 10 and November 12, 2009, which specified that the Department of Culture and Tourism and Anhui Wenyue Real Estate would be jointly liable to Zhejiang Kunlun Construction for construction payment of above ±0.000 and below ±0.000 involved in the case, abnormal construction losses and increase in financial costs. That is, according to the agreement signed by the three parties in the form of memorandum, the Department of Culture and Tourism and Anhui Wenyue Real Estate are joint debtors for the payment of the relevant sums, and the agreement does not provide for assumption of proportional liability. Although Anhui Wenyue Real Estate and Zhejiang Kunlun Construction signed a separate Contract on Undertaking

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Construction Project for the construction above ±0.000 and agreed in the Supplementary Agreement that Anhui Wenyue Real Estate would pay the above sums, Zhejiang Kunlun Construction did not in the Supplementary Agreement expressly release the Department of Culture and Tourism from its payment obligation, the latter of which shall still assume the obligation of making corresponding payment. Therefore, ruling by the Court of First Instance only from the perspective of privity of contract that the Department of Culture and Tourism shall not be liable for payment is erroneous and should be corrected. 2. Whether the Internal Service Center Shall be Jointly and Severally Liable for the Sums Due from Anhui Wenyue Real Estate Anhui Wenyue Real Estate is a single member limited liability company funded by the Internal Service Center as the sole shareholder. Although the Internal Service Center is not a party to the Contract on Undertaking Construction Project between Anhui Wenyue Real Estate and Zhejiang Kunlun Construction, pursuant to Article 63 of the Company Law, which stipulates that “(w)here the shareholder of a single member limited liability company is unable to prove that the company’s property is independent of the shareholder’s own property, the shareholder shall be jointly and severally liable for the debts of the company”, the Internal Service Center shall bear the burden of proving whether there is confusion of property with Anhui Wenyue Real Estate, otherwise it shall be jointly and severally liable for the relevant sums due from Anhui Wenyue Real Estate to Zhejiang Kunlun Construction. The decision of the Court of First Instance has improperly allocated the burden of proof by ruling that the Internal Service Center shall not be held jointly and severally liable on the ground that Zhejiang Kunlun Construction failed to submit sufficient evidence to prove confusion of property between Anhui Wenyue Real Estate and the Internal Service Center, leading to wrongful ruling on the assumption of civil liability, which should be corrected. Therefore, the grounds for appeal by Anhui Wenyue Real Estate and the Department of Culture and Tourism could not be established and approved by the court; and partial grounds for appeal by Zhejiang Kunlun Construction are established and approved by the court. Pursuant to Article 170 (2) of the Civil Procedure Law, the Supreme People’s Court rules as follows: “(1) To uphold Items (1), (2), (3), (5) and (6) of the Civil Decision of the Higher People’s Court of Anhui Province (No. 00014 [2013] Trial, Civ. Division); (2) To reverse Item (4) of the Civil Decision of the Higher People’s Court of Anhui Province (No. 00014 [2013] Trial, Civ. Division); (3) To order the Department of Culture and Tourism and its Internal Service Center to assume joint and several liability for the payment obligation of Anhui Wenyue Real Estate; and (4) To dismiss the other claims of Zhejiang Kunlun Construction.

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Comment on Rule The dispute in this case occurs against the background of policy changes related to real estate development. As the government agencies can no longer participate in real estate development, they should, on the one hand, withdraw from the market in a lawful and orderly manner, and on the other hand, protect the creditors’ interests during the transitional period. In this case, according to the ascertained facts, the Department of Culture and Tourism initially signed a construction contract directly with Changwan Real Estate for the real estate development, and, when Changwan Real Estate withdrew from the project undertaken by Zhejiang Kunlun Construction due to the contradictions between the two parties and the relevant policy changes, established Anhui Wenyue Real Estate to take charge of the project development and obtained the land use right of the project from the government free of charge. Therefore, the obligation for making construction payment shall be lawfully ascertained as agreed by the parties. The court of first instance had problems with the application of law and the allocation of the burden of proof in adjudicating whether the government agency and the relevant company established under its direction should assume joint civil liability. 1. Concerning the Application of Law, the Creditor’s Express Consent Needs to be Obtained for Joint Debtor’s Withdrawal from the Debt Repayment Article 84 of the Contract Law stipulates that the creditor’s consent needs to be obtained if the debtor transfers all or part of its contractual obligations to a third party. In judicial practice, sometimes no explicit boundary exists as to whether the debtor transfers all or part of its obligations to a third party and whether the debtor assumes joint liability with the new obligor or withdraws completely from the obligation. The creditor often fails to unequivocally state the liability of the debtor in consent to the joining of, or assumption of all the obligations by, the new debtor. As a result, controversies are prone to occur when the creditor claims that the debtor and the new obligor shall be jointly liable. Although the foregoing Article 84 does not specify some specific circumstances, its original intention is that it is necessary to establish the principle of debt transfer subject to creditor’s consent because it is creditor who will take the risk of having its interest favorably realized or unfavorably damaged when the debtor transfers its contractual obligations. From the perspective of the creditor, it is willing to accept both the original debtor and the new debtor and generally will not reject the new debtor to join in debt repayment, as long as its rights could be realized, so it is also necessary to require the creditor to clarify its attitude towards the original debtor’s withdrawal from debt repayment. If the creditor consents to the original debtor’s withdrawal from debt repayment, its claim that the original debtor shall be held liable when the new debtor fails to fulfill its contractual obligations will lack contractual basis. If the creditor does not expressly consent to the original debtor’s withdrawal from debt repayment, its claim that the original debtor

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shall be held liable when the new debtor fails to fulfill its contractual obligations should be supported. In this case, whether the Department of Culture and Tourism should be held jointly and severally liable for the sums payable by Anhui Wenyue Real Estate depends on the contractual agreement by the parties for the assumption of debt. According to the ascertained facts, the Department of Culture and Tourism, Anhui Wenyue Real Estate and Zhejiang Kunlun Construction signed a Memorandum on November 10, 2019 and a Supplementary Memorandum on 12, 2009, which specified that the Department of Culture and Tourism and Anhui Wenyue Real Estate would be jointly liable to Zhejiang Kunlun Construction for construction payment of above ±0.000 and below ±0.000 involved in the case, abnormal construction losses and increase in financial costs. Pursuant to the agreement signed by the three parties in the form of memorandum, the Department of Culture and Tourism and Anhui Wenyue Real Estate are joint debtors for the payment of the relevant sums, and the agreement does not provide for assumption of proportional liability. Although Anhui Wenyue Real Estate and Zhejiang Kunlun Construction signed a separate Contract on Undertaking Construction Project for the construction above ±0.000 and agreed in the Supplementary Agreement that Anhui Wenyue Real Estate would pay the above sums, Zhejiang Kunlun Construction did not in the Supplementary Agreement expressly release the Department of Culture and Tourism from its payment obligation, the latter of which shall still assume the obligation of making corresponding payment. In its appeal, there is contractual basis for Zhejiang Kunlun Construction to claim that the Department of Culture and Tourism assume joint and several liability. 2. Concerning the Allocation of the Burden of Proof, the Principle of Reverse Burden of Proof Shall be Followed as to whether a Single Member Limited Liability Company and Its Shareholder Constitute Confusion of Property Pursuant to Article 63 of the Company Law, which stipulates that “(w)here the shareholder of a single member limited liability company is unable to prove that the company’s property is independent of the shareholder’s own property, the shareholder shall be jointly and severally liable for the debts of the company”, the shareholder shall bear the burden of proving that the company’s property is independent of the shareholder’s own property, otherwise shall be jointly and severally liable for the debts of the company. In this case, on whether the Internal Service Center should be jointly and severally liable for the payments due from Anhui Wenyue Real Estate, Anhui Wenyue Real Estate is a single member limited liability company funded by the Internal Service Center as the sole shareholder. Although the Internal Service Center is not a party to the Contract on Undertaking Construction Project between Anhui Wenyue Real Estate and Zhejiang Kunlun Construction, in the case when Zhejiang Kunlun Construction, as the creditor of Anhui Wenyue Real Estate, claims confusion of property between the Internal Service Center and Anhui Wenyue Real Estate, the Internal Service Center should bear the burden of proving whether it has confusion of property with Anhui Wenyue Real Estate. However, it only contends that it should bear limited liability to the extent of its capital contribution, but fails to provide evidence

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to prove that the property of Anhui Wenyue Real Estate is independent of the Internal Service Center. Therefore, it should be jointly and severally liable for the relevant sums owed by Anhui Wenyue Real Estate to Zhejiang Kunlun Construction.

Huizhuo Liu Doctor of Laws, senior judge, Enforcement Bureau of the Supreme People’s Court of the People’s Republic of China.

Zhang X v. Haili Holding Group Co., Ltd., and Gan X (Dispute over Contract on Undertaking Construction Project): Probative Value of Decided Facts Ascertained by Judgment in Subsequent Litigation Xiaoyun Li

Rule The rules of evidence in civil proceedings stipulate that a party needs not prove by evidence the facts ascertained by the judgment of the people’s court which has taken legal effect. However, the decided facts ascertained by the judgment do not ipso facto have a probative value in the subsequent litigation. First, a party needs not to prove by evidence the decided facts in civil proceedings not because of the binding force of res judicata of effective judgment, but because of its nature of falling under the domain of evidence. Therefore, the decided facts will have no probative value in the subsequent litigation, if the party can provide evidence to the contrary sufficient to refute the decided facts. Second, even if the evidence to the contrary is sufficient to refute the decided facts, it does not mean that the judicial supervision procedure must be commenced first to correct the effective judgment. We cannot necessarily infer from any contradiction between the facts ascertained in subsequent litigation and the decided facts determined by the effective judgment that the effective judgment is wrong, but it only produces the legal effect that the decided facts determined by the effective judgment cannot be used as evidence in subsequent litigation. Finally, the probative value of decided facts in subsequent litigation depends on the relevancy of such facts with the facts to be proven in subsequent litigation. Some decided facts that can reflect partial facts in subsequent litigation because of Collegiate Panel: Xiaoyun Li, Zaiyu Guo and Dan Wang (Edited by Wenyan Ding; translated by Benlin Niu) X. Li (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_21

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intertwined parties or interrelated facts are less relevant with the facts to be proven in subsequent litigation, so such decided facts, despite of being facts ascertained by effective judgment, lack probative value for the facts to be proven in subsequent litigation.

Case Information 1. Parties Applicant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Liu X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Haili Holding Group Co., Ltd. (hereinafter referred to as Haili Holding Group) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Gan X 2. Procedural History First Instance: No. 00031 [2014] Trial, Civ. Division, the Third Intermediate People’s Court of Chongqing City (dated Nov. 28 of 2014) Second Instance: No. 00076 [2015] Final, Civ. Division, the Higher People’s Court of Chongqing City (dated Dec. 22 of 2016) Case-reopening via Certiorari: No. 375 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 25 of 2017) 3. Cause of Action Dispute over contract on undertaking construction project

Essential Facts In May 2013, Guizhou Huadun Urban Construction Investment Co., Ltd. (hereinafter referred to as Huadun Urban Construction), as the contract-issuing party, contracted the S Road Project to Haili Holding Group, and Gan X signed as the entrusted agent of Haili Holding Group. Haili Holding Group issued a Power of Attorney by the Legal Representative, stating that the following persons are hereby authorized to handle in the name of the company all matters relating to the negotiation and execution of contract related to S Road Project, establishment of Haili Holding Group Guiyang S Road Project Management Department (hereinafter referred to as Haili Holding

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Group Guiyang Project Department), opening accounts and organization of project implementation. Project Department: Gan X (the first person in charge), Jiang X (the second person in charge); Seal of the Project Department: Haili Holding Group Guiyang Project Department…; and affixed with the seals of Haili Holding Group, its legal representative, the Project Department and person in charge Gan X. On June 17, 2013, Zhang X (Party B) signed the Contracting Agreement with Haili Holding Group Guiyang Project Department (Party A), agreeing that Party A shall hand over the road subgrade engineering to Party B for construction, with an estimated cost of RMB 200 million yuan. With regard to the guarantee deposit, it is agreed that Party B shall pay Party A performance and safety guarantee deposit in the amount of 6% (RMB 12 million yuan) of the total estimated cost under this Agreement, with RMB 5 million yuan to be paid by Party B to Party A’s designated account on the day this Agreement is executed, and the remaining part to be paid in full within 5 days of formal entrance upon receipt of Party A’s entrance notice. If Party B cannot enter the field for construction after 30 days beyond the agreed time period, Party A shall from 31st day onwards pay capital interest at 3 times of the loan interest rate of the People’s Bank of China for the corresponding period. The name of Party A’s designated bank account is Haili Holding Group Guiyang Project Department. With regard to the liquidated damages, it is agreed that if either Party A or Party B breaches this Agreement, the liquidated damages is 20% of the total estimated cost of the Project. On the same day after signing the Agreement, Zhang X transferred RMB 3.9 million yuan to the designated account under the Agreement, but received the returned money the next day. On June 24, Haili Holding Group Guiyang Project Department issued a Letter on Change of Payment of Performance Guarantee Deposit to Zhang X, saying that, it has been reported to the management bank for handling that the agreed account cannot take in income and meet expenditure due to reasons attributable to the opening bank; to ensure the effectiveness and continuity of the Agreement and upon approval of the Group Company, Zhang X shall pay the money to the account of the first person in charge of the Department, which will confirm by going through relevant financial procedures and assume relevant liability therefor, with the private account of Gan X indicated in the Letter. On the same day, Zhang X transferred RMB 5 million yuan to the designated private account of Gan X, who then successively remitted RMB 4.7 million yuan, RMB 2.5 million yuan, and RMB 500,000 yuan to Huadun Urban Construction. On June 30, Haili Holding Group Guiyang Project Department issued a receipt to Zhang X for having received RMB 5 million yuan as the performance guarantee deposit. Thereafter, the engineering did not start in time, and Zhang X failed to enter the field as scheduled. On October 16, 2013, the Public Security Bureau of Linshui County, Sichuan Province placed the case of false pretense (with Gan X being the victim) on file for investigation. The public security organ discovered that Wang X, the legal representative of Huadun Urban Construction, was suspected of using the project in question to defraud Gan X of the project guarantee deposit in the amount of RMB 30 million yuan. On December 14, 2013, Haili Holding Group Guiyang Project Department promised to Zhang X that it would return the performance guarantee deposit of RMB 2.75 million yuan to

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Zhang X by December 20, 2013, otherwise it would assume 20% of the guarantee deposit RMB 5 million yuan paid by Zhang X as liquidated damages. Gan X and Jiang X, as the persons in charge, signed the Letter of Undertaking and affixed the official seal of the Project Department. Upon expiry, Haili Holding Group Guiyang Project Department failed to perform as promised. Apart from confirming the facts ascertained in the first instance, the second instance finds that the criminal judgment (No. 0121 [2016] Trial, Cri. Division, the People’s Court of Nanchang County, Jiangxi Province) has entered into force. The criminal judgment finds that: “(i)n 2013, the Defendant Pu X, without authorization and consent of Haili Holding Group, had the official seal of Haili Holding Group, seal of Bu X as the legal representative of Haili Holding Group and seal of Haili Holding Group Guiyang Project Department engraved through use of forged documents such as the business license and organization code of Haili Holding Group, and affixed the seals on documents such as the Letter of Attorney by the Legal Representative of Haili Holding Group. He agreed with Jiang X and Gan X to negotiate in the name of “Haili Holding Group” with Wang X, the then legal representative of Huadun Urban Construction, for S Road Project, and, through the bank account opened with a local bank in Guizhou Province in the name of “Haili Holding Group Guiyang Project Department”, charge “sub-contracting guarantee deposit” from Liu X, Lai X, Zhang X and Chongqing Helin Construction Labor Service Company in the name of the Project Department. The court of first instance on November 28, 2014 ruled: (1) that Haili Holding Group shall return Zhang X the performance guarantee deposit of RMB 5 million yuan within 5 days from the effective date of the judgment, and pay capital interest at 3 times of the loan interest rate of the People’s Bank of China for the corresponding period from August 3, 2013 to the date of full payment; and (2) to dismiss other claims of Zhang X. Dissatisfied with the first instance decision, Zhang X and Haili Holding Group appealed, and the court of second instance ruled on December 22, 2016 to dismiss the claims of Zhang X. Dissatisfied with the second instance decision, Zhang X applied to the Supreme People’s Court for reopening of the case, mainly for the reasons that: (1) there is new evidence sufficient to reverse the second instance decision. In Chongqing Helin Construction Labor Service Co., Ltd. v. Haili Holding Group, a case of dispute over contract on undertaking construction project heard by the People’s Court of Fulin District, Chongqing City, the Court holds that based on relevant evidence obtained, it is wrongful for the court of second instance to rule that the claims of Zhang X cannot be established by Pu X’s act of engraving seals as ascertained by the criminal judgment of the People’s Court of Nanchang County, Jiangxi Province; (2) new evidence shows that Haili Holding Group knows the existence of the seals in question, and has been using them for a long term. It not only affixed the seal on the power of attorney in question, but also used the seal in the performance of the contract with the land consolidation company in Lingshui County. Therefore, it is requested to revoke the second instance decision, hear the case via certiorari and uphold his claims. During the reopening of the case, Zhang X submitted the Contract on Undertaking Construction Project signed on January 28, 2014 by Haili Holding

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Group and Lingshui Land Preparation Company on H Resettlement Housing Project in Lingshui County, the bank return receipt dated May 11, 2015 for the payment of performance guarantee deposit to Lingshui Land Preparation Company through the account of Haili Holding Group, the bank voucher for the return of the performance guarantee deposit by Lingshui Land Preparation Company to the account of Haili Holding Group Chengdu Branch, the Judicial Appraisal Opinion (No. 1479 [2017]) issued by the Judicial Appraisal Center of Southwest University of Political Science and Law on June 6, 2017, and the civil decision of the People’s Court of Fuling District, Chongqing City (No. 03402 [2015] Trial, Civ. Division, the People’s Court of Fuling Districe, Chongqing City). Zhang X claims that those evidence mentioned above can prove that the seals in question has been under control and used by Haili Holding Group, who shall then be held liable for returning the guarantee deposit to Zhang X.

Issue Whether it can be found that Haili Holding Group shall not return the guarantee deposit of RMB 5 million yuan and interest thereof to Zhang X based on the effective criminal decision which finds that Pu X had privately engraved both the seal of Haili Holding Group affixed on the Power of Attorney by the Legal Representative and the seal of Helix Holding Group Guiyang Project Department affixed on the Contracting Agreement.

Holding Upon review, the Supreme People’s Court decided to hear the case via certiorari, and, after reopening of the case, held that Haili Holding Group shall be held civilly liable for the act of charging Zhang X guarantee deposit by Haili Holding Group Guiyang Project Department. Although the decision of the People’s Court of Fuling District, Chongqing City in another case has yet taken legal effect due to appeal by the parties, it does not affect relevant evidentiary materials in that case to be used in this case as evidentiary materials. Upon appraisal by the appraisal agency, the seal of Haili Holding Group affixed on the Contract on Undetaking Construction Project signed by Haili Holding Group and Lingshui Land Preparation Company is the same as that affixed on the Power of Attorney issued by Haili Holding Group to Gan X on May 9, 2013. Although Haili Holding Group claims that it cannot be ruled out that Pu X used forged seals in the project undertaken by Haili Holding Group, upon clarification by the People’s Court of Fuling District, Chongqing City during the trial of another case, failure of Haili Holding Group to apply for re-appraisal should be regarded as its endorsement of the appraisal agency’s conclusion that the seals affixed on the two documents are the same. Upon organization of evidence examination, recognition by

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Haili Holding Group of the authenticity of the bank return receipt for the payment of performance guarantee deposit to Lingshui Land Preparation Company through the account of Haili Holding Group, which was obtained ex officio by the People’s Court of Fuling District, Chongqing City in another case, and the bank voucher for the return of the performance guarantee deposit by Lingshui Land Preparation Company to the account of Haili Holding Group Chengdu Branch indicates that Haili Holding Group should have known such project related to Lingshui Land Preparation Company. Where the seal of Haili Holding Group affixed on the Contract on Undertaking Construction Project signed with the Land Preparation Company is the same as that affixed on the Power of Attorney issued to Gan X, with knowledge of the project related to Lingshui Land Preparation Company, it is factually wrong for Haili Holding Group to claim total ignorance of authorizing Gan X to establish Haili Holding Group Guiyang Project Department. There is no contradiction between Pu X’s being convicted of forgery of corporate seal by the People’s Court of Nanchang County, Jiangxi Province in its effective criminal decision and the presumption that Haili Holding Group should have known of the authorization of Gan X to establish Haili Holding Group Guiyang Project Department, Haili Holding Group shall be civilly liable for Gan X’s act of charging Zhang X guarantee deposit in the name of Haili Holding Group Guiyang Project Department. As for the amount of guarantee deposit to be returned by Haili Holding Group to Zhang X, the agreement in the nature of punitive damages between Haili Holding Group Guiyang Project Department and Zhang X that if Zhang X cannot enter the field as scheduled, he shall from 31st day onwards pay capital interest at 3 times of the loan interest rate of the People’s Bank of China for the corresponding period, and the later promise of Haili Holding Group Guiyang Project Department that if the guarantee deposit is not returned as scheduled it would assume 20% of the guarantee deposit of RMB 5 million yuan paid by Zhang X as liquidated damages are repeated agreement on the loss of fund use, so Zhang X’s claim for 20% of the guarantee deposit of RMB 5 million yuan as liquidated damages in addition to 3 times of the loan interest rate of the People’s Bank of China for the corresponding period cannot be supported. The Supreme People’s Court rendered a civil decision (No. 375 [2017] Reopening, Civ. Division, the Supreme People’s Court) to: (1) revoke the civil decision of the Higher People’s Court of Chongqing City (No. 00076 [2016] Final, Civ. Division, the Higher People’s Court of Chongqing City); (2) uphold the civil judgment of the Third Intermediate People’s Court of Chongqing City (No. 00031 [2014] Trial, Civ. Division, the Third Intermediate People’s Court of Chongqing City).

Comment on Rule The facts ascertained by the people’s court in its decision that has taken legal effect will become decided facts in civil litigation without being proved by the parties through evidence. In view that the decided facts exempted from being proved by evidence will exert substantial influence on subsequent litigation, in practice, judges

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face the problem that some party who has no objection to the result of the decision but to some facts ascertained in the judgment may lodge an appeal or even apply for reopening of the case with regard only to part of ascertained facts out of fear that the decided facts may become a hidden trouble in subsequent litigation. In fact, this problem involves how we view the decided facts, and how to assess the probative value of decided facts in subsequent litigation. 1. Legal Nature of Decided Facts The civil procedure laws around the world all provide grounds for evidence being exempted from proving, such as well-known facts, theorems and laws of nature and so on. However, in the civil procedure laws of the civil law system represented by Japan and Germany, the scope of “facts that do not need to be proved” is usually limited to voluntary admission, well-known facts and facts obvious to the court, but does not include the facts ascertained by the decision that has taken effect. In other words, the decided facts ascertained by the effective decisions in civil law countries are not automatically exempted from being proved by evidence, there are also legislations that negate the idea that decided facts do not need to be proved by evidence. In China, Article 75 (4) of the Opinions of the Supreme People’s Court on Several Issues Concerning the Application of the Civil Procedure Law of the People’s Republic of China (1992) (Repealed) for the first time expressly stipulates that the facts ascertained by the effective decision of the people’s court need not to be proved by the parties through evidence, which is further strengthened in the Rules on Evidence in Civil Procedures (2001). However, around whether the facts ascertained in an effective decision can have prejudgment effect on subsequent litigation, there have always been two tit-for-tat views of negative theory and positive theory in the academic community. The negative theory radically denies the idea that the decided facts in civil litigation need not to be proved by the parties through evidence, for the reason that: for decided facts to have prejudgment effect, the principle of res judicata must be invoked, but determination in ratio decidendi does not fall under the objective scope of res judicata and is therefore not covered thereby. In addition, adjudication of each case has its distinctive nature, and the facts ascertained in one case may vary substantially in status and nature in another case, with different requirements for the degree of proof. Appropriate examples are the civil procedure laws of Japan and Germany. On the other hand, the positive theory generally confirms the prejudgment effect of decided facts on subsequent litigation, which specifically can be divided into three schools. The first is judicial notice theory that the facts ascertained in an effective judgment falls with the scope of “judicial notice” as found in the Anglo-American law of evidence, “judicial notice means that a court will consider the law to be applied or facts to be ascertained without a party’s claim; and will take notice thereof without evidence provided by the party”. The second is the res judicata theory that holds a final decision on the merits not only prevents either party to a dispute from raising any issue or claim contradictory thereto, but also precludes the court to make any determination contradictory thereto. In other words, res judicata is manifested not

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only in its binding force on the whole litigation, but also in each specific matter determined by the court in the effective decision. The third is independent effect theory that holds facts ascertained in an effective decision are exempted from being proved by evidence in a subsequent litigation not because of res judicata, but because “the fact-proving effect of an effective decision is one of the inherent effects of a decision, which together with other effects of decision such as res judicata constitute the judgment’s effects system”. That is to say, it is considered that the issue is not within the scope of res judicata, but essentially within the scope of evidence. Considering that both the Judicial Interpretation on the Application of the Civil Procedure Law and the Rules on Evidence in Civil Procedures specify that facts ascertained by effective civil decision need not to be proved by the parties through evidence, the negative theory obviously does not correspond with the view held in the civil procedure law of China. There is no doubt for holding that China’s civil procedure law adopts the positive theory, i.e., the decided facts in an effective decision has the effect of prejudgment without proof in a subsequent litigation, but it is unclear which school in the positive theory does China’s civil procedure law specifically follow. We believe that following different schools in the positive theory concerns the standard for ascertaining decided facts. The expression of “unless the party provides contrary evidence sufficient to refute the decided facts” found in both the Rules on Evidence in Civil Procedures (2001) and the Judicial Interpretation on the Application of the Civil Procedure Law (2015) can be regarded as following the independent effect theory, i.e., the facts ascertained in an effective decision, which fall within the scope of evidence in nature, do not need to be proved by evidence, but the decided facts per se should still be subject to cross-examination and cannot be ascertained in a subsequent litigation if there is any contrary evidence sufficient to refute. 2. Probative Value of Decided Facts Since decided facts still fall within the scope evidence, the probative value of decided facts in a subsequent litigation shall in the final analysis be determined by standards for examining evidence. Given the circumstances in this case, the following aspects shall be attended to in practice. First, the decided facts must be the underlying facts in the effective decision. In other words, the decided facts ascertained in an effective decision should be critical facts in the case that have been ascertained as undoubted facts upon sufficient production of evidence, cross-examination and debate, but should not be non-critical facts that have been incidentally ascertained without being subject to production of evidence and cross-examination, let alone the facts ascertained through mutual compromise after mediation. As mentioned above, in practice, some party who has no objection to the decision of first instance but to some facts ascertained in the decision may lodge an appeal or even apply for reopening of the case in the opinion that some facts in the effective decision may be wrongfully ascertained. In our view, such appeal or application for reopening of the case has no meaning in itself, since the appeal or application for reopening of the case will still lead to maintaining the items in the original decision, merely reflecting the parties’ concerns that relevant

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ascertained facts may be used as underlying facts in another case. Such appeal or application for reopening of the case should not have been accepted. On the other hand, however, we should be strict in ascertaining decided facts in a subsequent case, not using underlying facts as a basis for adjudicating another subsequent case. By doing this, the requirements for an effective decision will be reduced, because, after all, in adjudicating a case, only the merits of the case will be reviewed, impossible to cover all factual issues in a flawless manner. Second, decided facts should be subject to production of evidence and crossexamination. Although the parties need not produce evidence for the decided facts that have undergone production of evidence, cross-examination and debate, because in terms of saving litigation resources there is no need to prove again the decided facts that have already been proved through production of evidence and examination, the decided facts still need to be proved by production of evidence and cross-examination before it can satisfy the attribute of evidence and the requirement that the evidence must be verified to be the basis for ascertaining facts as stipulated in the Civil Procedure Law. In other words, decided fact is only a form of evidence. Among the 8 forms of evidence listed in Article 63 of the Civil Procedure Law, decided facts ascertained by effective decision is close to documentary evidence in form, i.e., written documents that prove the facts of the case by the ideas expressed in words from judicial documents. The Civil Procedure Law stipulates that for documentary evidence, the original should be submitted, or, if it is difficult to submit the original, the duplicates, photographs, copies, excerpts thereof may be submitted. Therefore, effective judicial documents containing the decided facts should be produced as evidence for verification, so that the basis and process of ascertaining the decided facts by the effective decision then can be duplicated. Third, the content proved by decided facts can be overturned. “Unless the party provides contrary evidence sufficient to refute the decided facts” specified in the Judicial Interpretation on the Application of the Civil Procedure Law and the Rules on Evidence in Civil Procedures aims to regard decided facts as ordinary evidence, and once there is any contrary evidence sufficient to refute the probative value of the decided facts, then its probative value cannot be ascertained despite of the facts being ascertained by effective decision. However, refutation of the decided facts does not necessarily mean that the judicial supervision proceedings must be invoked to correct the effective decision, as the aforementioned provision only stipulates that “unless the party provides contrary evidence sufficient to refute the decided facts”, and does not indicate that the judicial supervision proceedings must be invoked against the effective decision. Even if the facts ascertained in the subsequent case contradict the decided facts, it cannot be considered that the effective decision is wrongfully rendered, only that the decided facts ascertained in the effective decision cannot be used as evidence in the subsequent case. Whether there is anything wrong with the effective decision shall be subject to other standards for ascertaining effective decision, but the effective decision cannot be overturned through judicial supervision proceedings simply because the decided facts ascertained in effective decision are refuted.

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Finally, the decided facts must be related to the facts to be proved in this case. The evidence as defined in civil procedure law refers to all the objective facts that can prove the real situation of the civil case. The fundamental reason why the decided facts in the effective judgment can be used as the evidence in the current case is that it can prove the real situation of the current case. If the decided facts and the facts to be proven in the current case lack connection, only with intertwined or overlapping parties or some connecting points due to back-to-back events, such decided facts cannot be regarded as meeting the requirements for authenticity, legality and relevance of evidence, because such decided facts are not meaningful for the facts to be proven in the current case. 3. Both the Evidence in the Judgment that Has Not Taken Effect and the Decided Facts Ascertained in the Judgment that Has Taken Effect Fall under the Scope of Evidence As a side note, Haili Holding Group as the Respondent in this case argued in response to the 4 new pieces of evidence submitted by Zhang X as the Applicant for reopening of the case that the so-called 4 new pieces of evidence could not be used as the basis for ascertaining the facts of this case because they were being examined in another case but had not been ascertained by an effective decision, being just materials the probative value of which had not been ascertained by any judicial document that has taken effect. In our view, the fact that the other case has not become legally valid does not affect the evidence produced in such other case to prove the facts of the current case, and the evidence produced by the parties to prove the facts of the other case does not have to be confirmed by a legal instrument that has taken effect. In other words, in terms of the degree of the evidence’s probative value, there is no difference between the evidence appearing in a decision that has not taken effect and the decided facts ascertained in the decision that has taken effect. Pursuant to the Civil Procedure Law, any evidence that can prove the facts of a case is evidence in civil proceedings. Although the other case has not yet taken effect, the current case does not invoke the facts ascertained in the other case, but produce and cross-examine the evidentiary materials appearing in the other case, i.e., evidence in the other case is accordingly transformed into the evidence of the current case in order to be used as the basis for the determination of the current case. Either production of relevant evidence in another case or the decision of another case not yet taken effect due to appeal by one party will not cause objective and truthful evidence to lose its probative value. Correspondingly, the decided facts ascertained in the decision that has taken effect are only evidence used in adjudicating the current case, which, if, upon production of evidence and cross-examination, are refuted by the evidence in the judgment that had not taken effect, falls under the circumstance that “unless the party provides contrary evidence sufficient to refute the decided facts” as stipulated in the Rules on Evidence in Civil Procedures and the Judicial Interpretation on the Application of the Civil Procedure Law. In this case, it is a paradox that the evidence appeared

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in the judgment that has not taken effect refutes the decided facts ascertained in the decision that has taken effect, because the two nevertheless fall under the scope of evidence and together are used to prove the facts in the current case, no matter whether relevant decision has taken effect or not.

Xiaoyun Li Doctor of Laws, senior judge, Office of State Compensation Commission of the Supreme People’s Court of the People’s Republic of China.

Heilongjiang Province Qingda Water Conservancy and Hydroelectric Engineering Co., Ltd. v. Daqing Oilfield Mudanjiang New Energy Co., Ltd. (Dispute over Contract on Undertaking Construction Project): Applicable Rules for the Interest on Construction Payment in Arrears and Liquidated Damages in Cases of Dispute over Contract on Undertaking Construction Project Jianhua Wu and Hening Ma

Rule The interest on construction payment in arrears is essentially legal fruits, which does not take the parties’ agreement as a necessary condition, but is in essence a compensation for the loss suffered by the non-breaching party for its funds being used. When the party claims both liquidated damages and interest on construction payment in arrears, the aggregate of the liquidated damages and the interest should be measured on the basis of actual losses. The liquidated damages calculated as agreed in the contract has the dual nature of compensating for the actual losses as its main purpose and punishing the breaching party as its secondary purpose, so the liquidated damages is not calculated only up the limit of the losses suffered by the non-breaching party, punitive damages can be moderately applied. Such rule helps to maintain the stability of the contractual relationship, protect the reasonable expectations of the parties, and promote transaction security.

Collegiate Panel: Jianhua Wu, Nengbao Zhang and Jie Pan (Edited by Wenyan Ding; translated by Benlin Niu) J. Wu (B) · H. Ma The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_22

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Case Information 1. Parties Applicant in the Reopening of the Case (Plaintiff in the First Instance, Appellee in the Second Instance): Heilongjiang Province Qingda Water Conservancy and Hydropower Engineering Co., Ltd. (hereinafter referred to as Heilongjiang Qingda) Respondent in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Daqing Oilfield Mudanjiang New Energy Co., Ltd. (hereinafter referred to as Mudanjiang New Energy) 2. Procedural History First Instance: No. 39 [2015] Trial, Civ. Division, the Intermediate People’s Court of Mudanjiang City, Heilongjiang Province (dated Jan. 18 of 2016) Second Instance: No. 433 [2016] Final, Civ. Division, the Higher People’s Court of Heilongjiang Province (dated Dec. 19 of 2016) Application for Reopening the Case: No. 333 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Nov. 30 of 2017) 3. Cause of Action Dispute over construction contract

Essential Facts After bidding and bid, Heilongjiang Qingda and Mudanjiang New Energy on September 30, 2012 signed the Mine Construction and Stripping Engineering Contract for the Construction of a Pilot Experiment Base (Mine Part) for 30,000 Tons of Shale Oil Along the Liushu River. Mudanjiang New Energy contracted the construction involved in the case to Heilongjiang Qingda, and the construction was completed on May 30, 2013. After its completion, no agreement on the settlement of the construction payment was reached by the two parties. Heilongjiang Qingda filed a lawsuit with the Intermediate People’s Court of Mudanjiang City, requesting that: (1) Mudanjiang New Energy shall make the construction payment in arrears in the amount of about RMB 40,000,000 yuan and interest on deferred payment; (2) judicial authentication shall be conducted, based on the conclusion of which the remaining payment shall be made; (3) Mudanjiang New Energy shall pay RMB 1,730,000 yuan for equipment purchase and RMB 2,300,000 yuan for equipment idling; (4) the litigation costs shall be borne by Mudanjiang New Energy. In the litigation, Heilongjiang Qingda changed Items (1) and (2) of the original claims to read as follows: Mudanjiang New Energy shall make the construction payment in the amount of RMB 56,272,248.62 yuan and the interest thereof calculated on the bank’s

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loan interest rate for the corresponding period, as well as the liquidated damages; and Mudanjiang New Energy shall bear the judicial authentication costs and litigation costs. With regard to the interest, the court of first instance holds that, in this case, the actual completion date of the construction in dispute was May 30, 2013 (the mine construction and stripping engineering), as confirmed by both parties. It is agreed in the contract that the construction payment shall be settled within 56 days after the completion acceptance of the construction. Therefore, pursuant to Articles 17 and 18 of the Judicial Interpretation of Several Issues about the Application of Law to Construction Contract Cases, Mudanjiang New Energy shall pay the interest on the construction payment in arrears. However, because Heilongjiang Qingda claims that the interest on construction payment in arrears and liquidated damages shall be calculated from July 27, 2013, the interest on the construction payment in arrears shall be calculated from July 27, 2013 to the entry into force of this Decision pursuant to the interest rate for similar loans issued by the People’s Bank of China for the corresponding period. With regard to the liquidated damages, it is agreed by the parties in this case that Heilongjiang Qingda is entitled to receive liquidated damages on a daily basis in the amount of RMB 1000.00 yuan if Mudanjiang New Energy fails to make completion settlement payment without justifiable reasons. As the project in dispute in this case was completed and delivered on May 30, 2013, Mudanjiang New Energy breaches the contract by failing to make construction payment in arrears in the amount of RMB 56,008,727.91 yuan since putting into operation upon completion up till now. Accordingly, this claim by Heilongjiang Qingda is supported. Mudanjiang New Energy shall, pursuant to the contract, pay Heilongjiang Qingda the liquidated damages on a daily basis in the amount of RMB 1000.00 yuan from July 27, 2013 to the entry into force of this Decision. Decision is rendered on the part of interest on construction payment and liquidated damages owed by Mudanjiang New Energy that Mudanjiang New Energy shall, within 30 days from the entry into force of this Decision, make construction payment to Heilongjiang Qingda in the amount of RMB 56,008,727.91 yuan and pay the interest thereon calculated from July 27, 2013 to the entry into force of this Decision pursuant to the interest rate for similar loans issued by the People’s Bank of China for the corresponding period; and Mudanjiang New Energy shall, within 30 days from the entry into force of this Decision, pay Heilongjiang Qingda the liquidated damages on a daily basis in the amount of RMB 1000.00 yuan from July 27, 2013 to the entry into force of this Decision. Dissatisfied with the Decision, Mudanjiang New Energy appealed against the first instance decision. At the second instance, it is found that Mudanjiang New Energy owed Heilongjiang Qingda construction payment in the amount of RMB 55,343,333.00 yuan. The court of second instance holds that, with regard to the liquidated damages for the construction payment in arrears, payment of liquidated damages on a daily basis in the amount of RMB 1000.00 yuan as agreed by the parties falls under the “method of calculating the damages arising from the breach of contract” as stipulated in Article 114 (1) of the Contract Law. It is not inappropriate for the court of first instance to rule pursuant to the agreement of the parties that Mudanjiang New Energy

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shall pay liquidated damages to Heilongjiang Qingda. In this case, both the parties’ failure to agree on the interest on payment in arrears and the parties’ agreement on “method of calculating the damages for breach of contract”, despite their different definitions, serve the function of filling the non-breaching party’s “actual losses”. Subject to the principle of “filling losses”, if the liquidated damages as agreed by the parties are too high or too low, one party may request a decrease or increase pursuant to Article 114 (2) of the Contract Law. Article 28 of the Judicial Interpretation on Several Issues about the Application of the Contract Law (II) stipulates that, when the amount of liquidated damages calculated by the method of calculating liquidated damages as agreed by the parties is greater than the bank’s loan interest for the corresponding period not agreed by the parties, i.e., the actual losses have been filled, it is inappropriate to make additional judgment on the bank’s loan interest for the corresponding period with regard to the payment in arrears. Finally, the court of second instance ruled that Mudanjiang New Energy shall make construction payment to Heilongjiang Qingda in the amount of RMB 55,343,333.00 yuan within 30 days after the Decision is served upon it, and to dismiss the claim of Heilongjiang Qingda for interest on construction payment in arrears. Disatisfied with the second instance decision, Heilongjiang Qingda applied to the Supreme People’s Court for reopening of the case.

Issue The key to whether Mudanjiang New Energy shall pay interest on construction payment in arrears lies in whether the parties shall agree on the nature of paying interest on construction payment in arrears, and the applicable rules on the interest on construction payment in arrears and the liquidated damages.

Holding Upon review, the Supreme People’s Court holds that: the Contract on Undertaking Construction Project signed by Heilongjiang Qingda and Mudanjiang New Energy shall be found to be lawful and valid as it is the true manifestation of the parties’ intentions, and not in violation of any provision on validity and prohibitive provision of laws and administrative regulations. Pursuant to Article 18 of the Judicial Interpretation of Several Issues about the Application of Law to Construction Contract Cases, interest shall be calculated from the day when the construction payment is payable. In this case, as confirmed by both parties, the final completion date of the two projects in dispute was May 30, 2013. It is agreed in the contract that the construction payment shall be settled within 56 days after the completion acceptance of the construction. Also pursuant to Article 17 of the Judicial Interpretation of Several

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Issues about the Application of Law to Construction Contract Cases, where the parties have agreed on the calculation of the interest on construction payment in arrears, such provisions shall prevail; otherwise, the interest rate for similar loans issued by the People’s Bank of China for the corresponding period shall apply. Because Heilongjiang Qingda claims that the interest on construction payment in arrears and liquidated damages shall be calculated from July 27, 2013, the interest on the construction payment in arrears shall be calculated from July 27, 2013. The interest on construction payment in arrears are legal fruits in nature, which needs no agreement by the parties. It is wrongful application of law when the court of second instance does not support the interest on the construction payment on the grounds that the Contract on Undertaking Construction Project signed by Heilongjiang Qingda and Mudanjiang New Energy does not provide for interest on construction payment in arrears, and the agreement on liquidated damages could compensate for the losses of Heilongjiang Qingda. Article 29 of the Judicial Interpretation on Several Issues about the Application of the Contract Law (II) stipulates that: “(w)here one party claims that the liquidated damages shall be properly decreased for they are excessively high, the People’s Court shall weigh and decide on the basis of the actual losses under the principle of fairness and good faith by taking into full consideration the performance of the contract, fault of the party, and the expected benefits. The liquidated damages higher than the losses so caused for 30 percent could be considered as “excessively higher than the losses so caused” under Article 114 (2) of the Contract Law. In this case, compared to the actual losses, the liquidated damages involved in the case are not too high, and may not be adjusted. The court supports the claim by Heilongjiang Qingda of liquidated damages for construction payment in arrears and the interest thereon for it is in line with the law and the agreement by the parties. The court of second instance renders the decision based on accurate finding of facts, but its refusal to support the claim for interest on construction payment in arrears is wrongful application of law and shall be corrected. Pursuant to Articles 17 and 18 of the Judicial Interpretation of Several Issues about the Application of Law to Construction Contract Cases, Article 114 of the Contract Law, Article 207 (1) and Article 170 (1)(2) of the Civil Procedure Law, it is ruled that Mudanjiang New Energy shall make construction payment to Heilongjiang Qingda in the amount of RMB 55,343,333.00 yuan within 30 days after the Judgment is served upon it, and pay the interest from July 27, 2013 to the entry into force of this Decision pursuant to the interest rate for similar loans issued by the People’s Bank of China for the corresponding period.

Comment on Rule In judicial practice, the parties to a construction contract may agree on (1) both the interest on construction payment in arrears and the liquidated damages; (2) either the interest on construction payment in arrears or the liquidated damages; or (3) neither the interest on construction payment in arrears nor the liquidated damages.

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The above-mentioned circumstances, together with the constructor’s possible claim of actual losses in some cases, would diversify litigation claims. In light of the above complex circumstances, courts would follow various standards in determining the interest on construction payment in arrears and liquidated damages. Therefore, it is necessary to determine the nature of the interest on construction payment in arrears and liquidated damages so as to accurately grasp the applicable rules. 1. Legal Nature of Interest on Construction Payment in Arrears To accurately grasp the standard for adjudication, first of all, we need to precisely determine the legal nature of the interest on construction payment in arrears. Article 17 of the Judicial Interpretation of Several Issues about the Application of Law to Construction Contract Cases stipulates that “(w)here the parties have agreed on the calculation of the interest on construction payment in arrears, such provisions shall prevail; otherwise, the interest rate for similar loans issued by the People’s Bank of China for the corresponding period shall apply.” Although civil legal acts generally take party autonomy as a prerequisite, the reason for the Supreme People’s Court’s clarification on the standard of protection for the interest on construction payment in arrears in the absence of agreement between the parties is that the interest on construction payment in arrears is essentially legal fruits, which does not take the parties’ agreement as a necessary condition, but is in essence a compensation for the loss suffered by the non-breaching party for its funds being used. Only in this way, can the capital fulfill its properties, and fairness be manifested. 2. Method of Calculating Liquidated Damages for Construction Payment in Arrears as Agreed in the Contract and the Applicable Rules for Interest It can be seen from Article 114 of the Contract Law, which stipulates that “(t)he parties may agree that if one party breaches the contract, it shall pay a certain sum of liquidated damages to the other party in light of the circumstances of the breach, and may also agree on a method for the calculation of the amount of compensation for the damages incurred as a result of the breach”, that, on the one hand, China adopts a mode including both compensatory liquidated damages and punitive liquidated damages; and on the other hand, the method of calculating liquidated damages based on the actual losses also shows that the principle of taking compensatory liquidated damages as priority and punitive liquidated damages as supplement shall be adhered to in the application of liquidated damages. The main aim of the principle of “filling losses” based on the concept of fairness and justice is to fill the non-breaching party’s losses in a substantial, complete and rapid manner. However, punitive liquidated damages has particular relevance in stabilizing trading order. Therefore, the liquidated damages does not take non-breaching party’s loss as its only premise, so punitive liquidated damages can be moderately applied. The liquidated damages calculated as agreed in the contract has the dual nature of compensating for the actual losses as its main purpose and punishing the breaching party as its secondary purpose. The interest arising from construction payment in arrears is the loss suffered by the constructor for its funds being used. Because the constructor’s actual losses include but not limited to interest on construction payment in arrears, the liquidated damages still

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plays a supplementary role. Therefore, the aggregate of the liquidated damages and the interest on construction payment in arrears should be measured on the basis of the actual losses. 3. A Reasonable Liquidated Damages System Can Promote Healthy Development of the Market Economy The principle of freedom of contract and the principle of full performance of the contract are two important principles ascertained in Chinese contract law, the former of which is the legal basis for respecting party autonomy, encouraging transactions, and developing the market economy. The essence of contracting is creating legally binding rights and obligations by market players through free negotiation. Imposing too many restrictions on the liquidated damages system is very likely to condone the breaching party to make little of the parties’ agreement and wantonly breach the contract, resulting in the instability of the trading order. The liquidated damages system, especially its support of moderately punitive liquidated damages, can encourage the parties to perform their obligations in strict accordance with the contract, help maintain stable contractual relations, protect the reasonable expectations of the parties, and promote transaction security. Civil and commercial players in economic activities shall exercise cautious and reasonable duty of care corresponding to its expected returns, and have in-depth market participation, keen market insight and adequate risk prediction ability. The system of liquidated damages can also encourage civil and commercial players to exercise duty of diligence and care in signing contracts, which will be conducive to the smooth and healthy development of the market economy.

Jianhua Wu Doctor of Laws, senior judge, the Second Circuit Court of the Supreme People’s Court of the People’s Republic of China. Hening Ma Juris Master, assistant judge, Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China.

Liu X v. Zhangye Jinxin Pawnshop Co., Ltd. (Supervision on Enforcement of Ruling on Pawn Contract Dispute): Determination of the Nature of a Pawn Contract with No Registration of the Things Pawned Changmao Shao and Shenghai Xue

Rule Despite of the pawn contracts signed by the parties, the pawn contract legal relationship is not established due to the parties’ failure to comply with the relevant provisions of the Measures for the Administration of Pawning by going through procedures for mortgage registration of the real estate as the thing pawned with relevant authorities pursuant to law. The pawn contracts signed by the parties are essentially loan contracts, and shall be enforced pursuant to the laws and judicial interpretations on loan contracts.

Case Information 1. Parties Complainant (Enforcee): Liu X Applicant for Enforcement: Zhangye City Jinxin Pawnshop Co., Ltd. (hereinafter referred to as Jinxin Pawnshop)

Enforcement Supervision Panel: Jinlong Huang, Shaoyang Liu and Changmao Shao (Edited by Yi Yang; translated by Benlin Niu) C. Shao (B) · S. Xue The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_23

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2. Procedural History Objection to Enforcement: No. 16 [2017] Enforcement Objection, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07) (Sept. 20 of 2017) Review of Enforcement: No. 125 [2017] Enforcement Review, Enforcement Division, the Higher People’s Court of Gansu Province (Dec. 1 of 2017) Supervision over Enforcement: No. 375 [2018] Enforcement Supervision, Enforcement Division, the Supreme People’s Court (Dec. 29 of 2018) 3. Cause of Action Dispute over pawn contracts

Essential Facts On May 17, 2016, Jinxin Pawnshop and Liu X signed a pawn contract to pawn the second-floor shop located at No. 60, X Street, X District, Zhangye City for RMB 4 million yuan for a period of 360 days commencing on May 7, 2016 and ending on May 12, 2017, with monthly comprehensive service fee being 2.7% to be deducted at the granting of the pawn loan and monthly interest of 0.383% to be paid off on the expiration of the pawn period. On the same day, Jinxin Pawnshop issued a pawn ticket to Liu X, indicating a pawn loan in the amount of RMB 4 million yuan, monthly fee rate at 2.7%, comprehensive service fee of RMB 108,000 yuan, and the amount actually paid being RMB 3,892,000 yuan. On August 27, 2015, Jinxin Pawnshop and Liu X signed three pawn contracts to pawn the first-floor shops located from east to west at Nos. 1 to 6, X Street, X District, Zhangye City each for RMB 2 million yuan for a period of 60 days commencing on August 27, 2015 and ending on October 25, 2015, with monthly comprehensive service fee being 2.796% for each contract to be deducted at the granting of the pawn loan and monthly interest of 0.404% for each contract to be paid off on the expiration of the pawn period. On the same day, Jinxin Pawnshop issued three pawn tickets to Liu X, each indicating a pawn loan of RMB 2 million yuan, monthly fee rate at 2.796%, comprehensive service fee of RMB 55,920 yuan, and the amount actually paid being RMB 1,944,080 yuan. On December 8, 2015, Jinxin Pawnshop and Liu X signed another pawn contract to pawn the third-floor shop located at No. 60, X Street, X District, Zhangye City for RMB 2 million yuan for a period of 120 days commencing on December 8, 2015 and ending on April 6, 2016, with monthly comprehensive service fee being 2.7% to be deducted at the granting of the pawn loan and monthly interest of 0.383% to be paid off on the expiration of the pawn period. On the same day, Jinxin Pawnshop issued a pawn ticket to Liu X, indicating a pawn loan in the amount of RMB 2

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million yuan, monthly fee rate at 2.7%, comprehensive service fee of RMB 54,000 yuan, and the amount actually paid being RMB 1,946,000 yuan. It is agreed in the above five pawn contracts that party B (Liu X), upon the expiration of the pawn period or extended period, shall redeem the thing pawned within 5 days, otherwise it becomes a dead pawn, under which circumstance Party A (Jinxin Pawnship) would be entitled to entrust an action house for public auction or sell by itself pursuant to the Measures for the Administration of Pawning; that Party A may dispose of the thing pawned without notice to Party B and use the proceeds therefrom to reimburse inter alia the announcement fee, auction fee, pawn money, comprehensive service fee, interest, Party A’s attorney fee and other expenses related to the sale of the thing pawned, with any remainder returned to, or excess claimed against, Party B; and that, if Party B conceals the existence of any co-ownership, dispute, seizure, detention or encumbrance, or disposes, transfers or delivers the thing pawned to any third party, Party B should pay 20% of the pawn loan to Party A as liquidated damages, and compensate Party A for any loss in excess of the liquidated damages. The pawned shops were the office building of Zhangye Finance Bureau obtained by Liu X through auction, but no mortgage registration formalities were undergone because Zhangye Finance Bureau had not obtained relevant title deeds. The Notary Office of Zhangye City notarized the above five pawn contracts by issuing notarial certificates (Nos. 814, 1087, 1088, 1089 and 1596) that are enforceable. After signing of the pawn contracts, Liu X fulfilled part of the repayment obligation, repaying Jinxin Pawnshop RMB 9,723,203 yuan in cash (the sum of principal and interest). On July 14, 2017, the Notary Office of Zhangye City issued a Certificate of Enforcement (No. 8 [2017], Enf. Cert.) indicating the sum for enforcement being RMB 13,428,800 yuan in total, including RMB 10,500,000 yuan for the principal, RMB 828, 800 yuan for the monthly interest and comprehensive service fee, and RMB 2,100,000 yuan for the liquidated damages. On August 16, 2017, on the strength of the Certificate of Enforcement, Jinxin Pawnshop applied to the Intermediate People’s Court of Zhangye City, Gansu Province for enforcement, which, during enforcement, made an Enforcement Ruling {No. 66 [2017] Enforcement, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07)} to seize and freeze the property valued at RMB 13,428,800 yuan under the name of the Enforcee Liu X. Dissatisfied with the Ruling, Liu X made an objection to the Intermediate People’s Court of Zhangye City, claiming that the Certificate of Enforcement (No. 8 [2017], Enf. Cert.) is wrongful due to its violation of Article 480 (1) of the Judicial Interpretation on the Application of the Civil Procedure Law, and requesting to revoke the No. 66 [2017] Enforcement, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07). The Intermediate People’s Court of Zhangye City made an Enforcement Ruling on September 20, 2017 {No. 16 [2017] Enforcement Objection, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07)} to dismiss Liu X’s objection. Still dissatisfied with the Ruling, Liu X applied to the Higher People’s Court of Gansu Province for review. The Higher People’s Court of Gansu Province made an Enforcement Ruling on December 1, 2017 (No. 125 [2017] Enforcement Review,

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Enforcement Division, the Higher People’s Court of Gansu Province) to dismiss Liu X’s request for review. Further dissatisfied with the Ruling, Liu X appealed to the Supreme People’s Court, requesting to revoke the Ruling of the Higher People’s Court (No. 125 [2017] Enforcement Review, Enforcement Division, the Higher People’s Court of Gansu Province), and remove relevant enforcement measures involved in the enforcement ruling of the Intermediate People’s Court of Zhangye City {No. 66 [2017] Enforcement, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07)}.

Issue Whether the notarial instruments of creditor’s claim by which enforcement is seeking are erroneous.

Holding Upon review, the Supreme People’s Court holds that Liu X’s claim of error in the notarial instruments of creditor’s claim and request for removing relevant enforcement measures involved in the Enforcement Ruling of the Intermediate People’s Court of Zhangye City {No. 66 [2017] Enforcement, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07)} is in essence to exclude the effect of enforcing the notarial instruments of creditor’s claim, i.e., requesting for not enforcing the notarial instruments of creditor’s claim. Article 238 (2) of the Civil Procedure Law stipulates that “(w)here a notarial instrument of creditor’s claim contains an error, the people’s court shall rule to deny enforcement”. All the instruments of creditor’s claim rendered enforceable by the notarial certificates (Nos. 814, 1087, 1088, 1089 and 1596 [2016]) are pawn contracts and notarized with regard to the rights and interests of the parties pursuant to the pawn legal relationship, but failure of the parties in this case to go through procedures for mortgage registration of the mortgaged real estate violates Article 42 (1) of the Measures for the Administration of Pawning, which stipulates that “(a) pawnbroker operating pawn business of real estate mortgage shall together with the pledger go through procedures for mortgage registration with relevant authorities pursuant to law before going through procedures for pawning”. The pawn contracts signed by Jinxin Pawnshop and Liu X are then loan contracts in essence, and thus the relevant laws and judicial interpretations on private lending are applicable to the determination of the loan principal, highest standard of interest rate and liquidated damages. Notarization of the principal, interest and liquidated damages in the notarial instruments of creditor’s claim beyond the limits as set forth in the judicial interpretation falls under the circumstance that “the content of the notarial instrument of creditor’s claim is

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inconsistent with the fact or violates the mandatory provisions of the law” as stipulated in Article 480 of the Judicial Interpretation on the Application of the Civil Procedure Law, and thus should not be enforced. In this case, the loan principal should be the amount actually paid after deduction of the comprehensive service fee, with the excess part not enforceable and not used as basis for the calculation of interest and fees. Specifically in enforcement, for the part voluntarily fulfilled by Liu X, the part of the interest or overdue interest and the annual interest charges altogether not exceeding the annual interest rate of 36% should be recognized, and the amount paid in excess of the annual interest rate of 36% should be set off against the principal; for the part unpaid by Liu X, the part of the interest or overdue interest and the annual interest charges altogether exceeding the annual interest rate of 24% should not be enforced; and the liquidated damages should not be enforceable since the total amount of interest and fees has exceeded the maximum interest rate established by the judicial interpretation. In summary, the Complainant Liu X’s claims are partially established, and the enforcement rulings of the Higher People’s Court of Gansu Province (No. 125 [2017] Enforcement Review, Enforcement Division, the Higher People’s Court of Gansu Province) and the Intermediate People’s Court of Zhangye City, Gansu Province {No. 16 [2017] Enforcement Objection, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07)} should be corrected for its inaccurate finding of facts and inappropriate application of law. Therefore, it is ruled to rescind the enforcement rulings of the Higher People’s Court of Gansu Province (No. 125 [2017] Enforcement Review, Enforcement Division, the Higher People’s Court of Gansu Province) and the Intermediate People’s Court of Zhangye City, Gansu Province {No. 16 [2017] Enforcement Objection, Enforcement Division, the Intermediate People’s Court of Zhangye City, Gansu Province (Gansu 07)}; to ascertain the loan principal in the notarial certificates of creditor’s right (Nos. 814, 1087, 1088, 1089 and 1596) by the amount actually paid by Jinxin Pawnshop, with the excess part not enforceable; not to enforce the part of the comprehensive service fee, annual interest rate, and comprehensive service fee within the pawn period as for the part unpaid by the Complainant Liu X in the notarial certificates of creditor’s right (Nos. 814, 1087, 1088, 1089 and 1596) that altogether is in excess of the annual interest rate of 24%; and to dismiss the other claims of the Complainant Liu X.

Comment on Rule The notary public’s issuance of a notarial certificate certifying the parties’ rights and obligations under the legal relationship of a pawn contract and certifying the principal, interest and liquidated damages beyond the limits as set forth in the judicial interpretation falls under the circumstances where the notarial certificate contains an error.

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1. Legal Nature of a Pawn Contract No specific provisions on the legal relationship of a pawn contract are contained in the General Principles of the Civil Law, the General Rules of the Civil Law, the Contract Law, and the Property Law. The Measures for the Administration of Pawning promulgated by the Ministry of Public Security and the Ministry of Commerce in 2005 to regulate and administer the pawn industry may apply mutatis mutandis to the determination of the legal relationship of pawning. Article 3(1) of the Measures for the Administration of Pawning stipulates that “‘pawning’ means an act whereby a pawner gives his or her chattels or property rights to a pawnshop as a pledge of the thing pawned or gives his or her real estate to the pawnshop as a mortgage for the thing pawned, pays expenses at a certain rate, obtains pawn money and redeems the thing pawned by repaying the pawn money and the interest thereof within the agreed period of time”. Article 30 thereof stipulates: “(t)he pawn ticket, as a loan contract between the pawnshop and the pawner, is a payment certificate by which the pawnshop pays the pawn money to the pawner. The pawnshop and pawner shall enter into a supplementary written contract to agree on issues other than the pawn ticket, but the issues agreed upon shall not be in violation of relevant laws, regulations and these Measures”. Pursuant to the above provisions, pawning, as a kind of term loan financing with consideration that takes property as pledge (mortgage), is essentially an act of lending with pledge (mortgage) as security, and is a special form of loan contract. However, the pawn contract has its own particularity in comparison with the general loan contract. Such particularity is mainly reflected in that, for a pawn contract to be formed, three elements must be satisfied: (1) the pawner delivers the thing pledged or goes through formalities for mortgage registration; (2) the pawnshop issues a pawn ticket to the pawner; and (3) the pawnshop pays pawn money. The general loan contract, on the other hand, is formed when a lawful and valid loan contract is signed by the parties or the lender provides the loan, without delivery of the thing pledged or going through formalities for mortgage registration by the borrower. 2. Elements for the Formation of a Pawn Contract with Real Estate as a Thing Pawned Pursuant to Article 42 (1) of the Measures for the Administration of Pawning, which stipulates that “(a) pawnshop that operates real estate pawning business shall, together with the pledger, go through procedures for mortgage registration with relevant authorities before going through formalities for pawning”, the elements for the formation of a real estate pawn contract are: (1) the pawner mortgages the real estate to the pawnshop, and the pawnshop and pawner go through procedures for mortgage registration with relevant authorities; (2) the pawnshop issues a pawn ticket to the pawner; and (3) the pawnshop pays the pawn money to the pawner as agreed in the pawn ticket. In this case, the pawn contracts, despite of being signed by Jinxin Pawnshop and Liu X, are not formed because failure by Jinxin Pawnshop and Liu X to go through procedures for mortgage registration of mortgaged real estate with

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relevant authorities is not in conformity with provisions of the Measures for the Administration of Pawning on using real estate as a thing pawned. 3. How to Handle Pawn Contract Not in Conformity with Legal Relationship of Pawning in the Enforcement Procedure The pawn contracts, although being signed by the parties, are not formed because the parties fail to go through procedures for mortgage registration of the real estate as the thing pawned. Now, the so-called pawn contracts signed by the parties are essentially general loan contracts from the perspective of their legal nature, and shall be enforced as such. Article 1 (1) of the Rules on Several Issues about the Application of Law to Private Lending Cases stipulates that: “‘private lending’ means the act of financing between and among natural persons, legal persons and other organizations”. It is further stipulated in Article 1 (2) that “(t)hese Provisions are not applicable to any dispute arising from granting loans or relevant financial businesses of such financial institution and any of its branch that is established with the approval of the financial supervisory authorities to engage in loan business.” In this case, Jinxin Pawnshop is not a financial institution established with the approval of the financial supervisory authorities to engage in loan business, so the dispute arising from its granting of loans should be handled as private lending. The loan principal, the standard for the highest interest rate, and liquidated damages should be calculated pursuant to the laws and judicial interpretations on private lending. 4. How to Handle Notarial Certificate on Creditor’s Right with an Error by Which Enforcement is Sought in the Enforcement Procedure Article 480 of the Judicial Interpretation on the Application of the Civil Procedure Law stipulates that: “(t)he notarial certificate for creditors’ right may be found to be with an error as specified in Article 238 (2) of the Civil Procedure Law if: (1) the notarial certificate on creditors’ right falls within the instruments that are not enforceable; (2) the person against whom enforcement is sought fails to attend the notarization in person or by an agent, or other circumstances where notarization process specified in laws has been seriously violated; (3) the notarial certificate on creditors’ right is inconsistent with facts or violates the mandatory provisions of the law; or (4) the notarial certificate on creditor’s right contains no provision that the person against whom enforcement is sought accepts enforcement in case of non-performance or partial performance of its obligations. The people’s court may rule that the notarial certificate on creditors’ right shall not be enforced if it finds that notarial certificate on creditors’ right violates public interests.” In this case, the basis for the enforcement is the five notarial certificates on creditors’ right issued by Zhangye Notary Office that are enforceable, and these five notarial certificates on creditors’ right notarizing the parties’ rights and obligations under the legal relationship of a pawn contract falls with wrongful determination of the matters notarized, i.e., error in the notarial certificate on creditors’ right by which enforcement is sought.

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Pursuant to Article 238 (2) of the Civil Procedure Law, which stipulates that “(t)he people’s court may not enforce the notarial certificate on creditors’ right with an error”, it shall be ruled in this case not to enforce the above-mentioned notarial certificates on creditors’ right. However, the real lending relationship between the parties is wrongfully found to be pawn contract relationship rather than loan contract relationship, resulting in wrongful determination of the amount of the creditors’ right, and money, as the subject matter for enforcement in this case, is divisible. The parties’ burden in litigation will be increased if the whole notarial certificate on creditors’ right is ruled not to be enforceable only because it wrongfully identifies loan contract relationship as pawn contract relationship. Moreover, Article 18 of the Rules on Several Issues about the Enforcement of Notarized Debt Instruments promulgated on October 1, 2018 stipulates that “(w)here a part of the notarial certificate on the creditors’ right falls under the circumstances set forth in Article 12 (1) of these Rules, the people’s court shall rule to not enforce such part; or the whole notarial certificate on the creditors’ right if the part that should not be enforceable is indivisible with other parts.” With reference to the spirit of the judicial interpretation, part of the notarial certificate on the creditors’ right may not be enforced. Therefore, in this case, the amount of the creditors’ right can be determined pursuant to the pawn contracts signed by the parties and the Rules on Several Issues about the Application of Law to Private Lending Cases; and the part beyond the limits as set forth in the juridical interpretation shall not be enforced if it falls under the circumstances where the notarial certificate on creditors’ right is inconsistent with facts or violates the mandatory provisions of law.

Changmao Shao Doctor of Laws, senior judge, director of Office for Comprehensive Affairs of Enforcement Bureau of the Supreme People’s Court of the People’s Republic of China. Shenghai Xue Master of Laws, assistant judge, Enforcement Bureau of the Supreme People’s Court of the People’s Republic of China.

Nanchang Municipal Construction Co., Ltd. v. Liu X and Jiangxi Fuzhen Road and Bridge Construction Co., Ltd. (Unjust Enrichment): No Liability for Restitution Where the Bona Fide Recipient of Ill-gotten Gains Has No Existing Interest Zhanfei Wang and Muhan Liu

Rule In civil legal relations, unjust enrichment occurs when one person is enriched without legal basis at the expense of another. Causation for unjust enrichment will be established if it is sufficient to conclude causal link between the two, based on fairness and general concept of the society. Its legal effect is that the rules from the property law on the rights and obligations of the occupant and rightful owner in occupation relationship will be applied by analogy, but a bona fide recipient will assume no obligation for restitution if he is found to have no existing interest.

Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Nanchang Municipal Construction Co., Ltd. (hereinafter referred to as Nanchang Municipal Construction)

Reopening Examination Collegiate Panel: Zhanfei Wang, Lunjun Zhou and Jun Wang (Edited by Jing Pan; translated by Benlin Niu) Z. Wang (B) · M. Liu The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected]; [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_24

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Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Liu X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Jiangxi Fuzhen Road and Bridge Construction Engineering Co., Ltd. (hereinafter referred to as Jiangxi Fuzhen) 2. Procedural History First Instance: No. 176 [2016] Trial, Civ. Division, the Intermediate People’s Court of Nanchang City, Jiangxi Province (Jiangxi 01) (dated Nov. 15 of 2016) Second Instance: No. 55 [2017] Final, Civ. Division, the Higher People’s Court of Jiangxi Province (dated Mar. 21 of 2017) Application for Reopening the Case: No. 2181 [2017] Appeal, Civ. Division, the Supreme People’s Court (dated Jul. 20 of 2017) 3. Cause of Action Unjustment enrichment

Essential Facts On May 5, 2014, Jiangxi Fuzhen as one party and Liu X and outsider Xin X as the other party signed a contract, agreeing that Liu X and Xin X will be affiliated to Jaingxi Fuzhen to contract for the construction of Section B of Jinxian G320 Beltway (New Line) issued by Nanchang Municipal Construction. After the signing of the contract, Liu X transferred RMB 20 million yuan as deposit to Jiangxi Fuzhen, who at the instruction of Xin X transferred RMB 6 million yuan as deposit to Nanchang Municipal Construction on May 12, 2014. On the same day, by the excuse of tender for road drainage project in Jinxian Industrial Park, Xin X instructed Nanchang Municipal Construction to receive the above RMB 6 million yuan and, on the next day, transfer the money out to the bank account of Jiangxi Boshiqiang Biological Engineering Co. Ltd. (hereinafter referred to as Jiangxi Boshiqiang Biological Engineering), which was under the control of Xin X. The aforementioned Section B of JinXian G320 Beltway (New Line) and road drainage project in Jinxian Industrial Park are fabircated by Xin X, relevant facts of which have been confirmed by the effective criminal decision of Nanchang Intermediate People’s Court (No. 14 [2015] Trial, Crim. Division). On June 19, 2014, Jiangxi Fuzhen issued a letter of commitment to Liu X, undertaking to return the RMB 20 million yuan deposit and the corresponding interest to Liu X, and has returned RMB 11.2 million yuan, with RMB 8.8 million yuan left. Liu X filed this lawsuit, requesting: Jiangxi Fuzhen to compensate for its losses of RMB 8.8 million yuan and interest thereon, and Nanchang Municipal Construction to assume joint and several liability for the RMB 6 million yuan and interest thereon.

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The court of first instance holds that the letter of commitment issued by Jiangxi Fuzhen indicates that it agreed to return the RMB 20 million yuan deposit, so it should return the remaining deposit of RMB 8.8 million yuan and interest thereon. There is no legal basis for Liu X’s claim for joint and several liability assumed by Nanchang Municipal Construction because Nanchang Municipal Construction had no contractual relationship with Liu X and had not obtained any actual benefit. Therefore, it is decided that Jiangxi Fuzhen shall return Liu X RMB 8.8 million yuan and interest thereon, and Liu X’s other claims are dismissed. Dissatisfied with the decision, Liu X and Jiangxi Fuzhen appealed. The court of second instance holds that because the RMB 6 million transferred out by Nanchang Municipal Construction is not of the same nature with the RMB 6 million yuan transferred in by Jiangxi Fuzhen in the name of Liu X and Xin X, it constitutes unjust enrichment, and shall be returned together with interest regardless of fault or not. Therefore, the court of second instance amended the decision by ordering Jiangxi Fuzhen to return Liu X RMB 2.8 million yuan and interest thereon, Nanchang Municipal Construction to return Liu X RMB 6 million yuan and interest thereon, and Jiangxi Fuzhen to assume joint and several liability therefor, and dismissed Liu X’s other claims. Dissatisfied with the decision, Nanchang Municipal Construction applied to the Supreme People’s Court for reopening of the case.

Issues 1. Whether unjust enrichment occurs between Nanchang Municipal Construction and Liu X; 2. Whether Nanchang Municipal Construction shall assume the obligation to return to Liu X RMB 6 million yuan and the corresponding interest thereon.

Holding Upon review, the Supreme People’s Court holds that: there is causal relationship between Nanchang Municipal Construction’s obtaining of benefit and Liu X’s suffering of loss because Liu X was defrauded by Xin X to pay RMB 6 million yuan as project deposit to Nanchang Municipal Construction, and there exists no legal relationship based on which Nanchang Municipal Construction received RMB 6 million yuan and no legal basis therefor, so in this case, the elements of unjust enrichment as stipulated in Article 92 of the General Principles of the Civil Law are satisfied. In determining the extent of the obligation to return the ill-gotten gains, whether the recipient acted in bona fide or mala fide shall be taken into account. If

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the recipient of ill-gotten gains acted in good faith, the restitution obligation shall be limited to the existing interest at the time of the request for restitution. Nanchang Municipal Construction shall not assume the obligation to return the RMB 6 million yuan because it did not have bad faith subjectively in that it did not know of the Xin X’s fraudulent act when receiving the RMB 6 million yuan and lost the obtained benefit by transferring the received money to a third party at the instruction of Xin X the following day. Therefore, the Court reverses the decision of the second instance, and upholds the decision of the first instance.

Comment on Rule In trial practice, the view that unjust enrichment will not occur in the absence of existing interest is one of the common divergences of views in the application of the legal system of unjust enrichment. Article 92 of the General Principles of the Civil Law stipulates that “(a) person who obtains improper benefit without lawful grounds, resulting in loss to another person shall return the improper benefit to the person who suffered the loss.” Article 122 of the General Rules of the Civil Law, which basically follows the provisions of the General Principles of the Civil Law on unjust enrichment, stipulates that “(a) person who obtains improper benefit without lawful grounds, resulting in loss to another person shall return the improper benefit to the person who suffered the loss upon the request thereof.” Pursuant to the abovementioned provisions, the elements for unjust enrichment are (1) one party obtains a benefit; (2) the other party suffers a loss; (3) a causal link exists between the one party’s obtaining of benefit and the other party’s suffering of loss; and (4) without lawful grounds. Among them, obtaining benefit should be determined based on the point of time at which the benefit was obtained, which refers to the increase of property interest, including positive and negative increases, i.e., the increase in the total amount of property and no decrease when there should have been a decrease. In this case, the total amount of property of Nanchang Municipal Construction increases by receiving as “contract deposit” the RMB 6 million yuan transferred from Jiangxi Fuzhen on May 12, 2014, thus constituting obtaining benefit. In addition, determination of causation is another difficulty in the elements of unjust enrichment. The causal relationship in unjust enrichment between loss and gain, different from the “vertical” causal relationship in tort between tortious act and injury, is based on the “horizontal” causal relationship between loss and gain— two results occurred due to some reason. There are two views on the benchmark of “obtaining ill-gotten gains and causing losses to others”, namely, direct causation and indirect causation. The former, as a more accepted theory, holds that the gains obtained and losses suffered should be based on the same cause in fact; while the latter believes that the gains obtained and losses suffered may not be based on the same cause in fact, and causal relationship may still be established even based on two causes in fact so long as causal link exists based on the concept of fairness and general concept of the society. This view mainly addresses gains and losses incurred

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by intervention of a third party, a typical situation of which is “A defrauded B to make non-debt repayment to C”. After the establishment of the unjust enrichment, the beneficiary’s obligation for restitution to the loser reflects the proper meaning of the effect of unjust enrichment. As to the scope of restitution, only Article 92 of the General Principles of the Civil Law stipulates that “(w)here improper benefit is obtained without lawful grounds, resulting in loss to another party, the improper benefit obtained must be returned to the person who suffered the loss.” Article 131 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 (Trial) (partially effective) stipulates that “ill-gotten gains returned should include the original property and the fruits thereof. Other benefits gained through making use of the ill-gotten gains should be collected after a deduction for labor and management expenses.” Failure of relevant laws and judicial interpretations to distinguish between bona fide and mala fide recipients in unjust enrichment, define the time frame for “unjust enrichment” and specify the scope of the obligation for restitution has to some extent brought out the legal loopholes. From the perspective of comparative law, relevant provisions from the civil code of Germany and Japan can serve as a reference. For example, Article 818 (3) of the German Civil Code stipulates: “(t)he liability to undertake restitution or to reimburse the value is excluded to the extent that the recipient is no longer enriched.” Article 822 thereof stipulates: “(i)f the recipient bestows the gains on a third person at no charge, then that third person is obliged to make restitution as if he had received the disposition from the creditor without legal grounds, to the extent that as a result of the bestowal the duty of the recipient to make restitution of the enrichment is excluded.” As far as the methodology in application of law is concerned, the above-mentioned loopholes in the law can be filled by analogy. The question of defining the scope of the obligation for restitution by the de facto bona fide beneficiary in the absence of any existing interest is, in terms of its legal nature and the basic structure of rights and obligations, similar to or even concurrent with the question between the possessor and the right holder in possession relationship, especially in case of a claim for damages by the right holder against the bona fide possessor when the thing possessed is damaged or lost, so rules on the rights and obligations between the possessor and the right holder as stipulated in Articles 241, 242 and 243 of the Property Law may be applied by analogy to determine the various scope of the obligation for restitution based on the presence of good faith or not on the part of the beneficiary. If the beneficiary is a bona fide one subjectively, the scope of the obligation for restitution shall be limited to the existing interest, or in the absence of any existing interest, no obligation for restitution shall be assumed; or if the beneficiary is a mala fide one subjectively, the obligation for restitution may not be released even in the absence of any existing interest.

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Zhanfei Wang Master in Economics, senior judge, the Third Circuit Court of the Supreme People’s Court of the People’s Republic of China. Muhan Liu Doctor of Laws (candidate), assistant judge, Environment and Resources Division of the Supreme People’s Court of the People’s Republic of China.

Jilin Jinhe Real Estate Development Co., Ltd. v. Sichuan Longhai Huifeng Industry Co., Ltd. (Dispute over Pooling Contract): Judicial Determination of the Establishment of Apparent Agency Xiangzhuang Sun

Rule Apparent agency, as an exception to unauthorized agency, aims to protect the reliance interest of a third party to the agency transaction and transaction safety. Because apparent agency, once established, will cause substantial detriment to the principal, its establishment shall not be extended. The legal elements of apparent agency are: the agent has no authority for agency; but a third party has reason to believe that the agent has the authority for agency; and establishes a civil juristic act with the agent having no authority for agency.

Case Information 1. Parties Procuratorial Protest-Lodging Organ: the Supreme People’s Procuratorate of the People’s Republic of China Petitioner (Defendant in the First Instance, Appellee in the Second Instance): Jilin Jinhe Real Estate Development Co., Ltd. (hereinafter referred to as Jinhe Real Estate) Respondent (Plaintiff in the First Instance, Appellee in the Second Instance): Sichuan Longhai Huifeng Industry Co., Ltd. (hereinafter referred to as Huifeng Industry) Collegiate Panel: Xiangzhuang Sun, Chengbo Ma and Langliang Tian (Edited by Ming Li; translated by Benlin Niu) X. Sun (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_25

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Appellee in the Second Instance (Defendant in the First Instance): Antu County Jiqing Agricultural and Supplementary Products Co., Ltd. (hereinafter referred to as Jiqing Agricultural Products) Appellant in the Second Instance (Defendant in the First Instance): Ruyang County Tianzhan Mining Co., Ltd. (hereinafter referred to as Tianzhan Mining) Appellees in the Second Instance (Defendants in the First Instance): Zhang X (A) and Zhang X (B) 2. Procedural History First Instance: No. 1003 [2009] Trial, Civ. Division, the Intermediate People’s Court of Chengdu, Sichuan Province (dated Jan. 28 of 2011) Second Instance: No. 541 [2011] Final, Civ. Division, the Higher People’s Court of Sichuan Province (dated Nov. 22 of 2012) Application for Reopening the Case: No. 118 [2013] Appeal, Civ. Division, the Supreme People’s Court (dated Jun. 30 of 2013) Retrial: No. 18 [2013] Final, Civ. Division, the Higher People’s Court of Sichuan Province (dated Sept. 25 of 2013) Protest: No. 179 [2014] Supervision, Civ. Division, the Supreme People’s Procuratorate (dated Oct. 21 of 2014) Case Reopening: No. 84 [2014] Protest, Civ. Division, the Supreme People’s Court (dated Aug. 28 of 2018) 3. Cause of Action Dispute over pooling contract

Essential Facts On December 8, 2008, Huifeng Industry, Jiqing Agricultural Products, Jinhe Real Estate signed a Joint Loan and Cooperative Grain Business Operation Agreement (hereinafter referred to as Cooperation Agreement), agreeing that Jinhe Real Estate will provide assets as guarantee to get a loan from the Agricultural Development Bank of China in the name of Huifeng Industry for grain business operation jointly carried out by the three parties, that Jiqing Agricultural Products is responsible for purchasing the grain and transporting it to the place designated by Huifeng Industry, Huifeng Industry is responsible for selling the grain, with all the profits distributed and the possible loss or risk from the cooperation shared by Huifeng Industry, Jiqing Agricultural Products and Jinhe Real Estate at a ratio of 45:10:45. On January 16, 2009, Huifeng Industry, Jiqing Agricultural Products and Jinhe Real Estate signed a Supplementary Agreement, agreeing to amend the grain sale as specified in the

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Cooperation Agreement as follows: Jiqing Agricultural Products shall directly sell the grain at the place of production, which shall be paid in full by Huifeng Industry, and Jiqing Agricultural Products shall pay Huifeng Industry and Jinhe Real Estate RMB 1,500,000 yuan respectively for the profit. Huifeng Industry shall remit the loan of RMB 40,500,000 yuan to the account of Jiqing Agricultural Products after the Agreement is signed and takes effect and obtaining the letter of confirmation issued by the Agricultural Development Bank of China at the place where Jiqing Agricultural Products is located, in which Huifeng Industry has paid RMB 14,500,000 yuan, with the remaining RMB 26,000,000 yuan to be remitted to the account of Jiqing Agricultural Products on January 19, 2009. Huifeng Industry fulfilled its obligation by remitting RMB 26,000,000 yuan to the account of Jiqing Agricultural Products. On January 21, 2009, Jinhe Real Estate issued a power of attorney to Huifeng Industry and Jiqing Agricultural Products, giving discretionary authority to Zhang X (B) as an agent to perform the Cooperation Agreement and Supplementary Agreement, whose authority includes but not limited to: performing contractual obligations; accepting contractual benefits; negotiating and settling any dispute arising from the performance of the above-mentioned Cooperation Agreement and Supplementary Agreement; and, in light of the cooperation, amend, supplement and terminate the above-mentioned cooperative relationship, with all the legal consequences thereof borne by Jinhe Real Estate. The power of attorney was affixed with the official seal of Jinhe Real Estate, and signed by Hao X, the legal representative of Jinhe Real Estate. On January 23, 2009, Jinhe Real Estate and Jiqing Agricultural Products signed an Agreement, agreeing that Jinhe Real Estate shall complete the business of corn purchase and sale, and Jiqing Agricultural Products shall remit RMB 14,000,000 yuan out of RMB 40,500,000 yuan for the purchase of 30,000 tons of corn to the account of Dalian Zhongbao Grain & Oil Company and the remaining RMB 26,500,000 yuan to Jinhe Real Estate. The Agreement was affixed with the official seals of Jiqing Agricultural Products and Jinhe Real Estate, and signed by Zhao X (B) and Xu X, the legal representative of Jiqing Agricultural Products. On March 6 and May 20, 2009, Zhang X (B) issued a repayment commitment letter in the name of Jinhe Real Estate, undertaking to return the corn purchase money and profits totaling RMB 43,500,000 yuan to Huifeng Industry. On June 2, 2009, Jiqing Agricultural Products issued a repayment commitment letter to Huifeng Industry, undertaking to return the loan of Huifeng Industry in the amount of RMB 43,500,000 yuan (including RMB 3,000,000 yuan for the profits). On August 12, 2009, Jinhe Real Estate issued a commitment letter to Huifeng Industry, indicating that, pursuant to the Cooperation Agreement, Supplementary Agreement and relevant agreement between Zhang X (B) as the agent of Jinhe Real Estate and Jiqing Agricultural Products, Jinhe Real Estate shall be jointly and severally liable for the repayment of RMB 43,500,000 yuan for the grain under cooperation recoverable by Huifeng Industry, and undertakes to repay RMB 43,500,000 yuan by November 15, 2009. On the same day, Zhang X (B) issued a commitment letter to Huifeng Industry, indicating that, pursuant to the Cooperation Agreement, Supplementary Agreement and the fact that Zhang X (B) is the ultimate user of RMB 43,500,000 yuan under the agreement, Zhang X (B) shall be jointly and severally liable for the repayment of the loan RMB 43,500,000 yuan recoverable by

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Huifeng Industry, and undertakes to repay RMB 43,500,000 yuan by November 15, 2009. On August 12, 2009, Zhang X (A) and Tianzhan Mining respectively issued a commitment letter to Huifeng Industry, undertaking to be jointly and severally liable with Zhang X (B) for the repayment of RMB 43,500,000 yuan to Huifeng Industry. It is also found that, as indicated in the Articles of Incorporation of Jinhe Real Estate, its registered capital is RMB 20,000,000 yuan, to which Zhang X (B) contributed RMB 10,2000,000 yuan, accounting for 51%. The court of first instance entrusted a judicial appraisal institution to appraise the power of attorney dated January 21, 2009, the Agreement dated January 23, 2009, the letter of commitment dated August 12, 2009, the official seal of Jinhe Real Estate affixed on the two letters of commitment dated August 12, 2009 and the signature of He X on the power of attorney dated January 21, 2009, as involved in the case. Chengdu Joint Judicial Authentication Center issued the Judicial Appraisal Opinion (No. 051 [2010]), concluding that the seal mark of Jinhe Real Estate affixed on the above-mentioned documents is not identical to the four seal marks submitted by Jinhe Real Estate, and the signature “He X” on the power of attorney dated January 21, 2009 is not signed by He X himself. Huifeng Industry filed a lawsuit with the court of first instance, requesting Jiqing Agricultural Products, Jinhe Real Estate and Zhang X (B) to be jointly and severally liable to Huifeng Industry for the repayment of RMB 43,500,000 yuan and interests thereon, and jointly and severally liable for all the losses suffered by Huifeng Industry. The court of first instance ruled that: Jiqing Agricultural Products shall repay Huifeng Industry RMB 40,500,000 yuan and interest thereon within 10 days from the effective date of the Decision; Jinhe Real Estate, Tianzhan Mining, Zhang X (A) and Zhang X (B) shall be jointly and severally liable for repayment of the abovementioned debts of Jiqing Agricultural Products. After Jinhe Real Estate, Tianzhan Mining, Zhang X (A), and Zhang X (B) have assumed the above-mentioned civil liability, they have the right to recover from Jiqing Agricultural Products; the other claims of Huifeng Industry are dismissed. Dissatisfied with the Decision, Tianzhan Mining appealed to the court of second instance. The court of second instance ruled to: (1) maintain Item 1 of first instance Decision; (2) amend the second instance Decision to read as “Jinhe Real Estate, Zhang X (A) and Zhang X (B) shall be jointly and severally liable for repayment of the abovementioned debts of Jiqing Agricultural Products. After Jinhe Real Estate, Zhang X (A) and Zhang X (B) have assumed the above-mentioned civil liability, they have the right to recover from Jiqing Agricultural Products”; (3) revoke Item 3 of the first instance Decision; and (4) dismiss the other claims of Huifeng Industry. Dissatisfied with the Decision of second instance, Jinhe Real Estate applied for reopening of the case. The Supreme People’s Court rendered a civil ruling (No. 118 [2013]), ordering the Higher People’s Court of Sichuan Province to retry the case. In retrial of the case, the Higher People’s Court of Sichuan Province holds that RMB 40,500,000 yuan involved in this case was remitted to Zhang X (B)’s instructions and collected in cash by Jinhe Real Estate as whose agent Zhang X (B) acted. Zhang X (B)’s acts constitute apparent agency, so Jinhe Real Estate shall be jointly

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and severally liable for the repayment. It is ruled to maintain the second instance Decision. Still dissatisfied with the Decision of the Higher People’s Court of Sichuan Province, Jinhe Real Estate applied to the procuratorial organ for trial supervision. The Supreme People’s Procuratorate lodged a protest with the Supreme People’s Court by a written civil protest (No. 179 [2014] Supervision, Civ. Division, the Supreme People’s Procuratorate of the People’s Republic of China). On December 23, 2014, the Supreme People’s Court decided to reopen the case.

Issues 1. Whether Zhang X (B)’s act of issuing a letter of commitment can be recognized as an act of Jinhe Real Estate; 2. Whether Jinhe Real Estate shall be jointly and severally liable for repayment pursuant to the letter of commitment.

Holding Upon review, the Supreme People’s Court holds that: 1. Whether Zhang X (B)’s Act of Issuing a Letter of Commitment Can be Recognized as an Act of Jinhe Real Estate First, Huifeng Industry has reason to believe that Zhang X (B) has the authority to act on behalf of Jinhe Real Estate. (1) Signing of the Cooperation Agreement involved in this case and the Loan Agreement involved in another case by Zhang X (B) and Hao X, the legal representative of Jinhe Real Estate, with Huifeng Industry, and signing by Zhang X (B) on the Loan Agreement involved in another case to guarantee in his own name for the debt owed by Jinhe Real Estate, show that Zhang X (B) is deeply involved in the negotiation of the overall financing transaction and the conclusion of the contract involved in this case and another case. (2) Jinhe Real Estate, after signing the Agreement in the early period, only had Zhang X (B) to complete the follow-up tasks under the Agreement on behalf of the company, and did not submit evidence to prove that the company had other personnel for further consultation or correspondence with Huifeng Industry and Jiqing Agricultural Products with regard to the performance of the Agreement involved in this case. (3) During the performance of the Cooperation Agreement and the Supplemental Agreement, Zhang X (B), as the agent of Jinhe Real Estate, has not only negotiated on several occasions with Huifeng Industry for repayment issues, but also signed an agreement with Jiqing Agricultural Products, who, as a party to the cooperation, also confirmed the identity of Zhang X (B) as an agent of Jinhe Real Estate. (4) Zhang X (B) is a majority shareholder of Jinhe Real Estate, who holds 51% of its stock and enjoys the controlling shareholder’s business management right in Jinhe Real Estate. In general, the majority shareholder’s interests

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are consistent with that of the company, so Huifeng Industry has reason to believe that Zhang X (B) will not harm the company’s interests. Second, the management and use of the official seal is imputable to Jinhe Real Estate. The facts ascertained in this case are sufficient to show that the chaotic management and use of seals by Jinhe Real Estate objectively leaves the counterparty to the transaction vulnerable to deviations in determining whether the document affixed with the official seal of Jinhe Real Estate manifests the true intention of Jinhe Real Estate. In the information note issued by Zhang X (B) as submitted by Jinhe Real Estate at trial, Zhang X (B) admits that the official seal of Jinhe Real Estate affixed on the power of attorney and the letter of commitment dated August 12, 2009 is privately engraved. In the absence of other corroborative evidence, this was not admitted by the original retrial decision because Zhang X (B) was a shareholder of Jinhe Real Estate and is interested in this case. Therefore, it is reasonable for the original court to find that the management and use of the official seal is imputable to Jinhe Real Estate. Third, in this case there is no contradiction among the letter of commitment affixed with the official seal of Jinhe Real Estate, the personal letter of commitment of Zhang X (B), and the letter of commitment issued in the capacity of the agent of Jinhe Real Estate, but for their respective reasons, both Zhang X (B) and Jinhe Real Estate are willing to be jointly and severally liable for the money owed by Jiqing Agricultural Products to Huifeng Industry. In this case, Jinhe Real Estate also did not submit other evidence to prove that Huifeng Industry had bad faith or was at fault in accepting the power of attorney, letter of commitment, and letter of undertaking involved in the case. In addition, the procuratorial organ’s protest opinion that Huifeng Industry was at fault to accept repayment by Jinhe Real Estate of its shareholder Zhang X (B)’s personal debt with the company’s assets has no legal basis and cannot be established. Therefore, it is found that Huifeng Industry had good faith and no fault in the transaction involved in the case. In summary, it is not inappropriate for the original retrial judgment to find that, under the circumstances that the official seal affixed on the power of attorney, letter of commitment and letter of undertaking is inconsistent with the several specimen seals provided by Jinhe Real Estate, Huifeng Industry has reason to believe that Zhang X (B) has the authority to act on behalf of Jinhe Real Estate and accept the letter of commitment of Jinhe Real Estate issued by him. 2. Whether Jinhe Real Estate Shall be Jointly and Severally Liable for Repayment Pursuant to the Letter of Commitment On August 12, 2009, Huifeng Industy received a letter of commitment with the name of Jinhe Real Estate and affixed with the official seal of the company, which states that Jinhe Real Estate is willing to be jointly and severally liable for the repayment of the money for the grain under cooperation recoverable by Huifeng Industry, and the company manifests no intention for guarantee. Therefore, it can be held that further arrangements are made with regard to the cooperation among Huifeng Industry, Jiqing Agricultural Products and Jinhe Real Estate, i.e., the original debtor Jiqing Agricultural Products will not withdraw from the original creditor-debtor relationship

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with Huifeng Industry, and Jinhe Real Estate as the other party to the Cooperation Agreement is willing to join the existing creditor-debtor relationship, assuming the repayment liability with Jiqing Agricultural Products to Huifeng Industry. Huifeng Industry’s acceptance of the letter of commitment of Jinhe Real Estate and suing Jinhe Real Estate for joint and several liability for repayment shows that it has accepted the commitment of Jinhe Real Estate. In light of the principle of debt accession in civil law and the above-mentioned commitment, it is found that the commitment of Jinhe Real Estate constitutes debt accession, i.e. concurrent assumption of debt. Pursuant to Article 4 of the General Principles of the Civil Law, which stipulates that “in civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility”, promises must be kept, so Jinhe Real Estate shall fulfill its obligation pursuant to its promise to be jointly and severally liable for repayment. Jinhe Real Estate failed to provide sufficient evidence and reasonable explanation as to why it did not appeal after the first instance ruled that Jinhe Real Estate shall be jointly and severally liable for repayment. By taking into account the fact that Jinhe Real Estate did not file an appeal and in light of the merits of the case, the original retrial judgment has both factual and legal grounds to rule that Jinhe Real Estate shall be jointly and severally liable for repaying the debt involved in this case owed by Jiqing Agricultural Products. In summary, the original retrial judgment shall be maintained for its accurate finding of facts and correct application of law. The procuratorial organ’s protest opinion cannot be established and shall not be admitted. After discussion by the Trial Committee of the Supreme People’s Court, it is ruled to maintain the civil decision of the Higher People’s Court of Sichuan Province (No. 18 [2013] Final, Civ. Division, the Higher People’s Court of Sichuan Province) pursuant to Article 207 (1) and Article 170 (1) of the Civil Procedure Law.

Comment on Rule 1. Elements for the Determination of Apparent Agency Article 49 of the Contract Law (1999) stipulates that “(w)here a person who has no power of agency, oversteps the power of agency, or whose power of agency has expired concludes a contract in the principal’s name, and the counterparty has reason to believe that the person has the power of agency, such act of agency is effective.” This is generally believed as a provision on apparent agency. Almost following the same logic, Article 172 of the General Rules of the Civil Law (2017) stipulates that “(w)here a person who has no power of agency, oversteps the power of agency, or whose power of agency has expired continuously performs an act of agency, and the counterparty has reason to believe that the person has the power of agency, such act of agency is effective.” Apparent agency, as an exception to unauthorized agency, aims to protect the reliance interest of a third party to the agency transaction and

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transaction safety. In this case, the seal affixed to the power of attorney by which Jinhe Real Estate confers authority to Zhang X (B) being identified as inconsistent with the several specimen seals provided by Jinhe Real Estate, and failure of Jinhe Real Estate to ratify Zhang X (B)’s act of agency shall be recognized as unauthorized agency. Therefore, it is necessary to consider whether the other elements of apparent agency are established. (1) The Counterparty Huifeng Industry Has Reason to Believe that Zhang X (B) Has the Authority to Act on Behalf of Jinhe Real Estate (a) Zhang X (B) and Hao X, the legal representative of Jinhe Real Estate, went to Chengdu to sign the Cooperation Agreement involved in this case with Huifeng Industry on the same day, and was deeply involved in the negotiation and conclusion of the contract involved in this case. (b) During the performance of the agreements involved in the case, Zhang X (B), as the agent of Jinhe Real Estate, has not only negotiated on several occasions with Huifeng Industry for repayment issues, but also signed an agreement with Jiqing Agricultural Products, who, as a party to the cooperation, also confirmed the identity of Zhang X (B) as an agent of Jinhe Real Estate. (c) Jinhe Real Estate, after signing the Agreement in the early period, only had Zhang X (B) to complete the follow-up tasks under the Agreement on behalf of the company. (d) Zhang X (B) is a majority shareholder of Jinhe Real Estate, who holds 51% of its stock and enjoys the controlling shareholder’s business management right in Jinhe Real Estate, and under general circumstances, Huifeng Industry has reason to believe that Zhang X (B) will not harm the company’s interests. Although many doctrinal studies have mixed up “having the appearance of agency” and “having reason to believe”, actually there is still some difference between “having reason to believe” and “having the appearance of authority” or “having external representation of agency”. The above-mentioned points (1) and (2) can be considered as factors in determining “having the appearance of agency” from the power of attorney issued by Zhang X (B), while points (3) and (4) are more of factors to make Huifeng Industry to have reason to believe in the agency. (2) Huifeng Industry Accepts in Good Faith the Power of Attorney and Letter of Commitment of Jinhe Real Estate Submitted by Zhang X (B) The letter of commitment affixed with the official seal of Jinhe Real Estate and submitted by Zhang X (B) to Huifeng Industry on August 12, 2009 recalls the tripartite cooperation among Huifeng Industry, Jiqing Agricultural Products and Jinhe Real Estate, and specifies that Jinhe Real Estate is willing to be jointly and severally liable for the repayment of money for the grain under cooperation recoverable by Huifeng Industry. Based on the above analysis of the factors, Huifeng Industry accepts Zhang

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X (B) and Jinhe Real Estate to be jointly and severally liable for the money involved in this case owed by Jiqing Agricultural Products to Huifeng Industry. Jinhe Real Estate does not provide other evidence to prove that Huifeng Industry was in bad faith or at fault in accepting the power of attorney, letter of commitment, and letter of undertaking. Determination of a bona fide counterparty in law must be premised on no negligence. (3) The Management and Use of the Official Seal is Imputable to Jinhe Real Estate The legal effect of apparent agency is to hold the principal liable for the civil act by the unauthorized agent and the counterparty, which is obviously a great detriment to the principal who does not want to assume the effect of the agency. Although the legislative intent for apparent agency in the General Rules of the Civil Law does not mention the principal’s fault, the creation of apparent agency is generally related to the principal’s fault.1 In essence, there is still a distinction between fault and imputability, although fault is at the center of imputability in traditional civil law. Imputability to the principal being a “dimension of degrees” from low to high, whether apparent agency is created depends on the comparison and balance between different degrees of imputability to the principal and different degrees of the counterparty’s reasonable reliance.2 As for this case, pursuant to the relevant provisions for the management of official seals, a company can only have one official corporate seal, but Jinhe Real Estate used two different official corporate seals respectively on the maximum mortgage contract and supplementary agreement involved in this case, and Jinhe Real Estate submitted four different approved seals as specimen in the follow-up appraisal. Although after the appraisal, the appraisal opinion holds that the seal mark of Jinhe Real Estate affixed on the power of attorney dated January 21, 2009 and letter of commitment dated August 12, 2009 is not identical to the marks of the four specimen seals submitted by Jinhe Real Estate, it is sufficient to show the chaotic management and use of seals by Jinhe Real Estate, which objectively leaves the counterparty to the transaction vulnerable to deviations in determining whether the document affixed with the official seal of Jinhe Real Estate manifests the true intention of Jinhe Real Estate. Therefore, it is reasonable to find that the chaotic management and use of the official seal is imputable to Jinhe Real Estate. 2. Relationship between Promise and Debt Assumption The letter of commitment issued by Jinhe Real Estate on August 12, 2009 indicates that it is willing to be jointly and severally liable for the repayment of the money for the grain under cooperation recoverable by Huifeng Industry. This shows that Jinhe Real Estate joins the existing debt and bears the debt jointly with the debtor, which legally constitutes concurrent assumption of debt.3 Concurrent assumption of debt is 1 参见李适时主编:《中华人民共和国民法总则释义》 , 法律出版社

2017 年版, 第 538 页。

2 参见叶金强:《表见代理构成要件中的本人归责性要件——方法论角度的再思考》 , 载《法律

科学 (西北政法大学学报) 》2010 年第 5 期。

3 参见陈华彬:《债法通论》 , 中国政法大学出版社

2018 年版, 第 378 页。

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similar to suretyship, but its claim period is not exactly the same as that of suretyship. As for the resulting civil liability, the person assuming the debt may, pursuant to the principle of good faith, be ruled to assume joint and several liability for repayment of debt. 3. Whether the Party Failing to Appeal after the First Instance Has the Power to Apply for Reopening of the Case after It is Ruled to Uphold the Original Decision in the Second Instance Filed by Another Party After the court of the first instance ruled that Jinhe Real Estate shall be jointly and severally liable for repayment of the loan, Jinhe Real Estate did not appeal, and such decision is upheld in the second instance filed by another party. Now, whether Jinhe Real Estate has the power to use the case reopening procedure to seek relief? The Supreme People’s Court has denied this power in several cases, largely on the grounds that the Civil Procedure Law dictates that the system whereby the second instance is final is the basic system of civil litigation in China. If a party believes that the court of first instance rendered a wrongful decision, he should file an appeal and exercise his litigation right through the second instance proceedings. In other words, the party should first choose the ordinary remedial procedures within the design of the civil litigation hierarchy and seek relief of his rights through the second-instance civil proceedings, while the case reopening proceedings is special remedial proceedings granted to the party with respect to any substantial error that may occur in the effective decision. If, after exhausting the ordinary remedies, the party still believes that the effective decision is erroneous, he has the power to apply to the people’s court for reopening of the case. For the party who did not appeal without justifiable reasons and whose rights and obligations have not been changed by the second instance decision, a special remedial mechanism should not generally be available to him, as this will lead to disguised encouragement or indulgence of dishonest parties to abuse the case reopening proceedings, thereby degenerating the special proceedings into an ordinary one.

Xiangzhuang Sun Doctor of Laws, senior judge, Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China.

Guangdong Overseas Chinese Trust & Investment Corp. v. Guotai Junan Securities Co., Ltd. (Dispute over Securities Repurchase Agreement): Judicial Determination of Legal Personality Xiangzhuang Sun

Rule Whether an enterprise has the legal personality or not depends on its legal capacity which must be determined by competent administrative agencies. The people’s court shall, considering the circumstances of the case, determine the legal personality of the enterprise and whether it is under certain liability.

Case Information 1. Parties Procuratorial Protest-Lodging Organ: the Supreme People’s Procuratorate of the People’s Republic of China Petitioner (Defendant in the First Instance, Appellant in the Second Instance): Guangdong Overseas Chinese Trust & Investment Corp. (hereinafter referred to as Guangdong Overseas Chinese Trust Corp.) Respondent (Plaintiff in the First Instance, Appellee in the Second Instance): Guotai Junan Securities Co., Ltd. (hereinafter referred to as Guotai Junan Securities Company) Collegiate Panel: Xiangzhuang Sun, Bo He and Jinsong Guan (Edited by Ming Li; translated by Xia Dai) X. Sun (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_26

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Respondent (Defendant in the First Instance): Guangdong Overseas Chinese Trust & Investment Corp. Zhongshan Office (hereinafter referred to as Guangdong Overseas Chinese Trust Zhongshan Office) 2. Procedural History First Instance: No. 262 [1998] Trial, Civ. Division, the Second Intermediate People’s Court of Tianjin City (dated Jun. 9 of 1999) Second Instance: No.224 [1999] Final, Civ. Division, the Higher People’s Court of Tianjin City (dated Nov. 11 of 1999) Application for Reopening the Case: No. 293–1 [2001] Supervision, Civ. Division, the Supreme People’s Court (dated Apr. 14 of 2010) Retrial: No. 0022 [2010] Retrial, Civ. Division, the Higher People’s Court of Tianjin City (dated Sept. 25 of 2010) Application for Reopening the Case: No. 293–2 [2001] Supervision, Civ. Division, the Supreme People’s Court (dated Dec. 12 of 2011) Retrial: No. 0003 [2012] Retrial, Civ. Division, the Higher People’s Court of Tianjin City (dated Jan. 8 of 2013) Protest: No. 2 [2016] Review, Civ. Division, the Supreme People’s Procuratorate (dated Oct. 21 of 2016) Case Reopening: No. 204 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Jan. 31 of 2018) 3. Cause of Action Dispute over securities repurchase agreement

Essential Facts On April 12 and May 17, 1995, the Dalian business department of Jun’an Securities Co., Ltd. (hereinafter referred to as the Business Department) signed two negotiable securities sales agreements with Guangdong Overseas Chinese Trust Zhongshan Office, among which, the agreement concluded on April 12, 1995 stipulated that the business department first purchased R180 treasury bonds at the full price of RMB 5 million yuan from Guangdong Overseas Chinese Trust Zhongshan Office, and then Guangdong Overseas Chinese Trust Zhongshan Office repurchased the treasury bonds it had sold at the price of RMB 5.585 million yuan with the price proportion of 100: 111.70 on October 12, 1995. On May 17, 1995, it was agreed upon that the business department would first purchase R180 treasury bonds at its full price of RMB 5 million yuan from Guangdong Overseas Chinese Trust Zhongshan Office, and then Guangdong Overseas Chinese Trust Zhongshan Office would repurchase the treasury bonds it had sold at the price of RMB 5.573 million yuan with the price proportion of 100: 111.46 on November 17, 1995.

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On the date of signing the above two agreements, the business department made two separate payments of RMB 5 million yuan each to Guangdong Overseas Chinese Trust Zhongshan Office, totaling RMB 10 million yuan. Guangdong Overseas Chinese Trust Zhongshan Office issued to the business department two negotiable securities custody notes of RMB 5 million yuan each, but the two parties failed to handle the physical delivery and sealing up procedures of the bonds. At the expiration of the repurchase period of the two agreements, Guangdong Overseas Chinese Trust Zhongshan Office failed to repurchase the securities as agreed. Guangdong Overseas Chinese Trust Zhongshan Office has successively repaid RMB 3.93 million yuan to the business department. By the time of the case hearing, Guangdong Overseas Chinese Trust Zhongshan Office had owed the business department RMB 6.07 million yuan of the repurchase principal of treasury bonds, with the interest thereon prior to and after the expiration date. Guangdong Overseas Chinese Trust Zhongshan Office was established upon the approval under the No. 5 [1993] Reply issued by Guangdong branch of People’s Bank of China on January 6, 1993, which also issued Financial Business License concurrently. Since then, Guangdong Overseas Chinese Trust Zhongshan Office has been enjoying its enterprise legal personality with the approval of Zhongshan Administration for Industry and Commerce, Guangdong. On August 7, 1994, the issued Notification Concerning the Clearing of Trust and Investment Institutions Approved By Exceeding Authority (No. 214 [1994] People’s Bank of China) stipulated that branches of trust and investment companies approved by any bank branch beyond its authority before July 7, 1993 can only be retained with the approval of the People’s Bank of China. If the names of the branches of the trust and investment companies stand as “branch” or “office”, then the creditor’s rights and debts shall be borne by the head office. The branch and office do not have the enterprise legal personality. On August 8, 1995, Reply to the Opinions on The Liquidation of Guangdong Trust and Investment Institutions (No. 61 [1995] Non-banking Financial Institutions of People’s Bank of China) stipulated that “it is agreed to retain Guangdong Overseas Chinese Trust Zhongshan Office, which does not have legal personality”. At the same time, Guangdong Overseas Chinese Trust is required to submit relevant materials of the Guangdong Overseas Chinese Trust Zhongshan Office in accordance with the conditions specified in the No. 214 document [1994] by the People’s Bank of China for verification and auditing, and is required to collect the provisional Financial Business License before the end of September, 1995. However, Guangdong Overseas Chinese Trust Corp. failed to go through the corresponding procedures for changing license as required. On August 10, 1998, Junan Securities Co., Ltd. (later renamed as Guotai Junan Securities Company) filed a lawsuit with the court of first instance, requesting Guangdong Overseas Chinese Trust Corp. and Guangdong Overseas Chinese Trust Zhongshan Office to repay the debt of RMB 10 million yuan due to its failure to repurchase the national debt, and the interest thereon in the amount of RMB 1.79 million yuan incurred by and after the expiration date, and bear the litigation costs of this case. The court of first instance held that an enterprise which had received Business License for Legal Person but in fact did not have the legal personality could be recognized as not having the legal personality. As Guangdong Overseas Chinese Trust Zhongshan Office did not have the legal personality, it was decided that Guangdong Overseas

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Chinese Trust Corp., as the superior competent department, shall bear joint and several discharge liability for the debts in this case. After Guangdong Overseas Chinese Trust Corp. filed an appeal, the second instance court dismissed the appeal and upheld the decision of first instance. Guangdong Overseas Chinese Trust Corp., dissatisfied with the decision, applied for retrial to the court of second instance, and the court dismissed the case with a notice. Still dissatisfied with the outcome, Guangdong Overseas Chinese Trust Corp. appealed to the Supreme People’s Court, and the Supreme People’s Court ordered the court of second instance to retry the case. The court of second instance made a civil ruling, affirming that Guangdong Overseas Chinese Trust Corp.and Guotai Junan Securities Company voluntarily reached a settlement agreement and had already fulfilled the decision of the first instance in the execution thereof, and ruling that this case shall terminate. Guangdong Overseas Chinese Trust Corp. was still dissatisfied with the judgment and continued to appeal to the Supreme People’s Court, and the Supreme People’s Court ordered the court of second instance to retry the case. The court of second instance upheld the decision of the second instance. Guangdong Overseas Chinese Trust Corp., still dissatisfied with the decision, applied for supervision to the Supreme People’s Procuratorate. As the result, the Supreme People’s Procuratorate lodged a protest against the case.

Issues 1. Whether the Guangdong Overseas Chinese Trust Zhongshan Office has independent legal person status; 2. Whether Guangdong Overseas Chinese Trust Corp. should jointly bear civil liability for the debts involved in the case.

Holding 1. Whether the Guangdong Overseas Chinese Trust Zhongshan Office Has Independent Legal Person Status Whether the Guangdong Overseas Chinese Trust Zhongshan Office has the independent legal person status should be judged mainly from the constituent elements required for a legal personality. In this case, the Guangdong Overseas Chinese Trust Zhongshan Office and the business department of Guotai Junan Securites Company signed a securities repurchase agreement in 1995, out of which a dispute arose in 1998. In accordance with Article 37 of the General Principles of the Civil Law which was in force at that time, “the necessary requirements for a legal person shall be as follows: (1) being established in accordance with the law; (2) possessing necessary property or funds; (3) having its own name, organization and premises; (4) being able to independently bear civil liability”. Whether the Guangdong Overseas Chinese Trust Zhongshan Office has the independent legal person status at that time shall

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be determined according to the above-mentioned requirements. First of all, Guangdong Overseas Chinese Trust Zhongshan Office was established in accordance with the law. Namely, it was approved by Zhongshan Municipal mayor’s work meeting, reviewed by Zhongshan Administration for Industry and Commerce and then established through ratification and registration. It obtained the Business License for Legal Person on December 31, 1992. On January 6, 1993, with the approval of Guangdong Branch of People’s Bank of China, Guangdong Overseas Chinese Trust Zhongshan Office obtained the Financial Business License issued by it. So, it can be concluded that the Guangdong Overseas Chinese Trust Zhongshan Office was established through legal approval procedures, and has not been cancelled so far. Secondly, Guangdong Overseas Chinese Trust Zhongshan Office has the necessary property or funds. On January 6, 1993, No. 5 [1993] Reply, issued by Guangdong branch of People’s Bank of China, clearly stated, “The ‘office’ is an economic entity with independent legal person status, which carries out independent operation, independent accounting, and is responsible for its own profit and loss”, which is clearly set forth in the Articles of Association of Guangdong Overseas Chinese Trust Zhongshan Office. There are eight local enterprises and institutions that have invested and participated in the project, whereas it’s confirmed after capital verification that Guangdong Overseas Chinese Trust Corp. has not joined them through investment. Thirdly, Guangdong Overseas Chinese Trust Zhongshan Office has its own name, organization and premises. According to the Business License for Legal Person submitted by Guangdong Overseas Chinese Trust Zhongshan Office and its Articles of Association, the name, organization and premises of Guangdong Overseas Chinese Trust Zhongshan Office are comparatively clear. Therefore, whether the Guangdong Overseas Chinese Trust Zhongshan Office has the title “Guangdong Overseas Chinese Trust Corp.” or not, its legal person status cannot be denied. Finally, Guangdong Overseas Chinese Trust Zhongshan Office can independently bear civil liability with its own property. Since then, the Guangdong Overseas Chinese Trust Zhongshan Office has repeatedly applied for retaining its legal personality and renewing the Business License for Legal Person, which all has been approved by Zhongshan Administration for Industry and Commerce. In addition, Guangdong Overseas Chinese Trust Zhongshan Office has been handling relevant procedures in its own name, holding industrial and commercial license, tax license and financial business license, etc. In practice, it also has always been operating independently, accounting independently and bearing its own profits and losses. The Notification Concerning the Clearing of Trust and Investment Institutions Approved by Exceeding Authority (No. 214 [1994] People’s Bank of China) and the Reply to the Opinions on the Liquidation of Guangdong Trust and Investment Institutions, (No. 61 [1995] Non-banking Financial Institutions of People’s Bank of China) clearly stated that branches of trust and investment companies shall not have the legal personality. However, the Reply on the Issues Concerning Offices of Guangdong Overseas Chinese Trust & Investment Corp.(No. 54 [2001] People’s Bank of China) stated, “… According to the actual situation, the Central Bank recognizes its qualification as an independent legal person, and carries out corresponding disposal”, which is not consistent with the contents of the above-mentioned No. 214 and No. 61 documents. Although the reply was issued after the commencement of this lawsuit, it indicated the basic attitude of People’s Bank of China. Based on the analysis of the above documents,

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it can be concluded that Guangdong Overseas Chinese Trust Zhongshan Office was not yet deprived of its legal personality upon the occurrence of the bond repurchase dispute, which should be considered as inadequate implementation of the relevant documents of People’s Bank of China. In general, the registration of relevant Administration for Industry and Commerce shall prevail in judging whether an enterprise has the legal personality. The court of second instance supported Guotai Junan Securities Company in claiming that the legal personality of Guangdong Overseas Chinese Trust Zhongshan Office should be denied according to the above-mentioned No. 214 and No. 61 documents, ignoring the legal person registration granted by the Administration for Industry and Commerce, and the substantive elements of the legal personality of Guangdong Overseas Chinese Trust Zhongshan Office, which was obviously improper, and should be corrected by the Supreme People’s Court. 2. Whether Guangdong Overseas Chinese Trust Corp. Should Jointly Bear Civil Liability for the Debts Involved in the Case In this case, Guangdong Overseas Chinese Trust Zhongshan Office was established in accordance with the law, and obtained the Business License for Legal Person and the Financial Business License. Guangdong Overseas Chinese Trust Corp., however, did not invest in the Office. Guangdong Overseas Chinese Trust Zhongshan Office was closed down in March, 2000 due to illegal operation, and the disposal and liquidation of the claims and debts involved were undertaken by the Leading Group Office for Risk Disposal of Local Small and Medium-Sized Financial Institutions and Rural Cooperative Fund Associations affiliated to the Zhongshan People’s Government. The specific circumstances under which Guangdong Overseas Chinese Trust Zhongshan Office has been established and liquidated proves that Zhongshan People’s Government is the initiator of the Office, but not the Guangdong Overseas Chinese Trust Corp., which didn’t participate in any operation and management thereof. Guangdong Overseas Chinese Trust Zhongshan Office is not an actual branch of Guangdong Overseas Chinese Trust Corp. In addition, Guangdong Overseas Chinese Trust Corp. did not participate in the signing and performance of the securities repurchase agreement. Guotai Juan Securities Company claimed that Guangdong Overseas Chinese Trust Corp. has charged the management fees from Guangdong Overseas Chinese Trust Zhongshan Office, but failed to prove it with adequate evidence. The former second instance decision that identified Guangdong Overseas Chinese Trust as the competent controlling authority of Guangdong Overseas Chinese Trust Zhongshan Office and ordered the former to bear joint and several liability for the debts of Guangdong Overseas Chinese Trust Zhongshan Office was found to be wrong in the findings of fact and the application of law and should be corrected. In conclusion, the facts found in the former second instance decision are basically clear, but the application of law is improper. The protest opinions of the Supreme People’s Procuratorate shall be adopted. The decision is rendered as follows: reverse the second instance decision (No. 0003 [2012] Reopening, Civ. Division, the Higher People’s Court of Tianjin City), the reopening ruling (No. 0022 [2010] Reopening, Civ. Division, the Higher People’s Court of Tianjin City), the final decision (No.224 [1999] Final, Civ. Division, the Higher People’s Court of Tianjin City), and the item 3 of the first instance decision (No. 262 [1998] Trial, Civ. Division, the Intermediate People’s

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Court of Tianjin City); uphold the item 1, item 2 and item 4 of the first instance decision (No. 262 [1998] Trial, Civ. Division, the Intermediate People’s Court of Tianjin City).

Comment on Rule In this case, whether Guangdong Overseas Chinese Trust Corp. should bear joint and several liability for the debts of Guangdong Overseas Chinese Trust Zhongshan Office depends on whether Guangdong Overseas Chinese Trust Zhongshan Office has the legal personality, and thus can bear the liability independently. 1. Conditions for Registration of Enterprise Legal Person A legal person is an organization that has the capacity for civil rights and civil conduct, which is entitled to civil rights and civil obligations independently by law. As an independent organization, a legal person has independent will and interests different from its members. Regulations on the Administration of the Registration of Enterprise Legal Persons is a standard formulated according to the relevant provisions of the General Principles of the Civil Law. Subject to Article 7 of the Regulation, entities applying for registration of enterprises as legal persons must satisfy the following conditions: (1) name, organization and articles of association; (2) fixed sites for business operations and essential facilities; (3) funds and employees in conformity with State regulations and in line with their scale of production, operation or service; (4) ability to bear civil liabilities independently; (5) a scope of business in conformity with the provisions of the relevant laws, regulations and policies of the State. In this case, according to the Business License for Legal Person, Articles of Association of Guangdong Overseas Chinese Trust Zhongshan Office and other evidences submitted by Guangdong Overseas Chinese Trust Zhongshan Office, it can be confirmed that Guangdong Overseas Chinese Trust Zhongshan Office has its own name, organization and Articles of Association, and actual business premise. At the beginning of its establishment, the Zhongshan People’s Government organized and coordinated eight local enterprises and institutions to invest and participate in the project,whereas Guangdong Overseas Chinese Trust & Investment Corp., according to the capital verification, didn’t subscribe any stock. In its operation and management, Guangdong Overseas Chinese Trust Zhongshan Office fully expressed its own will in implementing civil legal acts. There is no evidence showing that Zhongshan office needed to ask for instructions from Guangdong Overseas Chinese Trust Corp. in its daily operation and management, or Guangdong Overseas Chinese Trust Corp. ever collected management fees from the Office. The financial industry is an industry that needs special permission from the governing authority, and Guangdong Overseas Chinese Trust Zhongshan Office has obtained the Financial Business License issued by Guangdong Branch of People’s Bank of China on January 6, 1993. The above facts demonstrate that Guangdong Overseas Chinese Trust Zhongshan Office has satisfied all the conditions for the registration of an enterprise legal person. In addition, the establishment of Guangdong Overseas Chinese Trust Zhongshan Office was approved by Zhongshan People’s Government, not by Guangdong Overseas Chinese Trust Corp., which was obviously not in charge of its incorporation.

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Guangdong Overseas Chinese Trust Zhongshan Office was closed down in March 2000 due to its illegal operation. The disposal and liquidation of the claims and debts incurred accordingly were undertaken by the Leading Group Office for Risk Disposal of Local Small and Medium-Sized Financial Institutions and Rural Cooperative Fund Associations affiliated to the Zhongshan People’s Government. Based on the facts that Guangdong Overseas Chinese Trust Zhongshan Office has been established in charge of liquidation, Zhongshan People’s Government is the initiator of the Office. 2. Registration by the Administration for Industry and Commerce Different from a natural person, the capacities for civil rights and for civil conduct of a legal person have take effect simultaneously, generating from the establishment of legal personality and ending at the termination thereof. There are two steps in establishing a community with legal capacity: firstly, the community is established as a mass entity; then, its capacity is recognized through an administrative act of the governing organ. In China, the government organ that has the right to recognize and register the legal capacity of an entity is the Administration for Industry and Commerce, which shall perform its responsibility subject to the Regulations on the Administration of the Registration of Enterprise Legal Persons. The document No. 214 ([1994] People’s Bank of China), and the document No. 61 ([1995] Non-banking Financial Institutions of People’s Bank of China,) clearly stated that the branches of trust and investment companies shall not have the legal personality, but People’s Bank of China is not the authority in the recognition and registration of legal personality. It should be interpreted as that People’s Bank of China is promoting the non-legal personalization of the branches of trust and investment companies. The fact that Guangdong Overseas Chinese Trust Zhongshan Office has not been deprived of its legal personality can be regarded as that it actually enjoys its actual legal personality, or the relevant documents is implemented in an improper manner. People’s Bank of China is the governing authority in this field, with the power to issue the Financial Business License. If it is really necessary to implement its supervisory duties, it should make efforts to recognize or ban the Financial Business License with a clear attitude. If the Financial Business License of Guangdong Overseas Chinese Trust Zhongshan Office is withdrawn or banned, the Administration for Industry and Commerce shall not continue to recognize its legal person status during the annual inspection of Business License for Legal Person. But in fact, the Financial Business License of Guangdong Overseas Chinese Trust Zhongshan Office has always existed, and the recognition of its legal personality has been admitted by the Administration for Industry and Commerce, thus the Financial Business License of Guangdong Overseas Chinese Trust Zhongshan Office, as a legal person, should bear the legal liability.

Xiangzhuang Sun Doctor of Laws, senior judge, Judicial Supervision Division of the Supreme People’s Court of the People’s Republic of China.

Meng X, Changchun Shengxiang Construction Engineering Co., Ltd. v. Li X (A), Changchun Tengan Real Estate Development Co., Ltd. (Execution Objection by Outsiders): Findings of the Legal Liability of the Illegal Profiteer Ge Su

Rule 1. According to Article 141 of the Company Law, the property of the branch is the property of the parent company, and its civil liabilities shall be borne by the parent company. The special agreements between the parties on the internal business model and rights-responsibilities relationship of the parent company and its branch is not enforceable enough to stand against the publicity effect of the company registration, nor the third party outside the case. 2. If an enterprise or individual borrows the license of a construction enterprise in the name of contracting leasing, it shall bear the risk of not being protected by law due to its violation of laws and judicial interpretation.

1 This case should apply the Company Law (2013), Article 14 of which stipulates, “The company may set up branches. To set up a branch, the company shall file a registration application with the company registration authority, and shall obtain the business license. The branch shall not enjoy the status of an enterprise legal person, and its civil liabilities shall be borne by its parent company”.

Collegiate Panel: Ge Su, Mingyi Li and Nengbao Zhang (Edited by Yi Yang; translated by Xia Dai) G. Su (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_27

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Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Appellant of Second Instance): Meng X Appellant in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Changchun Shengxiang Construction Engineering Co., Ltd. (hereinafter referred to as Changchun Shengxiang Construction Company) Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellee in the Second Instance): Li X (A) Defendant in the First Instance: Changchun Tengan Real Estate Development Co., Ltd. (hereinafter referred to as Changchun Tengan Real Estate company) 2. Procedural History First Instance: No. 5 [2014] Trial, Civ. Division, the Intermediate People’s Court of Changchun City, Jilin Province (dated Feb. 12 of 2015) Second Instance: No. 72 [2015] Final, Civ. Division, the Higher People’s Court of Jilin Province (dated Jul. 7 of 2015) Case Reopening: No. 149 [2016] Reopening, Civ. Division, the Supreme People’s Court (dated Jul. 28 of 2016) 3. Cause of Action Execution opposition by the outsider

Essential Facts Changchun Dongya Construction Engineering Co., Ltd. (hereinafter referred to as Changchun Dongya Construction Company, the predecessor of Changchun Shengxiang Construction Company) was established on July 9, 1993, with the business scope of contracting domestic and foreign construction projects. In March 2006, Changchun Dongya Construction Company applied to Changchun Administration for Industry and Commerce for a branch establishment, that is, Jianhe Branch of Changchun Dongya Construction Company (hereinafter referred to as Changchun Jianhe Branch), which obtained the business license from Changchun Administration for Industry and Commerce, conducting project contracting within the business scope of its parent company. The branch’s civil liability shall be borne by the parent company. After the establishment, Changchun Jianhe Branch signed the internal contract with Changchun Dongya Construction Company entitled as Internal

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Contracting inside Changchun Dongya Construction Company, which stipulated that the contracting scope should be the industrial and civil construction specified in the license; Changchun Jianhe Branch should pay RMB 30,000 yuan business cost and RMB 100,000 yuan project cost to Changchun Dongya Construction Company per year. Since May 29, 2013, Li X (A) has been in charge of Changchun Jianhe Branch. On March 4, 2011, Changchun Dongya Construction Company and Changchun Office of Shenyang Air Force Military Region Officer Housing Development Center signed the Construction and Installation Project of Shenyang Air Force Military Region, promised to build the Lantian Jiayuan Project phase II with the contract price of RMB 83,561,772 yuan. After the court hearing, it was confirmed that the project was actually constructed by Li X (A) and Changchun Jianhe Branch. On January 9, 2012, Meng X sued Changchun Dongya Construction Company, Changchun Tengan Real Estate Company and Xiangze Branch of Changchun Dongya Construction Company (hereinafter referred to as Changchun Xiangze Branch), for a dispute over sales contract, to the Intermediate People’s Court of Changchun City, Jilin Province. On September 28, 2012, the Intermediate People’s Court of Changchun City rendered a civil decision (No. 2 [2012] Trial, Civ. Division, the Intermediate People’s Court of Changchun City, Jilin Province), under which: (1) Changchun Dongya Construction Company should pay Meng X the steel payment and liquidated damages; (2) Changchun Tengan Real Estate Company should assume the joint and several liability for the above payments, and had the right to recover from the debtor after the performance of its above-mentioned liability; (3) Other claims of Meng X should be dismissed. On December 18, 2012, the Intermediate People’s Court of Changchun City issued a civil ruling (2012, No. 2–6 [2012] Trial, Civ. Division, the Intermediate People’s Court of Changchun City, Jilin Province) to freeze the deposit of RMB 8.5 million yuan (actually RMB 5, 850, 435.10 yuan) in an account of Changchun Jianhe Branch in Changchun Street Sub-branch of Jiutai Rural Commercial Bank. The foresaid funds are the project funds of Lantian Jiayuan Project phase II, transferred from Shenyang Air Force Military Region Officer Housing Development Center to Changchun Jianhe Branch on December 17, 2012. As Li X (B) and Li X (A) provided replacement guarantee with their two houses, the Intermediate People’s Court of Changchun City ruled to unfreeze the amount of RMB 800,000 yuan from the frozen account of Changchun Jianhe Branch. On June 5, 2013, Meng X applied to the Intermediate People’s Court of Changchun City for the execution thereof (No. 155 [2013] Enforcement). During the execution, Li X (A) raised an objection and requested to unfreeze the money, with the ground that the amount of RMB 5, 850, 435.10 yuan seized by the Intermediate People’s Court of Changchun City, Jilin Province was the earnings of Li X (A) from his contracting of Changchun Jianhe Branch and construction of Lantian Jiayuan Project phase II. On May 14, 2014, the Intermediate People’s Court of Changchun City issued an executive order (No. 16 [2014] Execution Objection, Enforcement Division, the Intermediate People’s Court of Changchun City, Jilin Province), overruling Li X (A)’s objection. For this reason, Li X (A) filed a lawsuit of execution objection as an outsider of the case, requesting the Intermediate People’s Court of Changchun City to terminate in the No. 155 [2013] Enforcement case the

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execution of RMB 5, 850, 435.10 yuan deposit of Changchun Jianhe Branch and unfreeze the money. On February 12, 2015, the Intermediate People’s Court of Changchun City, Jilin Province rendered its decision (No. 5 [2014] Trial, Civ. Division, the Intermediate People’s Court of Changchun City, Jilin Province) that Changchun Dongya Construction Company and Changchun Jianhe Branch were not in the relationship of ordinary parent company and the branch. Changchun Dongya Construction Company had already contracted out Changchun Jianhe Branch, didn’t keep the operation and management thereof under its own corporate system. Besides, Changchun Dongya Construction Company only collected management fees from Changchun Jianhe Branch to retain the profit. However, as the actual contractor of Changchun Jianhe Branch, Li X (A) had the right to the property under the name of Changchun Jianhe Branch. In accordance with Article 78(2)2 of the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial), in this case, Li X (A) had enough civil rights and interests against the execution, thus Li X (A)’s claim was been supported. That is, in the execution case of No. 155 [2013], the deposit of RMB 5, 850, 435.10 yuan in the account of Changchun Changchun Jianhe Branch is not allowed to be executed. Meng X was dissatisfied with the decision and appealed the Higher People’s Court of Jilin Province ruled (No. 72 [2015] Final, Civ. Division, the Higher People’s Court of Jilin Province) that Changchun Jianhe Branch was a branch office legally established by Changchun Shengxiang Construction Company through registration, and the relationship between them was certainly parent company and the branch. The main issue in the case was whether Jianhe Branch had been contracted by others, and whether the money in the account was the investment and income of the contractor. Li X (A) was the actual investor and constructor of the Lantian Jiayuan Project phase II, so it could be determined that the fund in the account was the investment and income of Li X (A) in the process of contracting, so the court dismissed the appeal and upheld the decision of the first instance. After the decision took effect, Meng X and Changchun Shengxiang Construction Company applied to the Supreme People’s Court for case reopening, requesting the Court to reverse the first instance decision, and dismiss Li X (A)’s claim by law. On December 17, 2015, the Supreme People’s Court made a civil ruling (No. 2547 [2015] Appeal, Civ. Division, the Supreme People’s Court) to reopen the case via certiorari.

2 Article 78 of the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial) provides

that “If the branch of the enterprise legal person to be executed is unable to pay off its debts, the enterprise legal person may be ruled as the executed person. If the property directly managed by the enterprise legal person is still unable to pay off its debts, the people’s court may make a ruling to execute the property of other branches of the enterprise legal person. If it is necessary to execute the property of the branches that has been contracted or leased, the investment and deserved income of the contractor or lessee shall be protected by law”.

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Issue Whether the execution objection raised by the outsider Li X (A) to the disputed fund in the account of Changchun Jianhe Branch is tenable or not. Is it enforceable enough to deter the execution of the people’s court?

Holding Based on the issues of the case, the Supreme People’s Court holds that: First, as a branch of Changchun Shengxiang Construction Company, Changchun Jianhe Branch has been registered in the Administration for Industry and Commerce by law. Their relationship should be the one between the parent company and the branch, which is regulated by the provisions promulgated in the Company Law, that is, the property of the branch is the property of the parent company, and the parent company should share the civil liability of the branch. Second, Li X (A)’s internal agreements with Changchun Shengxiang Construction Company on the business model, rights and obligations of Changchun Jianhe Branch can’t stand against the publicity effect of the registration of the branch, thus cannot stand against the third party outside the case. If Changchun Jianhe Branch and Li X (A) assert that the assumption of the liability by them for Changchun Shengxiang Construction Company is against their internal agreement, they can conduct a negotiation between them. Third, the internal agreement presented by Li X (A), which was signed by Changchun Jianhe Branch and Changchun Shengxiang Construction Company is essentially the lease or the paid use of construction enterprises licenses, which is prohibited by laws and judicial interpretations. Therefore, even if it can be determined that Li X (A) and Changchun Shengxiang Construction Company have a de facto contracting and leasing relationship with Changchun Jianhe Branch, due to the illegality thereof, it shall not fall under the protection of Article 78 of the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial). Fourth, it is held by the Supreme People’s Court that the legitimate rights and interests of those who act in accordance with the law should be protected; on the contrary, those who violate the law due to their disregard or ignorance should bear corresponding legal liabilities. Li X (A), who knows or should has known that the law prohibits the act of borrowing license to engage in construction activities but still insists on carrying out illegal acts and earn benefits, shall bear the adverse consequences. Fifth, the term “actual constructor” is stipulated in the Judicial Interpretation of Several Issues about the Application of Law to Construction Contract Cases. Only in the construction contract disputes can the identity of the actual constructor be determined. This case is an action of execution objection by the outsider, but not a dispute over the construction contract of a construction project, further with no any

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hearing concerning the rights and obligations of all construction parties. Therefore, it is not appropriate to determine whether Li X (A) is the actual constructor. In consideration of what’s mentioned above, the Supreme People’s Court makes its case reopening decision to reverse the civil decisions of first and second instance and dismiss the claim filed by Li X (A).

Comment on Rule 1. Legitimacy Judgment of Basic Facts When the parties claim for the same amount of money concurrently with their own grounds both reasonable to a certain extent, the judge should first consider the balance of interests therebetween. (1) The Measurement of the Claims of Both Parties and the Legal Basis Thereof The legal basis involved in the dispute between the two parties in this case include Article 14(1) of the Company Law and Article 78 of the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial). According to the conflicting evidences presented by the both parties, Li X (A) asserts that the relationship involved here is a contracting, and as a contractor, his investment and deserved income should be protected; However, Meng X asserts that Chuangchun Jianhe Branch is a branch of Changchun Shengxiang Construction Company, so it is proper and justifiable for the people’s court to enforce the decision out of the property in its account as the property of Changchun Shengxiang Construction Company, and there is no contractual relationship between Li X (A) and Chuangchun Jianhe Branch. Therefore, the key to determining the dispute in this case is to determine whether the property in the frozen account of Changchun Jianhe Branch by the people’s court is the “investment and deserved income of the contractor or lessee” that falls under the protection of Article 78 of the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial). Considering prima facie evidence, Changchun Shengxiang Construction Company, Changchun Jianhe Branch have not signed any relevant contracting and leasing contracts with Li X (A), whose claim with himself as the contractor of Jianhe Branch thus lacks contractual basis. However, the creditor’s rights and interests claimed by Meng X have not only contractual basis, but also are confirmed by the effective decision, with more sufficient formal legitimacy and rationality. It’s found through the reopening proceedings that, the alleged internal agreement signed between Changchun Jianhe Branch and Changchun Shengxiang Construction Company is only a contracting by name, but in fact is the lease or paid use of construction enterprises licenses. Li X (A) also admitted during the litigation that Li X (A), in the name of Changchun Jianhe Branch, borrowed the license of Changchun Shengxiang Construction Company to undertake projects for profit. Whereupon, it can be concluded that the internal agreement presented by Li X (A) does not conform to the

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fact. In addition, Li X (A) asserts that there exists an internal agreement between him and Changchun Shengxiang Construction Company on the business model, rights and obligations of Changchun Jianhe Branch, which should be complied with. Meng X, however, is classified as a third party outside the internal agreements mentioned by Li X (A). According to the information under the registration of Changchun Shengxiang Construction Company and Changchun Jianhe branch, Changchun Jianhe branch is a branch office of Changchun Shengxiang Construction Company. According to the principle of commercial externalism, the internal agreement mentioned by Li X (A) can’t stand against the publicity effect of company registration, nor does it enjoy the legal effect against the third party outside the case. (2) Judgment on the Legality of the Substantive Rights of Both Parties There are many rules about the order of rights protection, such as the priority of real right over creditor’s right, the priority of mortgage and the priority of project payment over ordinary creditor’s right, and so on. In addition, the legality of rights is also an important aspect to be judged. In this case, the basis of Meng X’s claim is the steel sales contract signed between him and Changchun Xiangze Branch. The right is flawless and also confirmed by the court’s effective decision. Therefore, such creditor’s right is legitimate interest confirmed by the effective decision. In contrast, the ground for the claim raised by Li X (A), as mentioned above, is, in the name of “contracting” Changchun Jianhe Branch, borrowing the license of Changchun Shengxiang Construction Company to undertake projects for profit, which is not lawful. In judicial practice, the contracts signed by contractors with borrowed licenses are all regarded as void without exception. 2. Respect for Existing Rules In difficult cases, how to make a choice among existing rules, justice in individual cases and social influence is undoubtedly difficult and challenging for judges. According to the German scholar R. Alexy, legal rules are relatively definite norms as against legal principles, which are either implemented or not implemented without any other choice in between. They have been clearly set out within the scope of facts and laws and must be, if effective, implemented without any compromise. Under normal circumstances, the basic requirement for the court in applying laws is that the rules prevail. The main task of “legal discovery” is for the judge to strive to comb out rules which are applicable to individual cases. The judgment reasoning in this case also meet the requirements of respecting the existing rules of law. In this case, there are contradictions and conflicts between the explicit legal rules and the established facts of the case, which is also the main reason for the inconsistency between the decisions of reopening court and those of the first and second instance courts. The decisions of the first and second instance courts are based on the recognition of the established fact that Li X (A) actually invested money in and undertook the project. On the other hand, swung between the legal rules and the established facts, the reopening decision definitely chooses to maintain the certainty of the existing legal rules, setting a precedent for appealing, honoring and protecting the existing legal rules. As clearly stated in the decision, “since the

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rules of law function as the value judgment standards established by the legislature after comprehensive consideration, they should enjoy universal application effect in judicial practice, and become the creeds that the judiciary should always hold only subject to some special provisions of the law, and become a criterion free from certain special circumstances or established facts. Otherwise, if a rule of law is changeable with the special circumstances of a case or the established facts, it will no longer be universally believed in and willingly honored by people because of its uncertainty, thus losing its significance of existence. Furthermore, it will seriously harm the authority of the law, the stability of the order and the justice of the judiciary”. 3. Guidance of Legal Value In the work report of the Supreme People’s Court in 2018, Zhou Qiang, the President of the Supreme People’s Court, with the help of the cases like “Reputation Dispute of the Five Langyashan Heroes” and “A Doctor Dissuading Smoking in the Elevator”, clearly pointed out that the socialism core values should be cultivated and realized in judicial practice, giving full play to the educational, appraising, guiding and normative functions of the judiciary. Whereupon, it can be seen that the social significance of judicial judgment and application lies in providing value judgment or guidance, based on the specific facts of the case, for the underlying issues behind the controversies. Legal conduct and law-abiding characters should be highlighted and praised; on the contrary, those wrongful, immoral and illegal conduct or characters should be resisted, criticized and even punished. In the reasoning part of the decision, through the elaboration that “those who abide by the law and act in accordance with the law will be protected by the law; while those who do not do so or even violate the law should bear the risk of not being protected by the law or being punished by the law due to their disregard or even ignorance of the legal rules”, it fully expresses the firm choice of the reopening decision between legal and illegal rights in the protection thereof. This case fully demonstrates the value judgment and positive attitude of the Court in guiding people to abide by the law, and punishing the wrongdoings. It is of positive significance in promoting the socialism core values and giving full play to the positive guiding role of judicial decisions in legal and social values.

Ge Su Master of Laws, senior judge, Office of State Compensation Commission of the Supreme People’s Court of the People’s Republic of China.

Hu X (A), Hu X (B), et al. v. Deqing Jinhengkun Real Estate Development Co., Ltd., Chen X, et al. (Dispute over the Third-party Revocation): Determination of the Subject of the Third-party Revocation Xuefeng Ren

Rule In accordance with Article 56(3) of the Civil Procedure Law, the subject that have the right to claim for the withdrawal of an action as a third party should be strictly limited to the party with independent right to claim so as provided in Paragraph 1 and the interested party with no independent right to claim so as provided in Paragraph 2. The scope of the subject cannot be extended to any outsider who has just ordinary creditor’s right.

Case Information 1. Parties Appellant (Plaintiff in the First Instance): Hu X (A) Appellant (Plaintiff in the First Instance): Hu X (B) Appellant (Plaintiff in the First Instance): Zhou X (A) Appellant (Plaintiff in the First Instance): Jiang X

Collegiate Panel for the Second Instance Trial: Xuefeng Ren, Xiaohan Yu and Xiwu Huang (Edited by Yi Yang; translated by Xia Dai) X. Ren (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_28

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Appellant (Plaintiff in the First Instance): Zhou X (B) Appellant (Defendant in the First Instance): Deqing Jinhengkun Real Estate Development Co., Ltd. (hereinafter referred to as Deqing Jinhengkun Real Estate Company) Appellant (Defendant in the First Instance): Zhang X Appellant (Defendant in the First Instance): Shen X Appellee (Defendant in the First Instance): Chen X 2. Procedural History First Instance: No. 1 [2015] Revocation, Trial, Civ. Division, the Higher People’s Court of Zhejiang Province (dated Sept. 27 of 2016) Second Instance: No. 319 [2017] Final, Civ. Division, the Supreme People’s Court (dated Dec. 5 of 2018) 3. Cause of Action Third-party revocation

Essential Facts Hu X (A), et al. (five people) brought separate lawsuits against Chen X and the outsider Yang X due to the disputes over the private lending activities between them. After hearing, the relevant people’s court confirmed respectively the creditors’ rights enjoyed by Hu X (A), et al. against Chen X and Yang X, and ruled in the civil decision or settlement that Chen X and Yang X should bear corresponding liabilities. After the above civil decision or conciliation statement took effect, Chen X and Yang X failed to perform the obligation. Hu X (A), et al., then, applied to the Intermediate People’s Court of Hangzhou City, the Intermediate People’s Court of Huzhou City and other relevant courts for specific execution, but there were no property available for execution on the part of Chen X and Yang X. In another action involving the equity transfer contract dispute between Chen X and Deqing Jinhengkun Real Estate Company, Zhang X, Shen X (hereinafter referred to as the original case), the plaintiff Chen X claimed the equity transfer principal in the amount of RMB 170 million yuan and the interest thereon. The first instance decision upheld the claim of Chen X in the amount of RMB 149 with the interest thereon. However, with no any material change to the basic facts, the parties to the original case reached a conciliation agreement of “zero debt” during the second instance litigation, which has been confirmed by the second instance court in its settlement (No. 63 [2013] Final, Civ. Division, the Higher People’s Court of Zhejiang Province).

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Hu X (A), et al. believed that the parties to the original case had conspired with each other to reach a fraudulent conciliation agreement in order to avoid debts, and filed a lawsuit of revocation by the third party with the second instance court, asking the Higher People’s Court of Zhejiang Province to reverse the civil settlement issued by the Higher People’s Court of Zhejiang Province (No. 63 [2013] Final, Civ. Division, the Higher People’s Court of Zhejiang Province). The court of first instance held that Article 56 of the Civil Procedure Law should be interpreted in an expanded way in case of fraudulent litigation in the original case. Hu X (A), et al., as ordinary creditors, can bring a suit of third-party revocation, and the settlement by the second instance should be reversed by law. Deqing Jinhengkun Real Estate Company, Zhang X and Shen X, refused to accept the decision of the first instance and appealed to the Supreme People’s Court, claiming that Hu X (A), et al., as the ordinary creditors of Chen X, did not have the qualification to file a lawsuit of third-party revocation. Hu X (A), et al. also filed an appeal to request the Court to reopen the case or remand it to the court of second instance for a new trial.

Issue In the case of fraudulent litigation, or special protection of creditor’s rights specified in statutes (including creditor’s rights with statutory priority and legitimate revocation right by law), can the court, in addition to the two kinds of third-party stipulated in Article 56 of the Civil Procedure Law, expand the plaintiff to a case of third-party revocation to include those outsiders with just ordinary creditor’s rights.

Holding After hearing, the Supreme People’s Court holds that, the lawsuit filed by plaintiffs of the first instance, namely, Hu X (A), et al. is a lawsuit of third-party revocation. Article 56 of the Civil Procedure Law stipulates that “If a third party believes that he has an independent claim against the subject matter of the action of against the both parties to the case, he has the right to bring an action. Where the third party has no independent claim against the subject matter of the action but the outcome of the case will affect his legal interest, he may file a request to participate in the proceedings, or the people’s court shall notify the third party to do so. A third party that is to bear civil liability pursuant to the decision of the people’s court shall be entitled to the rights and obligations of the litigants. If the third party specified in the preceding two paragraphs fails to participate in the lawsuit due to non-personal reasons, but there is evidence to prove that part or all of the content of the legally

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effective decision, ruling, or settlement is defective and consequently damages its civil rights and interests, it may file a lawsuit with the people’s court that has made the decision, ruling, or conciliation within six months since they know or should have known the occurrence of the damage. After trial, the people’s court shall change or reverse the defective decision, ruling, or settlement if the claim is admissible; If the claim is not admissible, it shall be dismissed.” Subject to the above provisions, only the third parties with independent claims and non-independent claims as stipulated in the first two paragraphs of Article 56 of the Civil Procedure Law can be the subject of the case of third-party revocation. The first instance court involved the dispute over the equity transfer contract between Chen X and Deqing Jinhengkun Real Estate Company, Zhang X and Shen X. Hu X (A), et al. were ordinary creditors who had a private lending relationship with Chen X. First of all, regarding the original case, that is, the equity transfer contract dispute between Chen X and Deqing Jinhengkun Real Estate Company, Zhang X and Shen X, Hu X (A), et al. did not have an independent right of claim against the litigation subject matter. They didn’t constitute the third party with independent right of claim as provided in Article 56(1) of the Civil Procedure Law. Secondly, whatever the outcome of the original case concerning the dispute over the equity transfer contract between Chen X and Deqing Jinhengkun Real Estate Company, Zhang X and Shen X, the rights and obligations under the legal relationship of private lending between Hu X (A), et al. and Chen X wouldn’t be affected. Hu X (A), et al., as ordinary creditors in the private lending relationship with Chen X, do have de facto connection with the original concerning whether the creditor’s rights can be realized, which is yet different from the legal interest. Furthermore, in view of the original case, Hu X (A), et al. can’t constitute the third parties without independent claim rights as provided in Article 56(2) of the Civil Procedure Law. The plaintiffs in the first-instance, namely, Hu X (A), et al., are not the third parties in the original case, and are not qualified as the subject prescribed by law to file a third-party revocation suit, and their petition fail to meet the filing requirements for the third-party revocation suit. The appeal claims by Deqing Jinhengkun Real Estate Company, Zhang X, and Shen X are upheld by the Supreme People’s Court that Hu X (A), et al. are not the qualified plaintiffs in the third-party revocation suit so the appeal by them shall be dismissed. If there are errors in the civil settlement by the Higher People’s Court of Zhejiang Province (No. 63 [2013] Final, Civ. Division, the Higher People’s Court of Zhejiang Province), it shall be corrected through judicial supervision procedures in accordance with law. The Supreme People’s Court rules as follows: (1) reverse the decision of first instance (No. 1 [2015] Trial, Civ. Division, the Higher People’s Court of Zhejiang Province); (2) dismiss the claims raised by Hu X (A), Hu X (B), Zhou X (A), Jiang X and Zhou X (B).

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Comment on Rule This case is a third-party revocation suit. The third-party revocation litigation system was added to the Civil Procedure Law when it was amended in 2012 under Article 56 of the Civil Procedure Law, Articles 292 to 303 of the Judicial Interpretation on the Application of the Civil Procedure Law also have provisions to that effect. 1. The Subject Qualification of the Third-party Revocation Shall be Strictly Limited The Interpretation of the Civil Procedure Law compiled by the Legislative Affairs Commission of the Standing Committee of the National People’s Congress clearly states that, the subject who has the right to file a third-party revocation should be limited to the third party with or without the right of independent claim as stipulated in Articles 56(1),(2) of the Civil Procedure Law, and other subjects do not meet the qualification requirement.1 The first instance decision of this case expanded the category of the subject of the third-party revocation, holding that if there was malicious collusion between the parties in the original case to carry out a fraudulent litigation, the ordinary creditor could file the third-party revocation as the victim of the fraudulent litigation. Besides, the law clearly stipulates that, the creditor’s rights granted with special protection, including the claims with statutory priority and statutory revocation rights, can also be protected through the lawsuit of the third-party revocation. Whether the opinion is admissible or not is the first key issue that needs to be clarified in this case. If the opinion is not admissible, then, as previously mentioned, the petition raised by Hu X (A) et al. should be dismissed by a ruling, and there is no need to examine whether the settlement is erroneous. The Supreme People’s Court holds after hearing that Hu X (A) et al. are not qualified as the subject to file a third-party revocation suit. First of all, in view of the original case concerning the equity transfer contract dispute, against the litigation subject matter of the original case, Hu X (A) et al. did not enjoy the independent right of claim, and couldn’t constitute the third parties with independent claim rights as provided in Article 56(1) of the Civil Procedure Law. Secondly, whatever the outcome of the original case concerning the dispute over the equity transfer contract between Chen X and Deqing Jinhengkun Real Estate Company, Zhang X and Shen X, Where a petition for retrial filed bythe rights and obligations under the legal relationship of private lending between Hu X (A), et al. and Chen X wouldn’t be affected. Hu X (A), et al., as ordinary creditors in the private lending relationship with Chen X, do have de facto connection with the original concerning whether the creditor’s rights can be realized, which is yet different from the legal interest. In view of the original case, Hu X (A), et al. can’t constitute the third parties without independent claim rights as provided in Article 56(2) of the Civil Procedure Law. 1 参见吴高盛主编: 《

< 中华人民共和国民事诉讼法 > 释义及实用指南》 ,中国民主法制出版 社2012年版,第188页。

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2. The Relief of Fraudulent Litigation and the Improvement of the Third-party Revocation System Judging from the current judicial practice, the third party infringed by the fraudulent litigation lacks channels to file a lawsuit and exercise the litigation rights. In addition to the third-party revocation, according to Article 2272 and Subparagraph 8 of Article 2003 of the Civil Procedure Law, there are two main protection methods to be employed when the rights and interests of third parties (outsiders) are infringed: (1) The application of execution objection system. In accordance with Article 227 of the Civil Procedure Law, the scope of application of the execution objection system is limited to the execution process. If with a decision (settlement) by fraudulent litigation the parties waive the creditor’s right and don’t enter the execution procedure, the infringed outsider cannot then protect his rights in accordance with the above provisions. (2) The application by the outsider for the reopening of the case. In accordance with Article 422 of the Judicial Interpretation on the Application of the Civil Procedure Law, if an outsider applies for the reopening proceedings in accordance with Subparagraph 8 of Article 200 of the Civil Procedure Law, he should be “the party that must take part in the lawsuit concurrently”. Because the fraudulent litigation does not have a substantive legal relationship with the subject matter of the dispute, the third party often does not have the qualification to sue or initiate a reopening proceedings afterwards.4 2 Article

227 of the Civil Procedure Law provides that “In the course of execution, if an outsider raises a written opposition to the execution subject matter, the people’s court shall review it within 15 days from the date of receipt of the written opposition. If the reason is valid, the people’s court shall rule to suspend the execution of the subject matter; If the reason is not valid, the ruling shall be rejected. If the outsider or the party disagrees on such ruling and deems that the trial judgment or ruling is erroneous, the judicial supervision procedure shall apply; or if such disagreement is irrelevant to the trial judgment or ruling, the person or the party may initiate an action in people’s court within 15 days after service of the aforesaid ruling regarding opposition.” 3 Article 200 of the Civil Procedure Law provides that “Where a petition for retrial filed by a party falls under any of the following circumstances, the people’s court shall conduct a retrial: (1) if there is new evidence sufficient to overturn the trial judgment or ruling; (2) the basic facts found in the trial judgment or ruling are not evidenced; (3) the primary evidence admitted in the trial judgment or ruling for facts finding is forged; (4) the primary evidence admitted in the trial judgment or ruling for facts finding are not cross-examined; (5) for objective reasons, a party is unable to gather any primary evidence necessary for the trial of a case and applies in writing for the people’s court to investigate and gather the evidence, but the people’s court did not investigate and collect the evidence; (6) there is any erroneous application of law in the trial judgment or ruling; (7) the composition of the trial organization is illegal or the judges who should be avoided by law failed to do so; (8) the legal representative of a person without competency to participate in the action fails to participate in the action on behalf of the person or a party which shall participate in the action fails to participate in the action, which is not attributable to the fault of the party or the agent ad litem; (9) a party’s right to debate is illegally denied; (10) a default judgment is entered against a party which has not been subpoenaed; (11) the trial judgment or ruling is omitted or exceeds the claims of the parties; (12) the legal instrument on which the trial judgment or ruling is based has been revoked or modified; (13) when trying the case, a judge commits embezzlement, accepts bribes, practices favoritism for personal gains, or adjudicates by bending the law.” 4 参见张兴美: 《第三人撤销之诉原告适格问题研究》 ,载 《法学杂志》 2016年第6期。

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Though the claims by Hu X (A), et al., namely, the plaintiffs of first-instance, should be dismissed in this case (the third-party revocation), in the process of the case hearing, the collegiate panel had reasonable doubts on whether the civil settlement (No. 63 [2013] Final, Civ. Division, the Higher People’s Court of Zhejiang Province) conformed to Article 13 of the Civil Procedure Law, which provides that the “civil proceedings should follow the principle of good faith”,5 and believed that there might exist fraud in the original case. Under such circumstance, because Hu X (A), et al. lacked effective remedies, the court of second instance held that if the original case was indeed erroneous, the people’s court could correct the errors by law through judicial supervision procedures. The principle of litigant’s disposition by litigants has been increasingly emphasized in modern litigation, which makes it easier to provide favorable conditions for false litigation, especially with the strengthened settlement practice by courts. In judicial practice, there exist increasing cases in which both parties use fraudulent litigation to avoid debts, transfer property and escape liability. Due to the strict conditions for the people’s court to reopen cases involving the fraudulent litigation according to its functions and powers, it is difficult to fully protect the rights and interests of the outsiders infringed by the fraudulent litigation by relying solely on this procedure. Under this premise, some scholars have begun to consider including the third party injured by a fraudulent litigation into the class of the subjects of the third-party revocation cases so as to fully protect the legitimate rights and interests of them. According to some studies, the Civil Procedure Law and the relevant provisions of judicial interpretation provide that, the third-party revocation in China refers to “the system in which a third party outside the case applies for the revocation of an effective and erroneous decision, ruling and settlement between others in order to maintain his own civil rights and interests”. From the perspective of the legislative theory, the main purpose of adding the third-party revocation suit in China is to curb dishonest behaviors of improperly using civil judicial procedure, such as fraudulent litigation and malicious litigation. Different from the systems adopted by other countries or regions whose core function is to provide relief for the legitimate rights and interests of the third party or to safeguard the value of procedural protection, the purpose of the third-party revocation suit in China is to prevent and punish malicious litigation, promote the establishment of the good faith mechanism in civil litigation and eliminate the negative effect of the theory of “settlement first”. In the case where the current law strictly restricts the subjects of the third-party revocation, the judicial decision may prevent the claims by outsiders infringed by fraudulent litigation from proper support, which also can’t get effective protection from conventional remedies. Such situation led consequently to the inconsistency between judicial practice and the legislative purpose of the third-party revocation. Although after this Court dismissed the appeal of the parties, the court of second 5 Article 13 of the Civil Procedure Law (2012 Amendment) provides that “Civil proceedings should

follow the principle of good faith. The parties shall be entitled to dispose of their civil rights and litigious rights within the scope prescribed by law.”

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instance instructed the Higher People’s Court of Zhejiang Province to retry the original case through the judicial supervision procedure, the relief provided through reopening proceedings cannot be regarded as a positive way to protect the rights and interests of the outsider infringed by the fraudulent litigation. Therefore, we can consider expanding the class of the subjects of the third-party revocation. For example, in the case of a fraudulent litigation, outsiders other than the two types of third parties as stipulated by law can also file a third-party revocation suit.

Xuefeng Ren Juris Master, senior judge, the Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China.

Zhang X v. Tianjin Hengzeng Real Estate Company, Zhejiang Huanyu Construction Company (Dispute over the Third-party Revocation): Identification Criteria of the Third-party without Independent Right to Claim in a Third-party Revocation Lawsuit Shaojun Fu

Rule The third-party without an independent right to claim in the third-party revocation lawsuit is generally limited into three situations: one is that the party’s civil rights are injured or the exercise of his civil rights is impeded, or he is under the obligation of restitution and compensation under the decision of first instance; the second is that the party has the priority right specially protected by law, that is, the statutory priority; the third is that the party has evidence to prove that there existed fraud in the previous case, causing damage to his interests.

Case Information 1. Parties Appellant (Plaintiff in the First Instance): Zhang X

Collegiate Panel for the Second Instance Trial: Jinsong Jia, Shaojun Fu and Aimei Xie (Edited by Xu Han; translated by Xia Dai) S. Fu (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_29

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Appellee (Defendant in the First Instance): Tianjin Hengzeng Real Estate Development Co., Ltd. (hereinafter referred to as Tianjin Hengzeng Real Estate Company) Appellee (Defendant in the First Instance): Zhejiang Huanyu Construction Group Co., Ltd. (hereinafter referred to as Zhejiang Huanyu Construction Company) 2. Procedural History First Instance: No. 1 [2016] Revocation, Trial, Civ. Division, the Higher People’s Court of Tianjin City (dated Nov. 16 of 2016) Second Instance: No. 13 [2017] Final, Civ. Divison, the Supreme People’s Court (dated Mar. 30 of 2017) 3. Cause of Action Disputes over a third-party revocation

Essential Facts On May 4, 2012, the construction unit, Tianjin Hengzeng Real Estate Company, determined Zhejiang Huanyu Construction Company as the bid-winner of the Bishui Manor Project phase III. On May 7, 2012, the two companies signed the Tianjin Construction Project Construction Contract (hereinafter referred to as the Record Contract), and on May 24, 2012, the contract was submitted to the relevant management for file, and it was agreed upon that Zhejiang Huanyu Construction Company should be in charge of operating the construction of Bishui Manor Project phase III, with the commencement date of May 7, 2012, and the completion date of October 30, 2013, and the contract price of RMB 159,777,866 yuan. On August 21, 2014, the two companies signed the Supplementary Agreement of Bishui Manor Project phase III (hereinafter referred to as the Supplementary Agreement), agreeing that Tianjin Hengzeng Real Estate Company repeatedly breached the contract during the contract performance process and did not pay the project payment as scheduled, and the original agreement thus could not be fulfilled, after the negotiation between the two parties, the original agreement were partially modified with the tentative contract cost of RMB 196 million yuan (excluding Party A’s subcontracting project) and the adjusted commencement date of the project of May 1, 2012, completion date of November 30, 2014. On December 22, 2014, Tianjin Jiantong Engineering Tendering Consulting Co., Ltd. (hereinafter referred to as Tianjin Jiantong Engineering Tendering Consulting Company), an outsider entrusted by Tianjin Hengzeng Real Estate Company, issued the Bishui Manor Project phase III Completion Settlement Audit Report (Hereinafter referred to as the Settlement Audit Report), which stated that the amount of the project settlement report submitted by Zhejiang Huanyu Construction Company was pledged as RMB 272,702,227 yuan, but after the review, the amount was confirmed as RMB 234,042,972 yuan. On January 7, 2015, Tianjin Hengzeng Real Estate

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Company, Zhejiang Huanyu Construction Company, and Tianjin Jiantong Engineering Tendering Consulting Company all signed with seals to verify the Settlement Audit Report under which he above-mentioned audited amount was confirmed. On January 12, 2015, Tianjin Hengzeng Real Estate Company signed a memorandum with Zhejiang Huanyu Construction Company, the main content of which is as follows: In accordance with the Supplementary Agreement and the audit results, the two parties reached a memorandum on the following matters: (1) Both parties confirmed unanimously that the total settlement price of Bishui Manor Project phase III is RMB 234,042,972 yuan. (2) Since Tianjin Hengzeng Real Estate Company repeatedly breached the contract during the performance thereof and did not pay the project payment as agreed, with only the amount of RMB 93.1 million yuan having been paid to Zhejiang Huanyu Construction Company through December 31, 2014, which caused great damage to Zhejiang Huanyu Construction Company. Now Tianjin Hengzeng Real Estate Company promised to pay the project payment according to the following plan: Pay 85% of the aforesaid total settlement price by the Spring Festival of 2015… (3) If Tianjin Hengzeng Real Estate Company still fails to make the payment at maturity, Zhejiang Huanyu Construction Company has the right, upon the occurrence of any overdue payment, to request Tianjin Hengzeng Real Estate Company to pay the entire remaining project payment. At the same time, Zhejiang Huanyu Construction Company and Tianjin Hengzeng Real Estate Company agreed to enjoy the priority creditors’ rights concerning all the unpaid project payments mentioned above out of the evaluated price or auctioned price of the Bishui Manor Project phase III. On April 1, 2015, Zhejiang Huanyu Construction Company issued the reminder letter to Tianjin Hengzeng Real Estate Company on the payment of Bishui Manor Project phase III (hereinafter referred to as the Reminder Letter) as follows: In view of Tianjin Hengzeng Real Estate Company’s failure to pay RMB 70 million yuan for the construction project before the 2015 Spring Festival, in accordance with Article 3 of the Memorandum, Zhejiang Huanyu Construction Company sent a letter to Tianjin Hengzeng Real Estate Company, reminding it as follows: (1) Tianjin Hengzeng Real Estate Company should immediately pay the remaining project payment of Bishui Manor Project phase III. (2) Tianjin Hengzeng Real Estate Company should negotiate with Zhejiang Huanyu Construction Company as soon as possible on the priority payment of the above-mentioned arrears of the project payment out of the evaluated price of the Project. Otherwise, Zhejiang Huanyu Construction Company will recover the project payment through lawsuits, and request to be paid first out of the auction money of this project. On June 19, 2015, Zhejiang Huanyu Construction Company issued a report to Tianjin Hengzeng Real Estate Company and the outsider of the case, namely, Tianjin Binhai New Area Tanggu Project Supervision Company (hereinafter referred to as Binhai New Area Tanggu Project Supervision Company), the main content of which is as follows: Bishui Manor Project phase III has already met the conditions for the filing and acceptance of the project, and should be verified and sealed by Tianjin

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Hengzeng Real Estate Company with its seal of engineering department, and by Binhai New Area Tanggu Project Supervision Company with its special seal of supervision department, and further verified and signed by relevant staffs specified by Tianjin Hengzeng Real Estate Company and Binhai New District Tanggu Project Supervision Company. On July 15, 2015, Tianjin Hengzeng Real Estate Company, Zhejiang Huanyu Construction Company and Binhai New Area Tanggu Project Supervision Company sealed and signed on the On-site Inspection and Acceptance Memorandum, confirming that the project involved basically met the acceptance standards. In June, 2015, Zhejiang Huanyu Construction Company filed a lawsuit with the Higher People’s Court of Tianjin City, requesting that: (1) Tianjin Hengzeng Real Estate Company pay RMB 138,994,172 yuan to Zhejiang Huanyu Construction Company for project payment, as well as liquidated damages and attorney fees. (2) Zhejiang Huanyu Construction Company enjoy the priority claim among the creditor’s rights set out in the preceding item towards the Bishui Manor Project phase III. (3) All litigation costs be borne by Tianjin Hengzeng Real Estate Company. On February 18, 2016, the Higher People’s Court of Tianjin City issued its decision (No. 0018 [2015] Trial, Civ. Division, the Higher People’s Court of Tianjin City) (hereinafter referred to as the case-related decision, the corresponding case is referred to as the No. 0018 case). The “It’s found after hearing” part of the decision identified the main contents of the Record Contract, Supplementary Agreement, memorandum signed between Tianjin Hengzeng Real Estate Company and Zhejiang Huanyu Construction Company, as well as the relevant information as to the contract performance and settlement, which is as follows: “On June 12, 2012, Zhejiang Huanyu Construction Company actually started the project construction. On August 28, 2013, the basic construction quality of the project involved was tested and evaluated as up to the standard. On September 24, 2013, the main project (involved in the lawsuit) passed the quality inspection. By the end of January 2015, the involved project had been basically completed.” Regarding the performance of the project payment, it’s found in the case decision that: “Tianjin Hengzeng Real Estate Company has paid RMB 93.1 million yuan to Zhejiang Huanyu Construction Company. According to the statement submitted on January 22, 2016 by Zhejiang Huanyu Construction Company to the Higher People’s Court of Tianjin City, it’s recognized by Zhejiang Huanyu Construction Company that the two premises provided by Tianjin Hengzeng Real Estate Company (a total amount of RMB 1,948,800 yuan) are treated as the project payment of RMB 1,948,800 yuan to Zhejiang Huanyu Construction Company. The two parties also confirmed before the judge that the total quality warranty deposit for the project involved was RMB 7,021,289.16 yuan (3% of the total construction cost).” In the “It’s held by the Court” part regarding whether Tianjin Hengzeng Real Estate Company owes Zhejiang Huanyu Construction Company the project payment, the reason for the decision is as follows: “the Record Contract signed between Tianjin Hengzeng Real Estate Company and Zhejiang Huanyu Construction Company by means of bidding process is valid. According to the related report and the On-site

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Inspection and Acceptance Memorandum, the project involved has already met the conditions for project completion and acceptance. Moreover, Tianjin Hengzeng Real Estate Company has not raised any objection to the project quality. Based on the finds of facts, it can be concluded that both parties have agreed upon the project arrears owed by Tianjin Hengzeng Real Estate Company to Zhejiang Huanyu Construction Company.” As to the amount of the arrears, the decision set out its reasons as follows: “The memorandum which reaffirmed the rights and obligations between the both parties should be deemed valid. According to the memorandum and the confirmation of the parties after the account verification in court, it can be determined that the amount of the project payment already paid by Tianjin Hengzeng Real Estate Company to Zhejiang Huanyu Construction Company was: RMB 93,100,000 yuan + RMB 1,948,800 yuan = RMB 95,048,800 yuan. Therefore, Tianjin Hengzeng Real Estate Company still owes Zhejiang Huanyu Construction Company the amount of the project payment: RMB 234,042,972 yuan (total construction cost) –RMB 95,048,800 yuan (already paid) = RMB 138,994,172 yuan. In accordance with Article 2 of the Memorandum, the first payment of Tianjin Hengzeng Real Estate Company should be made before the Spring Festival of 2015 (February 19, 2015). Up to this litigation, Tianjin Hengzeng Real Estate Company hasn’t performed its payment obligations under the contract. In accordance with Article 3 of the Memorandum, Tianjin Hengzeng Real Estate Company should pay Zhejiang Huanyu Construction Company all the arrears in the amount of RMB 138,994,172 yuan.” Regarding the issue of priority claim for project payment, the reasoning part of the decision first elaborated the provisions of the Contract Law and relevant judicial interpretations regarding the priority claim, and then further argued that: “In this case, the parties first signed the Record Contract. Then in the process of contract performance, due to the changes regarding the basis of contract performance, the two parties signed the Supplementary Agreement, which is a modification to the Record Contract, and thus should be accepted as valid. The Supplementary Agreement stipulates that the completion date of the project involved is November 30, 2014. Both parties agreed upon the issue of project settlement on January 9, 2015, and signed the Memorandum on January 12, 2015, modifying the previous agreement on the issue of payment, and reaching a new agreement on the priority claim for the project payment. On April 1, 2015, Zhejiang Huanyu Construction Company issued a Reminder Letter to Tianjin Hengzeng Real Estate Company to urge the project arrears, and clearly advocated the priority claim for the project payment. In June 2015, Zhejiang Huanyu Construction Company sued to the Higher People’s Court of Tianjin City, expressly asserting its priority claim in the construction project payment. Both parties now agree that the project involved meets the requirements for completion and acceptance. In summary, Zhejiang Huanyu Construction Company has claimed its priority claim for the project payment within the statutory time limit, and shall be determined to enjoy the priority claim for the project payment.” The main text of the case decision states that: “(1) Tianjin Hengzeng Real Estate Development Co., Ltd. shall, within 10 days from the effective date of this decision, pay RMB 138,994,172 yuan to Zhejiang Huanyu Construction Group Co., Ltd., with the liquidated damages calculated on RMB 138,994,172 yuan from February

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20, 2015 to the date of payment determined by this decision with an annual rate of 10%; (2) Zhejiang Huanyu Construction Group Co., Ltd. enjoys the priority claim for the project payment of the Bishui Manor Project phase III within the amount of RMB 138,994,172 yuan; (3) Other claims of Zhejiang Huanyu Construction Group Co., Ltd shall be dismissed.” Zhang X claimed that the decision involved was erroneous and damaged his legitimate mortgage right, which was created by Tianjin Hengzeng Real Estate Company on the construction project under construction (the Bishui Manor Phase III) for the loans borrowed by the outsider Xu X from Zhang X in the amounts of RMB 44.5 million yuan and RMB 84.5 million yuan. According to the two conciliation statements (No. 293 [2014], No. 294 [2014]) of the Tianjin Arbitration Commission presented by Zhang X, Tianjin Hengzeng Real Estate Company assumes the mortgage guarantee obligation first for Xu X’s debts and then assumes the joint guarantee obligation. Under the Tianjin Real Estate License No. 43048131126008 and No. 43048131126000 presented by Zhang X, the collateral involved is determined as Bishui Manor Building No. 29/30, and the Bishui Manor Phase III include Building 29 and Building 30 of Bishui Manor. Plaintiff Zhang X filed a lawsuit with the Higher People’s Court of Tianjin City, requesting the court to: (1) reverse the case-related decision. (2) order the two defendants to assume the relevant litigation costs in this case. The Higher People’s Court of Tianjin City held that, based on the litigation assertions of the parties, the issue in this case could be identified as: Whether Zhang X’s request to reverse the case-related decision is acceptable or not. The Higher People’s Court of Tianjin City held that Zhang X’s claim that the judgment involved was erroneous and lacked factual and legal basis. The Higher People’s Court of Tianjin City thus didn”t support it and dismissed Zhang X’s claim in accordance with Article 56 (3) of the Civil Procedure Law, Article 292 of the Judicial Interpretation on the Application of the Civil Procedure Law. Dissatisfied with the first instance decision of the Higher People’s Court of Tianjin City, Zhang X appealed to the Supreme People’s Court, asking the court: (1) to reverse the decision of first instance (No.1 [2016] Revocation, Civ. Division, the Higher People’s Court of Tianjin City), remand the case to the Higher People’s Court of Tianjin City for a new trial, or modify the decision in favor of the assertions filed by the appellant in the first instance litigation. (2) to order the appellees to assume the litigation costs of the first and second instance.

Issue Whether Zhang X is qualified as the third person to file a revocation suit against No.0018 Case.

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Holding The Supreme People’s Court holds that, in accordance with Article 56 of the Civil Procedure Law, the subject of the third-party revocation suit must be the third party with independent claims or without independent claims in the first and second litigations. 1. Zhang X is Not the Third Party with Independent Claim Zhang X is not the client of the involved Bishui Manor Project phase III, nor is it the contractor or the architect. Besides, the outcome of No. 0018 case doesn’t involve the private lending relationship between Zhang X and Tianjin Hengzeng Real Estate Company, and doesn’t dispose of any rights enjoyed by Zhang X in the private lending relationship, so, Zhang X doesn’t have any independent claim in rem for the underlying project in No. 0018 case, and is not the third person with independent claim in No. 0018 case. 2. Zhang X is Not a Third Party without Independent Claim A third party without an independent claim is generally limited to three situations: First, the civil rights of the parties are infringed or the exercise of such civil rights is impeded, and the parties are under the obligation of restitution or compensation under the previous decisions; second, the parties have a priority right with special protection by law called statutory priority; third, the parties have evidence to prove that there existed fraud in the previous litigations, causing damage to their interests. Firstly, in the arbitrations handled by the Tianjin Arbitration Commission (No. 293 [2014] Mediation, No. 294 [2014] Mediation), Zhang X and Tianjin Hengzeng Real Estate Company had a private lending relationship between them. In No. 0018 case, Tianjin Hengzeng Real Estate Company and Zhejiang Huanyu Construction Company have a construction contracting relationship with no any legal connection therebetween. The parties’ exercise of rights and performance in the litigation of the construction project contract does not affect, either directly or indirectly, the parties’ exercise of rights and performance in private lending. Secondly, it is determined under Article 1 of the Official Reply on the Priority of Claim for the Construction Project Price that the priority of the contractor of the construction project is superior to the mortgage right and other creditors’ rights. The mortgage right enjoyed by Zhang X for the involved project does not constitute the civil rights and interests that should be protected by means of the third-party revocation lawsuit as prescribed in Article 56 of the Civil Procedure Law. Finally, in this case, Zhang X asserted that Tianjin Hengzeng Real Estate Company and Zhejiang Huanyu Construction Company maliciously colluded in raising the price of the construction project in order to avoid their legal debts towards Zhang X. However, Zhang X did not provide evidence to support his claim, so his appeal grounds cannot stand. To sum up, Zhang X is not qualified as the third party to file the third-party revocation lawsuit against the outcome of No. 0018 case. The first-instance decision

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is erroneous in the application of law and should be corrected. In accordance with Article 330 of the Judicial Interpretation on the Application of the Civil Procedure Law, it’s ruled as follows: (1) reverse the first instance decision (No. 1 [2016] Trial, Civ. Division, the Higher People’s Court of Tianjin City); (2) dismiss Zhang X’s appeal.

Comment on Rule The core issue of this case is how to understand the term “third party” who has no independent claim as provided in Article 56 (2) of the Civil Procedure Law, which hasn’t so far been expressly defined either by law or judicial interpretations. In accordance with the Civil Procedure Law, the Judicial Interpretation on the Application of the Civil Procedure Law, the Provisions of the Supreme People’s Court on the Strict Implementation of the Civil Procedure Law of the People’s Republic of China in Economic Trial Work (Expired), the Guidance for Prevention and Sanction of Sham Litigation, etc., the third parties without independent claim are determined under three circumstances: firstly, the civil rights of the parties are infringed or the exercise of such civil rights is impeded, and the parties are under an obligation of restitution or compensation under the first instance decision; secondly, the parties have priority rights specifically protected by law called statutory priority; thirdly, the parties have evidence to prove that there is a false litigation in the previous case, causing damage to their interests. 1. Legal Stakes If the legitimate rights and interests of the parties are infringed, or the parties are impeded in exercising their rights by law, or the parties are judged to bear civil liability such as restitution or compensation in the previous case, the party may be deemed to have a legal connection with the outcome of the previous case. In this case, No. 0018 case resolved the dispute over the project payment between Tianjin Hengzeng Real Estate Company and Zhejiang Huanyu Construction Company, which did not damage Zhang X’s legitimate rights and interests in the private lending relationship, nor did it hinder Zhang X in exercising his rights. Besides, Zhang X was not ruled to bear any civil liability, thus Zhang X had no legal connection with the No. 0018 case. 2. Statutory Priority Where the parties have priority rights specifically protected by law called statutory priority, he can file the lawsuit of third-party revocation, which mainly includes: (1) the statutory priority claims as stipulated in the law, such as the project payment priority right under Article 286 of the Contract Law, the maritime lien under Articles 21 and 22 of the Maritime Law. (2) the creditor’s right that enjoys the statutory revocation right, such as the right of creditors’ revocation as provided in Article 74

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of the Contract Law, and the right of revocation of bankruptcy claims as provided in Articles 31 and 32 of the Enterprise Bankruptcy Law, etc. Under any of the following circumstances, any person shall not be regarded as a third-party without independent claim: (1) The party with ordinary creditor’s rights, who normally can’t be protected by means of the third-party revocation lawsuit, unless special protection is stipulated under the above-mentioned laws. (2) Whoever has no direct connection with the disputed subject matter in the case and is under no obligation of restitution or compensation, and the outsiders who have agreed with the plaintiff or defendant upon arbitration or jurisdiction, or any party to the case with exclusive jurisdiction. (3) In the case of product quality disputes, any person other than the plaintiff or the defendant who has been proved with solid evidence to have provided the contracted products or products up to legitimate standard, or the parties to the case who did not raise objection within the prescribed quality objection period, or the consignee who has already recognized the quality of the product. (4) Any person other than the plaintiff or the defendant who has fulfilled his obligations, or obtained the property of a party by law and paid the corresponding consideration. In this case, Zhang X had the mortgage right over the involved project, which was an ordinary claim, and in accordance with Article 286 of the Contract Law, and Article 1 of the Official Reply on the Priority of Claim for the Construction Project Price which states that “The project payment priority right enjoyed by the contractor is superior to the mortgage right and other claims”, the project payment priority right is a statutory priority, that is, when the mortgage right of Zhang X and the project payment priority right of Zhejiang Huanyu Construction Company are against the identical subject matter, the project payment priority right may have de facto influence on the civil rights and interest enjoyed by Zhang X. However, such effect on the ordinary creditors is not the legal interest relationship under the protection of third-party revocation lawsuit as specified in Article 56 of the Civil Procedure Law. If ordinary creditors who are under de facto influence in the first instance decision are allowed to file a third-party revocation lawsuit, a large number of similar litigation will surely arise, which will cause chaos to litigation order, bring burden of unnecessary litigations to the parties, and further impair transaction security and social order, as well as undermine the res judicata and authority of the effective decision, which obviously goes against the ultimate purpose of the third-party revocation lawsuit mechanism. 3. Prevention of and Relief against False Litigation Article 10 of the Guidance for Prevention and Sanction of Sham Litigation stipulates that, during the litigation of the third-party revocation petition, of an outsider’s execution objection, and of application by an outsider for reopening, if the effective decision constitutes a false litigation, it must be corrected in a timely manner to

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protect the outsider’s litigation right and other substantive rights; Meanwhile, it is necessary to prevent the relevant personnel from taking advantage of the aforesaid legal system to create false litigation and do harm to the legitimate interests of the rights holders in the original lawsuit. As an exception to the rule that ordinary creditors normally are not allowed to bring a third-party revocation lawsuit, in order to effectively protect the outsider’s litigation right and other substantive rights, ordinary creditors may file a third-party revocation lawsuit if there is evidence to prove that there exists a false litigation. It is, however, also necessary to prevent outsiders from taking advantage of the third-party revocation lawsuit to do harm to the interests of legal rights holders in the original lawsuit. In this regard, if the party files a revocation action on the ground of the existence of false litigation, he must provide preliminary evidence to prove the existence thereof, namely, the preliminary evidence specifically in line with the various situations listed in Article 2 of Guidance for Prevention and Sanction of Sham Litigation, which is as follows: (1) the parties are close in their relationships, such as husband and wife, friends, or share common interests, such as affiliated companies; (2) the amount of the subject matter claimed by the plaintiff for judicial protection is seriously inconsistent with his own economic status; (3) the facts and grounds on which the plaintiff filed his action is obviously inconsistent with common sense; (4) there is no substantive dispute over civil rights between the parties; (5) even without insufficient evidence, the both parties still voluntarily reached a mediation agreement in a timely manner and request the people’s court to issue a settlement. In this case, Zhang X asserted that Tianjin Hengzeng Real Estate Company and Zhejiang Huanyu Construction Company maliciously colluded to avoid their legal debt towards him by means of raising the project price without proper reason.However, he failed to provide evidence to support his claim, therefore, the grounds for his appeal are not admissible.

Shaojun Fu Doctor of Laws, senior judge, the First Civil Division of the Supreme People’s Court of the People’s Republic of China.

Henan Shenquanzhiyuan Industrial Development Co., Ltd., and Zhao X v. Ruzhou Boyi Sightseeing and Medical Theme Park Development Co., Ltd., Yan X, etc. (Supervision on Enforcement of the Decision on Private Lending Dispute): Balance and Protection of Parties’ Interests in Paying-a-debt-in-kind-assets Cases Guohui Xiang

Rule 1. In the special case where the execution procedure of the whole case shall be terminated on the date of the service of the ruling of the paying-a-debt-in-kind-assets, the determination of whether the objection raised by the parties and interested parties against the ruling of the paying-a-debt-in-kind-assets exceeds the time limit should be subject to the related limitation provisions under the Official Reply on Issues about the Time Limit for Filing an Objection to the Termination of Enforcement by the People’s Courts. 2. Although the execution court has consolidated the relevant cases into a single execution, the priority order should be determined in line with the order by which the original executor applied for the seizure procedure according to the corresponding claims, so as to avoid infringing on the interests of other priority creditors. 3. The rule of integrated premises seizure shall come into effect when the housing and land seizure procedures are not processed separately. If the court only registers the land use rights seizure but does not register the affiliated ground building Enforcement Supervision Collegiate Panel: Guohui Xiang, Yiquan Mao and Yan Zhu (Edited by Yi Yang; translated by Xia Dai) G. Xiang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_30

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seizure, or vice versa, the case where the court later registers the ground buildings seizure or the land use rights seizure which were not formerly registered shall only be regarded as waiting for seizure.

Case Information 1. Parties Petitioner (Applicant for Enforcement): Henan Shenquanzhiyuan Industrial Development Co., Ltd. (hereinafter referred to as Henan Shenquanzhiyuan Industrial Company) Applicant for Enforcement: Zhao X Enforcee: Ruzhou Boyi Sightseeing and Medical Theme Park Development Co., Ltd. (hereinafter referred to as Ruzhou Boyi Development Company) Enforcee: Yan X Enforcee: Sun X Interested Party: Liu X Interested Party: Wang X 2. Procedural History Objection to Enforcement: No. 27, 29, 30 [2017] Enforcement Objection, Enforcement Division, the Intermediate People’s Court of Pingdingshan City, Henan Province (Henan 04) (dated May 2 of 2017) Review of Enforcement: No. 148, 149, 158 [2017] Enforcement Review, Enforcement Division, the Higher People’s Court of Henan Province (dated Mar. 30 of 2018) Supervision over Enforcement: No. 848, 847, 845 [2019] Enforcement Supervision, Enforcment Division, the Supreme People’s Court (dated Mar. 19 of 2019) 3. Cause of Action Disputes over private lending

Essential Facts During the execution by the Intermediate People’s Court of Pingdingshan City, Henan Province of the four private lending cases concerning the execution application against Ruzhou Boyi Development Company, Yan X, Sun X by Chen X,

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Guo X, Chun X and Jia X, the original executors, namely, Chen X, Guo X, Chun X and Jia X, transferred separately, in accordance with effective decisions, to Henan Shenquanzhiyuan Industrial Company their creditor’s rights against Ruzhou Boyi Development Company, Yan X and Sun X. The court, upon the application of Henan Shenquanzhiyuan Industrial Company, reached its execution ruling on April 4, 2017 {No.57-4 [2016] Enforcement, Henan Province (Henan 04)}, confirming Henan Shenquanzhiyuan Industrial Company as the only legal application executor of the aforesaid four cases, with the total creditor’s right in the amount of RMB 129,605,303.59 yuan (including the principal, the interest thereon and other expenses), and consolidating the four cases into a single execution. From 10:00 am on April 1st, 2017 through 10:00 am on April 2nd, 2017, the Intermediate People’s Court of Pingdingshan City, Henan Province held an auction on Taobao for part of the land use rights enjoyed by Ruzhou Boyi Development Company (No. 0069 [2013], National Land, Ruzhou City,) and some of the ground buildings, with the auction reserve price in the amount of RMB 177,922,700.00 yuan, which failed because no one participated in bidding. Afterwards, Henan Shenquanzhiyuan Industrial Company applied for paying-a-debt-in-kind-assets out of the abortively auctioned property (except the hot spring hotel within the plot B14-03). As to the project payment owed by the bankruptcy administrator of Ruzhou Boyi Development Company toward the architect, Henan Shenquanzhiyuan Industrial Company and its shareholders, namely, Chen X, Guo X, Chun X and Jia X, issued a commitment letter to the Intermediate People’s Court of Pingdingshan City, Henan Province, promising to return the project payment after the final accounting of the architect. Because the outsider of the case, namely, Ruzhou Jishiyu Economic Management Service Co., Ltd. (hereinafter referred to as Ruzhou Jishiyu Economic Management Service Company), filed an execution objection concerning the No. 1 residential building in the list of abortively auctioned property, the Intermediate People’s Court of Pingdingshan City, Henan Province reached its execution ruling on April 4, 2017 {No. 57-5 [2016] Enforcement, Henan Province (Henan 04)}, ordering to“ transfer all the remaining abortively auctioned property except the hot spring hotel and No. 1 residential building, in the form of paying-a-debt-in-kind-assets, to Henan Shenquanzhiyuan Industrial Company at the reserve price of RMB 153,073,614.00 yuan. And the project payment owed by Ruzhou Boyi Development company toward the architect shall be returned by Henan Shenquanzhiyuan Industrial Company and its shareholders, namely, Chen X, Guo X, Chun X, Jia X, after the final accounting of the architect. Zhao X, Liu X and Wang X raised an objection with the Intermediate People’s Court of Pingdingshan City, Henan Province, and the court reached its execution ruling {No. 27, 29, 30 [2017] Enforcement Objection, Henan Province (Henan 04)}, dismissing the objection. Zhao X et al. applied to the Higher People’s Court of Henan Province for review, and the court reached its execution ruling (No. 148, 149, 158 [2017] Enforcement Review, the Higher People’s Court of Henan Province), reversing the execution rulings of the Intermediate People’s Court of Pingdingshan City, Henan Province

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{No.27, 29, 30 [2017] Enforcement Objection, Henan Province (Henan 04); No.57–5 [2016] Enforcement, Henan Province (Henan 04)}. Henan Shenquanzhiyuan Industrial Company petitioned to the Supreme People’s Court, asking the court to reverse the objection and the review ruling, and uphold the execution ruling by the Intermediate People’s Court of Pingdingshan City, Henan Province (No.04-57-5 [2016], Execution Ruling, Henan Province).

Issues 1. Whether the objection to the paying-a-debt-in-kind-assets ruling exceeds the statutory time limit; 2. Whether the paying-a-debt-in-kind-assets ruling damages the interests of other creditors with the priority in seizure order; 3. Whether the paying-a-debt-in-kind-assets ruling will lead to inconsistency between the ownership of land and housing.

Holding After hearing, the Supreme People’s Court holds that: 1. The Question of Whether the Objection to the Paying-a-debt-in-kind-assets Ruling Exceeds the Statutory Time Limit The case where the paying-a-debt-in-kind-assets ruling is issued before the issuance the notice of case closure constitutes a general execution, and the objection to such ruling should be raised prior to the completion of the execution procedure. However, in the special case where the execution procedure shall be terminated on the date when the paying-a-debt-in-kind-assets ruling is served, when considering whether the objection raised by the parties and interested parties to the ruling exceeds the statutory time limit, it is more justifiable for the court to refer to the provisions to that effect of the Official Reply on Issues about the Time Limit for Filing an Objection to the Termination of Enforcement by the People’s Courts. According to the findings of this case, it’s on April 13, 2017 that the execution court received the execution objection petition from Zhao X the execution objection petition from Liu X and Wang X on April 25, 2017, and the execution objection petition from Ruzhou Boyi Development Company on April 14, 2017. Since the paying-a-debt-in-kind-assets ruling was issued on April 4, 2017, it is evident that the execution objection was filed within the prescribed 60-day period. So, it is not inappropriate for the Intermediate People’s Court of Pingdingshan City, Henan Province to hear the objection petition. 2. The Question of Whether the Paying-a-debt-in-kind-assets Ruling Damages the Interests of Other Creditors with the Priority in Seizure Order

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Although the cases filed by the four parties, namely, Chun X, Jia X, Chen X and Guo X, were consolidated by the execution court, the compensation priority order among the parties should be determined according to the time sequence by which they applied for the seizure procedure on their corresponding claims. Because Henan Shenquanzhiyuan Industrial Company has acquired the creditor’s rights formerly enjoyed by Jia X, Chun X, Chen X and Guo X, the Intermediate People’s Court of Pingdingshan City, Henan Province ruled to transfer all the involved properties to Henan Shenquanzhiyuan Industrial Company to offset the debt, in which case the compensation order of the creditor’s rights enjoyed by Jia X and Chun X’s was de facto prioritized, consequently affecting the legitimate rights and interests of those creditors who enjoyed a more favorable position in waiting for seizure. 3. The Question as to Whether the Paying-a-debt-in-kind-assets Ruling Will Lead to Inconsistency between the Ownership of Land and Housing It has been established under the Property Law the principle of integrated disposition of land use rights, and ground buildings, structures and other affiliated facilities, which should be conformed with by the people’s court in disposing of relevant properties in execution procedures by concurrently disposing of the land use rights together with ground buildings and structures. The Higher People’s Court of Henan Province held that, it was not inappropriate for the Intermediate People’s Court of Pingdingshan City, Henan Province to reach the paying-a-debt-in-kind-assets ruling which would result in inconsistency between the owner of the partial buildings not paid to Henan Shenquanzhiyuan Industrial Company to offset the debt, and the land use right holder of the land on the surface of which the building was constructed. 4. Only the Offset of the Debt with Properties in Whole after the Auction is Aborted is in Line with the Spirit of Paying-a-debt-in-kind-assets The offset of the debt with the partial property will lead to the inconsistency between such properties and the original object of auction. In this case, the execution court therefore held an auction for the involved properties as a whole. The opinion of Henan Shenquanzhiyuan Industrial Company that the partial property without reasons for revocation should be transferred to offset the debt should not be adopted. In summary, the court rules to dismiss the appeal of Henan Shenquanzhiyuan Industrial Company.

Comment on Rule 1. Strengthen the Procedural Guarantee for the Right of Objection It is one important procedural right for the parties to object to illegal executions. The execution court and its superior court can, through the execution objection review and the review application made against the objection ruling, review the legality of the execution and correct the illegal execution in a timely manner. The rules providing

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for objection and other rights seek to rectify the illegal execution in a timely manner, ensure the procedure in line with law, and fully protect the legitimate rights and interests of the parties and other interested parties, which is essentially a procedural execution remedy.1 Meanwhile, for the purpose of ensuring the interests of other parties, improving the execution efficiency, and stabilizing the execution procedure, the time requirements for the parties and interested parties to raise objection should also be clarified. In accordance with Article 6 (1) of the Rules on Several Issues about Objection to Enforcement and Review Cases, and the Official Reply on Issues about the Time Limit for Filing an Objection to the Termination of Enforcement by the People’s Courts, the time limit of raising objection by the parties and interested parties includes that: (1) any objection to the general execution shall be filed before the termination of the execution procedure; (2) any objection to the termination of the execution shall be filed within 60 days from the date of the service of the execution termination document; anyone who doesn’t receive the document may raise his objection within 60 days from the day when he knows or should have known of the termination of the execution. In accordance with Article 15 (2) of the Opinions on Several Issues About Filing and Concluding the Enforcement Cases, a notice of case closure shall be made and served on the parties upon the termination of the execution. Where both parties verify in writing the termination of the execution, or verbally verify the same with a transcript for record, there is no need to produce a notice of case closure. Such notice of case closure shall function as the legal document for the termination of the execution. Correspondingly, the case where the paying-adebt-in-kind-assets ruling is issued before the issuance of the notice of case closure is regarded as a general execution, and the objection to the paying-a-debt-in-kind-assets ruling should be raised prior to the termination of the execution procedure. On the same day when the paying-a-debt-in-kind-assets ruling was issued, the Intermediate People’s Court of Pingdingshan City, Henan Province served the ruling on Henan Shenquanzhiyuan Industrial Company, which immediately brought about the legal effect of the property rights transfer, the execution procedure of offset land and buildings being terminated. However, the termination of the execution against a specific subject matter is different from that of the entire case. Prior to the execution termination of the whole case, the parties and interested parties can still file an execution objection. In the special case where the execution of the entire case is terminated on the date of the service of the paying-a-debt-in-kind-assets ruling, if the objection to the paying-a-debt-in-kind-assets ruling is not allowed due to the termination of the execution proceedings, the parties to the case and other interested parties will be deprived materially of their right to object to the paying-a-debt-inkind-assets ruling, which is essentially a statutory right of objection enjoyed by them, and is inconsistent with the spirit of protecting the right of objection by law. Therefore, in the special case where the execution of the entire case is terminated on the date of the service of the paying-a-debt-in-kind-assets ruling, when reviewing whether the objection raised by the parties to the case and other interested parties against the Ruling exceeds the time limit, it is more justifiable for the court to refer 1 参见肖建国主编: 《民事执行法》 ,中国人民大学出版社2014年版,第196页。

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to the provisions to that effect of the Official Reply on Issues about the Time Limit for Filing an Objection to the Termination of Enforcement by the People’s Courts.2 2. Consolidated Execution Cannot Change the Order of Execution Regarding the execution order, in accordance with Article 88 (1) of the Rules on Several Issues about People’s Courts’ Enforcement Work (Trial), if multiple creditors apply for the execution against the same person, and each creditor has no security interest in the subject matter of execution, they should be compensated according to the time order of the execution measures adopted by the execution court. The term “consolidated execution” is not a strict legal concept, but just a common practice. Cases with the same executed person handled by different judges are normally handed over to a single judge to for the investigation, evaluation, disposal and distribution of the property in a unified manner. The consolidated execution plays a significant role in strengthening the execution management and centralizing the execution resources, but it shall not impair the legal status and compensation order of the parties thereto. 3. Principles of Determining the Order of Seizures It’s argued that the order of land seizure and housing seizure should be determined separately, with as its legal basis Article 9 (2) of the Rules for the People’s Courts to Seal up, Distrain and Freeze Properties in Civil Enforcement, which states that “in the case of the seizure of registered property, the relevant registration authority shall be notified to handle the registration procedures; any seizure without registration procedure can’t stand against the seizure with it”, and Article 23 (2),which states that “If the registration authority for the ground buildings and the land use right are not the same one, the seizure registration shall be handled separately”. The petitioner in this case also holds such view, asserting that Chen X and Guo X are the first and second order seizure applicants, and Chun X and Jia X rank first and second the seizure of the buildings and structures. It’s found in this case that, although Jia X applied to the execution court for measures to be taken to seize the headquarters building of the operator of the involved B29 plot, the land use rights of the land on the surface of which the building was constructed have already been seized. The Higher People’s Court of Henan Province has also expressed clear opinions on the principle of determining the order of seizures in related cases. For instance, the Supreme People’s Court stated in its execution ruling (No. 204 [2016] Enforcement 2 There is a view that exceeding the time limit of opposition to execution actions does not mean that

the parties or interested parties have lost the remedy to correct the execution violations, and they can still appeal to the execution court or the superior court; The court initiated the implementation of supervision procedures to review. See Jiang Bixin and Liu Guixiang, edited by the Executive Bureau of the Supreme People’s Court: Understanding and Application of the Supreme People’s Court’s Regulations on Several Issues Concerning the Handling of Execution Opposition and Review Case of the People’s Courts, People’s Court Press, 2015, p. 87. According to this view, even if it does not refer to the spirit of the Reply on the Issue of the Time Limit of Opposition for the Execution Termination of People’s Court to handle opposition under special circumstances, it seems that the parties have paths for relief, but the implementation of supervision procedures is an unconventional remedy, which cannot replace the statutory and conventional relief for the parties, otherwise the protection of the parties’ procedural rights is still insufficient.

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Supervision, Enforcement Division, the Supreme People’s Court) that, under Article 23 (1) of the Rules for the People’s Courts to Seal up,Distrain and Freeze Properties in Civil Enforcement, “The legal effect on the ground building seizure also works on the land use rights of the land on the surface of which the ground building is constructed, vice versa, unless the land use rights and the ownership of the ground buildings belong separately to the executed person and another person.” Although it’s also provided under Paragraph 2 of this article that, “if the registration authorities for the ground buildings and the land use right are not the same one, the seizure registration should be handled separately”, the purpose of which is to require the execution court to improve the execution measures, implementing proper publicity procedure, and the failure to handle the seizure registration separately will not affect the effect of the seizure. The effective ruling follows the effective principles of integrated premises seizure when the seizure procedures of the building and land are not handled separately and The Supreme People’s Court reiterated this principle in the letter to the Higher People’s Court of Ningxia Hui Autonomous Region (No. 10 [2018]).There is no contradiction between Article 23 and Article 9 (2) of the Rules for the People’s Courts to Seal up, Distrain and Freeze Properties in Civil Enforcement which provides that “the seizure, detainment and freezing action without registration shall not prevail over those with registration”. In the case where the court only registered the seizure of the land use rights but not the ground buildings, or vice versa, even if other courts registered afterwards the seizure of the ground buildings or land use rights which hadn’t been registered, it can only be treated as waiting for seizure. According to what’s stated above, the land use rights of the relevant building and the underlying land enjoyed by Jia X both constitute the waiting for seizure. Although Chen X and Guo X only took seizure measures against the land use rights, pursuant to the provision that the legal effect of the seizure of the land use rights also works on the ground buildings, the seizure order of the involved buildings enjoyed by Chen X and Guo X should be the same as that of the land use right. Though the execution court consolidated the cases of different parties, namely, Chun X.Jia X, Chen X and Guo X, it should still determine the compensation order among the parties according to the time sequence by which they applied for the seizure on their corresponding claims. 4. The Relationship between the Overall Auction and Partial Offset Henan Shenquanzhiyuan Industrial Company claims that, although in the paying-adebt-in-kind-assets ruling issued by the Intermediate People’s Court of Pingdingshan City, Henan Province, there exists ambiguous expression, and different perceptions and argument concerning whether partial properties can offset the debt, those offset property determined by verification with no reasons for revocation should be owned by Henan Shenquan Zahiyuan Industrial Company from the effective date of the debt-in-kind ruling by the Intermediate People’s Court of Pingdingshan City, Henan Province. Regarding this issue, it is generally believed that it is in conformity with the provision of debt-in-kind to offset the debt with the premises as a whole after the overall auction failed. The case of offset by partial property may bring about

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the inconsistency between the offset partial property and the original object of the auction. In order to fully display the value of the partial property and protect the interests of all parties fairly, under the premise that the property is divisible, if there is need to dispose of some of the property, it is advisable to determine the reference disposal price for the partial property through re-evaluation and arrange another auction, rather than directly offset the debt with the partial property after the overall auction failed.3

Guohui Xiang Doctor of Laws, senior judge, Enforcement Bureau of the Supreme People’s Court of the People’s Republic of China.

3 The opinion of the Supreme People’s Court in a similar case: in the case that the overall evaluation

price of Sanzhou Building is far beyond the amount of the execution target, and it can be evaluated in sections and handled in layers, the overall auction should not be conducted. In view of the fact that the executed party had no opposition to the overall evaluation and auction at that time, the overall auction was not inappropriate. However, after the overall auction failed, the entire building should be paid off to meet the spirit of debt-in-kind provisions with the approval of the execution appellant. Debt-in-kind with some of the floors is already different from the original auction target.

Beijing Avic Zhicheng Technology Co., Ltd. v. Shenzhen Feipengda Refined Manufacturing Co., Ltd. (Dispute over Copyright Infringement): Miniature Works in the Original Proportion Do Not Constitute Model Works Rong Li

Rule 1. Works protected by China’s Copyright Law must meet the following three requirements at the same time: (1) they must belong to the intellectual creation in the fields of literature, art and science; (2) they must be original; and (3) they can be reproduced in tangible forms. The originality of a work means that the author has invested some intellectual labor in creating the work, enabling the work to exhibit the minimum amount of creativity, and the work is independently conceived and completed by the author, which can demonstrate the spiritual labor and intellectual decision of the author. 2. In the case of copyright infringement of model works, the first thing for the people’s court is to determine the basis of rights that the obligee requires for protection. When the obligee claims to protect the miniature model reduced from the original proportion, the said model shall not be protected by the Copyright Law because of the absence of originality as copies from the original. 3. China’s Copyright Law only protects the expression of works, and the said law does not extend to ideas, craftsmanship, operating methods or mathematical concepts. The expression protected by the Copyright Law shall be intellectual achievements with aesthetic significance in literary, artistic and scientific ways, while the practical and functional expressions to meet people’s actual needs will not be protected. Collegiate Panel: Dian Luo, Rong Li and Xiurong Ma (Edited by Wenyan Ding; translated by Lin Sun and Yi Zheng) R. Li (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_31

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Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Shenzhen Feipengda Refined Manufacturing Co., Ltd. (hereinafter referred to as the Feipengda Company) Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Beijing Avic Zhicheng Technology Co., Ltd (hereinafter referred to as the Avic Zhicheng Company) 2. Procedural History First Instance: No. 7 [2013] Trial, Civ. Division, the First Intermediate People’s Court of Beijing City (dated Feb. 20 of 2014) Second Instance: No. 3451 [2014] Final, IP. Division, the Higher People’s Court of Beijing City (dated Feb. 5 of 2015) Application for Reopening the Case: No. 353 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 29 of 2017) 3. Cause of Action Dispute over copyright infringement

Essential Facts On November 16, 2007, Avic Zhicheng Company obtained the copyright to manufacture and sell the “J-10” aircraft model from Avic Chengdu Aircraft Design & Research Institute (hereinafter referred to as Avic CADI). On September 1, 2011, Avic Zhicheng Company purchased the sued infringing product, the “J-10” aircraft model manufactured and sold by the Feipengda Company with notarization. Avic Zhicheng Company in the first instance trial claimed that the authorized “J-10” aircraft model was reduced from the real “J-10” aircraft in equal proportion, and asserted that the model manufactured and sold by the Feipengda Company has infringed the copyright of its “J-10” aircraft artistic work, and the copyright of the “J-10” aircraft design drawing as a graphic work and artistic work. So, it requested the court of first instance to order that (1) the Feipengda Company immediately stop manufacturing and sell the sued infringing products and destroy all molds, equipment, products and semi-finished products in inventory; (2) the Feipengda Company publicly apologize on China Aviation News to eliminate negative influence; (3) the Feipengda Company compensate for the economic loss of RMB 5 million yuan to Avic Zhicheng Company; and (4) the Feipengda Company compensate for the

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reasonable expenses of RMB 33,360 yuan that the Avic Zhicheng Company paid for the case. On February 20, 2014, the court of first instance rendered the civil decision numbered No. 7 [2013] Trial, Civ. Division, the First Intermediate People’s Court of Beijing City, in which the court rejected all claims made by the Avic Zhicheng Company. Avic Zhicheng Company filed an appeal against the decision of the first instance. During the second instance, Avic Zhicheng Company only claimed that its “J-10” aircraft is an artistic work and the “J-10” aircraft model is a model work, and asserted that the “J-10” aircraft model was produced before the birth of “J-10” aircraft, of which the first flight was in March 1998, thus shall be protected. The court of second instance held that the “J-10” aircraft did not constitute an artistic work, but constitutes a model work, and found that the model work that Avic Zhicheng Company required to be protected is completed by Avic CADI and reported by news of CCTV(China Central Television) International channel on January 5, 2007. The model was reduced from the “J-10” aircraft in equal proportion. According to Subparagraph 4 of Article 13 of the Regulations on Implementing the Copyright Law, the higher similarity between the model and the original, or the needs (of demonstration, experiment or observation) are better met. So, the claim that the Feipengda Company infringed on the copyright of “J-10” aircraft model of Avic Zhicheng Company was well established. On February 5, 2015, the court of second instance issued the civil decision No. 3451 [2014] Final, IP. Division, the Higher People’s Court of Beijing City, in which it was ordered that Feipengda Company compensate Avic Zhicheng Company for economic losses of RMB 400,000 yuan and reasonable expenses of RMB 33,360 yuan. After the decision came into effect, Feipengda Company applied to the Supreme People’s court for reopening the case for new trial. During the reopening, Avic Zhicheng Company altered its basis of right. It decided to protect the model on the photo of leaders listening to report in February 1990 in the atlas of 40 Years of China’s Aviation Industry, rather than the copyright of the artistic work of “J-10” aircraft. The Supreme People’s Court decided to reopen the case via certiorari.

Issues 1. How to determine the basis of right to protect the model of “J-10” aircraft claimed by Avic Zhicheng Company; 2. Whether the “J-10” aircraft model required to be protected by Avic Zhicheng Company constitutes the model work provided in China’s Copyright Law.

Holding The Supreme People’s Court holds that the basis of right claimed by Avic Zhicheng Company was affirmed in the first instance, and the company did not apply for change

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within the prescribed time limit. So, its claim to change the basis of right was not supported by the court. The “J-10” aircraft model that Avic Zhicheng Company required to be protected is a miniature model from the real aircraft in equal proportion. In the absence of originality, it did not constitute the model work protected by Copyright Law. Therefore, the decision in the second instance was revoked and that in the first instance upheld. After investigation, the Supreme People’s Court holds that the “J-10” aircraft model work that Avic Zhicheng Company claimed for protection in the first instance was the “J-10” aircraft model authorized for manufacturing and selling by Avic CADI, which was a miniature model of the “J-10” aircraft in equal proportion, so the “J-10” aircraft was built first, and the “J-10” aircraft model that Avic Zhicheng Company required to be protected in the case came into being later. Since Avic Zhicheng Company claimed that the “J-10” aircraft model manufactured and sold by the Feipengda Company infringed its copyright to the “J-10” aircraft model, it shall bear the burden of proof that the Avic Zhicheng Company’s “J-10” aircraft model authorized for manufacturing and selling is protected by the Copyright Law of China. In comparison, the “J-10” aircraft model required to be protected by Avic Zhicheng Company in the present case has the same appearance with the real “J10” aircraft except for difference in materials and sizes. It is safe to say that Avic Zhicheng Company did not create any new points, lines, surfaces and structures through its own choosing, selection, arrangement, design, summarizing and description no matter how much effort it has exerted in reducing the size of “J-10” aircraft in equal proportion. The process of size reduction in equal proportion only accurately reproduced the original appearance of the “J-10” aircraft on another carrier, and did not bring out new expression. That is to say, it was only a technical process of scaling down the original in a strict manner. Since Avic Zhicheng Company in this case cannot prove that the “J-10” aircraft model it manufactured by reducing the “J-10” aircraft in equal proportion possesses originality, its efforts were still for reproduction, which means the “J-10” aircraft model was still a copy of “J-10” aircraft, instead of a model work protected by the Copyright Law of China. Even if we agree to the facts determined by the court of second instance that the “J-10” aircraft model manufactured and sold by Avic Zhicheng Company was a copy to the model completed by Avic CADI, and Avic CADI’s model was a copy of real “J-10” aircraft, which leads to the conclusion of absence of originality, therefore, Avic CADI’s model shall not be protected by the Copyright Law of China. Thus, the determination made by the court of second instance that “the higher the similarity between the model and the original, the higher its originality” was in violation of the basic principles of China’s Copyright Law.1 Given that China’s Copyright Law only protects the expression of works and does not extend to ideas, craftsmanship, operating methods or mathematical concepts, and the expression protected shall be intellectual achievements with aesthetic significance in literary, artistic and scientific ways, while the practical and functional expression to meet people’s actual needs will 1 参见王迁: 《论等比例模型在著作权法中的定性——兼评“首例飞机模型著作权侵权案”》 ,载

《中国版权》 2015年第4期。

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not be protected. Therefore, the statement made by the court of second instance that “the more the model meets the actual needs, the higher its originality” went against the legislative intention of the Copyright Law. And the claim made by Avic Zhicheng Company that the Feipengda Company infringed its copyright to the “J-10” aircraft model was absent of facts and legal basis, so the decision made by the court of first instance to support its claims was correct. The Supreme People’s Court revoked the decision of second instance and upheld the decision of first instance.

Comment on Rule 1. On Determining the Basis of Right that Obligee Claims for Protection In the trial of case on copyright infringement of model works, the first thing is to determine the basis of right that the obligee requires for protection. In accordance with the provisions of the Civil Procedure Law, a lawsuit must meet the following requirements: (1) plaintiff should be citizens, legal persons and other organizations that have direct interests in the case; (2) defendant is definitive; (3) litigation claims, facts and reasons are specific; and (4) the case is a civil lawsuit that the people’s court can accept and the accepting people’s court has the jurisdiction. Litigation claim means a request in which one party claims its legal rights from the other party and asks the court to make a specific decision to support it. The parties must have clear and specific claims, facts and reasons when they bring a lawsuit in the first instance. The parties shall apply for the change of claims before the end of debate in the court of first instance if they have such needs. Similarly, where the obligee changes the basis of right that it claims for protection, it should put forward the request before the end of the debate in the court of first instance. The people’s court shall not allow the obligee’s constant requests to change its basis of right it claims for protection in different litigation stages. After the basis of right was confirmed, whether the alleged infringing product infringes the copyright of other works can be finally determined upon determining whether a work protected by the Copyright Law can be constituted under such basis of right. 2. China’s Copyright Law Does Not Protect Practical Functions Works of applied art is a special product with both practicability and artistry. In certain conditions, it can be protected by the Copyright Law of China as an artistic work. Bearing with originality and having their practicability and artistry separated are important conditions for them to be protected by the Copyright Law. China’s Copyright Law protects the original expression of the author in their works, rather than the ideas reflected. Practical functions, that is, the practicability and functionality to meet people’s needs in daily life, are categorized as ideas rather than expression, so it should not be protected by the Copyright Law. What the Copyright Law protects is the artistry of works of applied art, a feature related to originality to some extent. The higher the artistry, the higher the originality. The view that “the more the model

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meets the actual needs, the higher its originality” wrongly combines the practical function and the originality of the works of applied art together, which violates the legislative spirit that the Copyright Law does not protect ideas. 3. Requirements for Model Works to be Protected by China’s Copyright Law Article 2 of the Regulations on Implementing the Copyright Law provides that “works shall refer to original intellectual achievements in the fields of literature, art and science which can be expressed in a certain form.” Subparagraph 13 of Article 4 of the Regulations on Implementing the Copyright Law states that “model works or replica refer to three-dimensional works made in a certain proportion based on the shape and structure of original objects for purposes of display, experiment or observation.” In accordance with Article 2 of the Regulations on Implementing the Copyright Law, the works protected by the Copyright Law in China must meet three requirements at the same time as follows: (1) they must be intellectual creation in the fields of literature, art and science; (2) they must be original; and (3) they can be reproduced in tangible forms. When judging whether a model or replica should be protected by the Copyright Law, we shall first determine whether the model has the above three elements at the same time, instead of separately judging whether it complies with the provisions of Subparagraph 13 of Article 4 and Article 2 of the Regulations on Implementing the Copyright Law. Where the provisions of Subparagraph 13 of Article 4 of the Regulations on Implementing the Copyright Law are met but the three requirements provided in Article 2 thereof are not, the model cannot be regarded as a model work that shall be protected by the Copyright Law of China. The originality of a work, as one of the above three requirements, means that the author has invested some mental labor in creating the work, enabling the work to exhibit the minimum amount of creativity, and the work is independently conceived and completed by the author, which can demonstrate the spiritual labor and intellectual decision of the author. Originality is a necessity for a work to be protected by the Copyright Law. Therefore, models do not constitute model works. A work satisfying the provisions of Subparagraph 13 of Article 4 of the Regulations on Implementing the Copyright Law only constitutes a model rather than a model work. Only the original model work is protected by the Copyright Law of China. No matter how much effort is exerted in reducing the size of the original in equal proportion, it does not involve choosing, selecting, arranging, designing, summarizing and describing to produce any new points, lines, surfaces and geometric structures. The process of reducing size in equal proportion is to accurately reproduce the appearance of the original on another carrier without demonstrating any new expression, which is just a technical process of scaling down the original in a strict manner. It is still a reproduction, and the model resulted from is a copy of the original, which does not constitute a model work protected by China’s Copyright Law.

Rong Li Doctor of Laws, senior judge, the Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China.

Michael Jeffrey Jordan v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China and Qiaodan Sports Products Co., Ltd. [Administrative Dispute over (Graphics) Trademark Infringement]: Requirements for Protecting the Prior Right of Image in Trademark Administrative Cases Weike Du and Xian Tang

Rule “Image” protected by the right of image/portrait should be identifiable and include personal characteristics enabling the public to discern the corresponding subject of right (the specific natural person), thus clearly representing the specific subject of right. Where the logo claimed to be protected by the parties based on the right of image does not contain enough facial features to be identified, the parties shall produce sufficient evidence to prove that the logo has other personal features enough to reflect Collegiate Panel: Junli Xia, Yanfang Wang and Weike Du (Edited by Wenyan Ding; translated by Lin Sun and Yi Zheng) According to the reform and redeployment to the central authorities, the relevant responsibilities of the Trademark Office and the Trademark Appeal Board of the State Administration for Industry and Commerce have been uniformly transferred to the National Intellectual Property Administration, PRC. W. Du (B) · X. Tang The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] X. Tang e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_32

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the corresponding natural person, and is identifiable, through which the public can recognize that the logo refers to the natural person.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Michael Jeffrey Jordan (hereinafter referred to as Michael Jordan) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Trademark Review and Adjudication Board of the State Administration for Industry and Commerce Third Party: Qiaodan Sports Products Co., Ltd. (hereinafter referred to as the Qiaodan Sports Company) 2. Procedural History First Instance: No. 9178 [2014] Trial, Adm. Division (IP), the First Intermediate People’s Court of Beijing City (dated Dec. 18 of 2014) Second Instance: No. 965 [2015] Final, Adm. Division (IP), the Higher People’s Court of Beijing City (dated Apr. 23 of 2015) Application for Reopening the Case: No. 332 [2015], Adm. Division (IP), the Supreme People’s Court (dated Dec. 27 of 2017) 3. Cause of Action The administrative dispute over trademark infringement

Essential Facts In the case of administrative dispute over trademark infringement among Plaintiff Michael Jordan; Defendant, the Trademark Review and Adjudication Board of the State Administration for Industry and Commerce; and the third party, the Qiaodan Sports Company, the subject was the trademark No. 6020570 “ ” (hereinafter referred to as the disputed trademark) of the Qiaodan Sports Company. It was approved to be used on commodities under the international classification No. 28 including the game machine, puppet and toy, with registration number being No. 6020570. Michael Jordan claimed that the trademark used his personal image of

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playing basketball, the public can easily connect him with the brand, which damaged his prior right of image. Therefore, based on the provisions of Article 31 of the Trademark Law (revised in 2001) that “the application for trademark registration shall not damage the existing prior right of others”, Michael Jordan applied for revocation of the disputed trademark in the case. According to the Trademark Review and Adjudication Board of the State Administration for Industry and Commerce, the graphic trademark involved was a person’s silhouette, of whom the action image was quite ordinary, and did not refer to a specific person directly. Therefore, it was difficult to connect the graphic with Michael Jordan. Based on these determinations, the Board made the decision No. 52052 [2014] Ruling on No. 6020570 Graphic Trademark Dispute, Trademark Review and Adjudication Board of SAIC (hereinafter referred to as the Ruling No. 52052), in which the ruling ordered that the trademark in dispute can be maintained for use. Michael Jordan refused to accept the ruling and filed an administrative lawsuit with the First Intermediate People’s Court of Beijing City. On December 18, 2014, the First Intermediate People’s Court of Beijing City issued the civil decision numbered No. 9178 [2014] Trial, Adm. Division (IP), the First Intermediate People’s Court of Beijing City, rejecting Michael Jordan’s claim. Michael Jordan filed an appeal. On April 23, 2015, the Higher People’s Court of Beijing City issued the civil decision numbered No. 965 [2015] Final, Adm. Division (IP), the Higher People’s Court of Beijing City, rejecting the appeal and maintaining the decision of the first instance trial. Michael Jordan, still not satisfied, appealed to the Supreme People’s Court for reopening the case for new trial.

Issue Whether the registration of the disputed trademark damaged Michael Jordan’s prior right of image as claimed by him in the case.

Holding The Supreme People’s Court holds that the right of image claimed by Appellant in case reopening could constitute the prior right provided in Article 31 of the Trademark Law. The “image” protected by the right of image is a visual reflection of the appearance features of a specific natural person. The public can identify and refer to the corresponding natural person through the “image”, and distinguish the person from others accordingly. According to the right and the nature of the “image” itself, it should be recognizable, containing enough personal characteristics to enable the public to identify the corresponding subject of right, that is, the specific natural person. In this way, it completes the definitive identification of the corresponding subject of right. In the event that the logo asked to be protected by the right of

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image is not recognizable and cannot clearly refer to a specific natural person, it is of difficulty to claim that the logo represents the personal dignity or personal interests belonging to a specific natural person that should be protected by laws. From the cognitive habits and characteristics of the public, the facial feature of natural persons is one of the most important physical traits. Generally, the public can recognize specific natural persons and distinguish them from others through their facial features. Provided that the logo claimed to be protected by the parties based on the right of image does not contain enough facial features to be identified, the parties shall produce sufficient evidence to prove that the logo has other personal features enough to reflect the corresponding natural person, and is identifiable, through which the public can recognize that the logo refers to the natural person. When it comes to Michael Jordan’s right to image, his sports image in the photo clearly reflects his personal characteristics including the facial feature, body shape, and number on his jersey. The public can clearly identify the natural person in the photo as Michael Jordan, so Michael Jordan enjoys the right of image of the photo. ” involved in the case, as a simple silhouette of a figure in black, The trademark “ does not contain any personal characteristics related to Michael Jordan except the body contour, though the logo is basically consistent with the mirror image of his body contour in the photo exhibiting his sports image. In addition, Michael Jordan does not have any other legal rights for the corresponding action of the logo since other natural persons can also make the same or similar actions. The logo thus does not have the recognizability that can explicitly refer to Michael Jordan. Therefore, Michael Jordan cannot enjoy the right of image on the logo, and his claim that the disputed trademark in the case damaged his right of image cannot be established. For above reasons, the Supreme People’s Court dismissed Michael Jordan’s application for case reopening.

Comment on Rule This case is a typical one to determine whether the parties enjoy the prior right of image in accordance with the Trademark Law. The requirements for natural persons to claim protection for their prior right of image in administrative disputes over trademark infringement are determined in this case according to laws, and the relevant application standards of law for determining the prior right of image are clarified, which is of guiding significance for the trial of similar cases. 1. Significance of Protecting the Prior Right of Image in the Trademark Law Article 311 of the revised version of the Trademark Law in 2001 provided for an important system on protecting prior rights, which embodied the Trademark Law’s 1 Article

31 of the Trademark Law amended in 2001 stipulates that “the application for trademark registration shall not prejudice the prior rights of others.” The same is also stated in the Trademark Law amended in 2013 and April 2019.

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efforts in safeguarding and defending the prior rights.2 To protect civil rights and other legitimate rights and interests legally is the basic spirit of civil law, and also the starting point and foothold of civil legislation.3 The right recognized by trademark law is a right of property. Therefore, the protection of prior civil rights and interests should also be regulated in the Trademark Law. The provisions on the protection of prior rights are also the important legal basis to the principle of advocating good faith and curbing abusive registration.4 With regard to the prior rights stated in Article 31 of the Trademark Law, Article 18 of the Rules on Several Issues about the Trial of Administrative Cases Involving the Authorization and Determination of Trademark Rights also made a statement that “the prior rights include the civil rights enjoyed by the parties prior to the date of application for the trademark in dispute and other legitimate rights and interests that should be protected.”5 Therefore, the prior rights in the Trademark Law include not only those clearly provided in civil law, such as the rights of image, name,6 copy, but also other legitimate rights and interests that have not been clearly deemed as rights but should be protected according to laws. For example, Article 6 of the Law against Unfair Competition that was revised in April 2019 states that the prior rights include rights to “the names, packages and decorations of commodities and the names of enterprises with certain influence”. Before the issuance of the aforesaid Rules on Several Issues about the Trial of Administrative Cases Involving the Authorization and Determination of Trademark Rights, another judicial policy document, Opinion on Trying the Administrative Cases Involving the Authorization and Determination of Trademark Rights, issued by the Supreme People’s Court in April 2010, states: “when the people’s court examines and determines whether the trademark in dispute damages the existing prior rights of others, the prior rights that have been specially provided in the Trademark Law shall be protected in accordance with the provisions thereof; the legitimate rights and interests that should be protected in accordance with the General Principles of the Civil Law and other laws, when not protected by the provisions in the Trademark Law, shall be protected in accordance with the general provisions.” This provision is consistent with the intention of Article 18 of

2 参见杜微科: 《商标法视野下的在先姓名权保护“乔丹”商标争议行政纠纷系列案件评析》 ,

载 《法律适用》 2017年第18期。 3 参见李适时主编: 《中华人民共和国民法总则释义》 , 法律出版社2017年版, 第15页。 4 参见宋晓明等: 《的理解与适用》 ,载 《人 民司法·应用》 2017年第10期。 5 Article 2 of the Tort Law of the People’s Republic of China stipulates that “Infringement on civil rights and interests shall bear the liability in accordance with this law thereof. The civil rights and interests mentioned here include the rights of life, health, name, reputation, honor, image, privacy, marital autonomy, guardianship, ownership, usufructuary right, security right, copyright, patent right, exclusive right to trademarks, discovery right, equity right, inheritance right and other personal and property rights and interests”. 6 For the prior right to name in the field of the Trademark Law, see decisions No.15, No.26 and No.27 [2016] Reopening, Adm. Division, the Supreme People’s Court concerning the trademark of “Qiaodan”.

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the Rules on Several Issues about the Trial of Administrative Cases Involving the Authorization and Determination of Trademark Rights. Four articles in the Rules on Several Issues about the Trial of Administrative Cases Involving the Authorization and Determination of Trademark Rights respectively make statements on protecting the prior rights of copy, name, brand name and role image, as well as work name and role name. However, the judicial interpretation did not contain clear provisions to protect the prior right of image. We believe that the right of image is an important personal right enjoyed by natural persons. To protect the right of image of natural persons is of great significance for safeguarding their personal dignity and protecting their interests. The right to human dignity, including the right of image, is a moral right in essence, but absorbs the characteristics of property rights over years,7 which obvious demonstrates a connection to property interests.8 As the trademark functions to identify the source of goods or services,9 they have so much to do with the production and operation of businesses. Therefore, in the Trademark Law, the protection of the right to human dignity, including the prior right to name and image, is not only related to human dignity, but also particularly important to safeguard the property interests in the commercial use of names and images.10 2. Requirements for Protecting the Prior Right of Image in the Trademark Law Some basic laws related to civil issues, including the General Principles of the Civil Law, the General Rules of the Civil Law, and the Tort Law, only made baisc provisions concerning the right of image. The right of image is the right of a natural person to the spiritual and material interests embodied in his own image.11 But for what “image” is and how to understand the specific connotation of “image” and the conditions to seek protections based on the right of image, the application standards of law are not clear. In this case, the Supreme People’s Court has determined the requirements for natural persons to claim the protection of prior right of image in administrative disputes over trademark infringement. First of all, the “image” protected by the right of image is a “recognizable human feature”,12 and should be identifiable. First, the right of image belongs to the right to human dignity, which is an absolute right, with the obligee being the dominator, and shall not be offended by others.13 Therefore, the protected object of the right of image must be recognizable, so that the public can identify the corresponding 7 参见王利明: 《我国民法典重大疑难问题之研究》 (第2版),

法律出版社2016年版, 第208页。 第192页。 9 According to Article 48 of the Trademark Law amended in April 2019, “the use of a trademark mentioned herein refers to the act of adopting the trademark on commodities, packaging or containers of commodities, commodity trading documents, or in advertisements, exhibitions and other commercial activities to identify the source of commodities”. 10 参见杨立新、尹艳: 《侵害肖像权及其民事责任》 ,载 《法学研究》 1994年第1期; 隋彭生: 《论肖 像权的客体》 ,载 《中国法学》 2005年第1期。 11 参见李适时主编: 《中华人民共和国民法总则释义》 ,法律出版社2017年版,第15页。 12 隋彭生: 《论肖像权的客体》 ,载 《中国法学》 2005年第1期。 13 参见杨立新: 《人格权法》 ,法律出版社2015年版,第17页。 8 参见杨立新: 《人格权法》 , 法律出版社2015年版,

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subject of right through the image. In this way, a clear right boundary can be drawn to prevent the right of image of others from being infringed. Second, recognizability is an inevitable requirement, for the right to human dignity is inseparable from the subject of right. The right of image, as a variety of the right to human dignity, has the characteristics of always being exclusive only to the subject of right.14 Image is the appearance of a natural person and the external form of the person’s objective and real material entity.15 Natural persons’ appearances are in various forms, including face, body, view of back, silhouette, specific actions, etc. However, not all of them are featured with enough personal characteristics and identification capability, through which the public can recognize and relate to the subject of right. If that were the case, there would be no scenarios of “mistaking persons” in daily life. Therefore, the appearance protected by the right of image should be recognizable, demonstrating the characteristics of the individual,16 and can form a corresponding relationship with the natural person who claims the protection of the right of image, so that the public can identify and distinguish the natural person from others. In addition, the “image” protected by the right of image mainly refers to the facial features of natural persons, and other traits in appearance, including those that are sufficient to present the external image of an individual.17 Face is the concentrated embodiment of the image of human beings. Considering the cognitive habits of the general public, the natural persons are usually identified and distinguished by their facial features. However, in certain circumstances, we can also identify a specific natural person through other traits in appearance besides facial features. But the certainty and accuracy of what is proved by these traits are not so strong, and are often restricted by specific occasions and situations. Personal images such as specific actions and physical body parts other than the face, if recognizable, that is, the specific person can be identified through these features, the obligee shall be allowed to file a lawsuit based on these images.18 In this case, the Appellant in the case reopening claimed that his photo of sports image published in the journal of American Professional Basketball Illustrated (Chinese International Edition) has been widespread and received much attention. The Appellant in the case reopening enjoys its right of image. As the trademark “ ” involved in the case adopted the sports image of Appellant in the case reopening, the relevant public can easily associate it with the Appellant and produce misidentification. The trademark thus infringed the right of image of the Appellant. The sports image in the photo clearly reflects the Appellant’s personal characteristics including the facial feature, body shape, and number on his jersey. Based on this, the public can clearly identify the natural person in the photo as the Appellant, so he enjoys the right of image of the photo. The trademark 14 参见王利明: 《人格权法》 (第2版),中国人民大学出版社2016年版,第16页;杨立新: 《人格权法

》 ,法律出版社2015年版,第40页。

15 参见杨立新: 《人格权法》 ,法律出版社2015年版,第191页。 16 参见王泽鉴: 《人格权法:法释义学,比较法,案例研究》 ,北京大学出版社2013年版,第141页。 17 参见王泽鉴: 《人格权法:法释义学,比较法,案例研究》 ,北京大学出版社2013年版,第141页。 18 参见王利明: 《人格权法》 (第2版),中国人民大学出版社2016年版,第259页。

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“ ” involved in the case is only a silhouette of a figure in black, which does not contain any personal characteristics related to the Appellant in the case reopening except the body contour, although it is basically consistent with the mirror image of the body contour of the Appellant’s sports image in the photo. In addition, the Appellant does not have any other legal rights for the corresponding action of the logo since other natural persons can also make the same or similar actions. The logo thus does not have such recognizability that the public can explicitly associate it with the Appellant. Therefore, the Appellant cannot enjoy the right of image on the logo, and his claim that the trademark involved in the case damaged his right of image cannot be established. It should also be noted that since the decision was made before the implementation of the General Rules of the Civil Law, the Supreme People’s Court made a decision based on the provisions19 of the General Principles of the Civil Law and the Tort Law. As the General Rules of the Civil Law made principled provisions as to the right of image, 20 the application of law in this case still exerts a strong guiding significance for the trial of similar cases. Article 798 (2) of the Right to Human Dignity Of Civil Code of the People’s Republic of China (Draft for Second Deliberation) issued on April 26, 2019 states: “the image herein refers to the external appearance of a specific natural person that can be recognized and reflected on a certain carrier via means of shooting, carving, painting, etc.” The application of law in this case is also consistent with the opinions of the draft.

Weike Du Doctor of Laws, senior judge, the Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China. Xian Tang Master of Laws, assistant judge, the Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China.

19 Article 100 of the General Principles of the Civil Law stipulates: “citizens have the right of image.

Without their consent, their images are not allowed to be used for profit”. 20 Article 110 of the General Rules of the Civil Law stipulates: “natural persons shall have the rights of life, body, health, name, image, reputation, honor, privacy, marriage autonomy, etc. And legal persons or unincorporated organizations shall have the right of name, reputation, honor, etc”.

Hebei Farun Forestry Technology Co., Ltd. v. Hebei Expressway Hengda Management Office (Dispute over Infringement of Right to New Varieties of Plant): Understanding and Identification of “Production” and “Reproduction” in Article 28 of the Seed Law Lihua Mao

Rule For those authorized varieties being propagated vegetatively, the plants themselves are the propagation materials, planting without cuttage, grafting and other reproduction behaviors does not constitute the “production” nor “reproduction” as provided in Article 28 of the Seed Law. Therefore, such behaviors do not infringe upon the right to new varieties of pant enjoyed by other people.

Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Hebei Expressway Hengda Management Office (hereinafter referred to as Hengda Management Office)

Collegiate Panel: Li Zhu, Lihua Mao and Shu Tong (Edited by Wenyan Ding, translated by Lin Sun and Yi Zheng) L. Mao (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_33

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Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Hebei Farun Forestry Technology Co., Ltd. (hereinafter referred to as the Farun Forestry Technology Company) 2. Procedural History First Instance: No. 33 [2017] Trial, Civ. Division, the Intermediate People’s Court of Shijiazhuang City, Hebei Province (Hebei 01) (dated May 15 of 2017) Second Instance: No. 512 [2017] Final, Civ. Division, the Higher People’s Court of Hebei Province (dated Aug. 28 of 2017) Case Reopening: No. 247 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 28 of 2018) 3. Cause of Action Infringement of new variety rights of plant

Essential Facts In the case of dispute over infringement upon the right to new variety of plant between the Appellant, the Hebei Hengda Management Office, and the Appellee, Farun Forestry Technology Company, the latter claimed that Hengda Management Office planted the unauthorized seedlings of “Beauty Elm” on both sides of the expressway and the greenbelt in areas under the office’s management, which infringed the new variety rights of “Beauty Elm” shared by the company itself and the Hebei Academy of Forestry Sciences. Therefore, Farun Forestry Technology Company sued for infringement damages of RMB 125,000 yuan. The Intermediate People’s Court of Shijiazhuang City, Hebei Province in the first instance held that the promoted planting of the “Beauty Elm” in the expressway greenbelt under its management by Hengda Management Office was conducted by the construction unit via legal bidding, which did not violate the law. Hengda Management Office did not produce, reproduce or sell the “Beauty Elm” or reuse the breeding materials of “Beauty Elm” planted by the construction unit in the expressway greenbelt to produce breeding materials for another variety. Thus, Hengda Management Office did not infringe the variety rights claimed by Farun Forestry Technology Company. The court of first instance rejected the claim of Farun Forestry Technology Company. Farun Forestry Technology Company was not satisfied and filed an appeal. The Higher People’s Court of Hebei Province in the second instance held that the “Beauty Elm”, which was bred in an asexual way, was the breeding material itself. The use of it by Hengda Management Office was an act of producing breeding materials of an authorized variety. And Hengda Management Office did not purchase the “Beauty Elm” from the owner of the variety but used it without permission, which damaged the interests of the owner. In addition, the purpose of the managment office

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planting the “Beauty Elm” was to improve the overall service and quality of the expressway so as to increase economic benefits, which was a commercial behavior. Therefore, its conduct did not fall into scenarios such as “using authorized varieties for reproduction or conducting other scientific research activities” or “farmers using or reproducing breeding materials of authorized varieties themselves”, under which “the user does not need to get permission from the owner of the new plant variety rights and pay any fees” as regulated by Article 29 of the Seed Law. Therefore, Hengda Management Office infringed on the right to new variety of plant involved in the case by planting and using the “Beauty Elm” on the greenbelt and both sides of the expressway under its management. The court of second instance revoked the judgment rendered by the first instance court, and ruled Hengda Management Office to compensate Farun Forestry Technology Company for the economic loss of RMB 80,000 yuan. Hengda Management Office was not satisfied, and applied to the Supreme People’s Court for case reopening. The Supreme People’s Court decided to reopen the case via certiorari.

Issue Whether Hengda Management Office has infringed upon the right to new variety the “Beauty Elm” enjoyed by the Hebei Academy of Forestry Sciences and Farun Forestry Technology Company.

Holding After the Supreme People’s Court reopened the case via certiorari, it issued the civil decision (No. 247 [2018] Reopening, Civ. Division, the Supreme People’s Court) on December 28, 2018 to revoke the decision of the second instance and maintain that of the first instance. After the investigation, the Supreme People’s Court held that no one else, without the permission of the owner of the variety rights, may “produce, reproduce or sell” the breeding materials of the authorized variety, or “reuse” the breeding materials of the authorized variety to produce that of another variety for commercial purposes in accordance with Article 28 of the Seed Law. The original provisions are that “the unit or individual that completes the plant breeding shall have exclusive rights to the authorized variety. Any other unit or individual may not, without the permission of the owner who enjoys the new plant variety rights, produce, reproduce or sell the breeding materials of the authorized variety, or reuse the breeding materials of the authorized variety in producing that of another variety for commercial purposes, except as otherwise provided in this law, other relevant laws and administrative regulations.”

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In this case, the Hengda Management Office was sued for planting and using the unauthorized seedlings of “Beauty Elm” on both sides of the expressway and greenbelt under its management. The “Beauty Elm” involved in the case is a breeding in asexual propagation, so the plant itself is the breeding materials. However, according to the existing evidence and the fact recognized by Farun Forestry Technology Company that “Hengda Management Office did not have behaviors of expanding the plant’s reproduction”, the Supreme People’s Court holds that there was no evidence to prove that Hengda Management Office planted “Beauty Elm” seedlings involved to sell for profits, nor did the office carry out such behaviors of expanding reproduction as cuttage or grafting, the planting behavior itself was neither production nor reproduction. Meanwhile, the planting behavior conducted by Hengda Management Office was not subject to the regulation of the right of selling in variety rights, and it did not constitute “reusing the breeding materials of the authorized variety in producing that of another variety” as provided in the Seed Law. Therefore, the sued behavior of Hengda Management Office did not infringe the variety rights of “Beauty Elm” enjoyed by the Hebei Academy of Forestry Sciences and the Farun Company.

Comment on Rule The key to the conclusion made in the judgment of the case is to understand and identify the “production” and “reproduction” behaviors provided in Article 28 of the Seed Law. As far as the application of law is concerned, this case is mainly to decide whether the planting of “Beauty Elm” bred in an asexual manner constitutes a violation to Article 28 of the Seed Law. Compared with the Regulations on Protecting of New Varieties of Plants, the revised Seed Law in 2015 on the protection of new varieties added the item of “reproduction”. As stated in Article 28, “the unit or individual that completes the plant breeding shall have exclusive rights to the authorized variety. Any other unit or individual may not, without the permission of the owner who enjoys the new plant variety rights, produce, reproduce or sell the breeding materials of the authorized variety, or reuse the breeding materials of the authorized variety in producing that of another variety for commercial purposes, except as otherwise provided in this law, other relevant laws and administrative regulations.” Literally, the law regulates that without the permission of the variety owner, no one else may “produce, reproduce and sell” the breeding materials of the authorized variety, or “reuse” the breeding materials of the authorized variety to produce that of another variety for commercial purposes. Compared with the provisions of the Regulations on Protecting of New Varieties of Plants, this article not only adds the right to “reproduce” into the rights of new plant varieties, which is in parallel with the right to “produce” and “sell”, but also removes the expression of “not for commercial purpose” which originally restricted the right to “produce or sell”. In terms of legislative purpose, the Regulations on Protecting New Varieties of Plants added “reproduce” to cover behaviors

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of expanding breeding in an asexual manner such as cuttage and grafting on the original basis, ensurig that these behaviors need to obtain permission from the owner of the new plant varieties, given that the production of plant varieties traditionally was limited to seeds, while the protection to new plant varieties in asexual breeding is deficient. But how to define “reproduction”? We believe that “reproduction” at least refers to the expansion and re-plantingof the variety, thus the pure planting behavior after purchasing the seedlings does not belong to the scope of reproduction. In addition, though there is no expression of “not for commercial purpose”, in consideration of the legislation intention, it should not be ignored. When it comes to the present case, Farun Forestry Technology Company sued Hengda Management Office for planting and using the unauthorized seedlings of “Beauty Elm” on both sides of the expressway and greenbelt under its management. So, does the behavior that Hengda Management Office directs the construction unit planting “Beauty Elm” on both sides of the road via bidding constitute “production, reproduction or selling” given the fact that the “Beauty Elm” involved is a breeding prorogated in an asexual way and the plant itself is a breeding material? We believe that based on the existing evidence and the fact that the parties recognized in the court trial that “Hengda Management Office did not carry out behaviors to expand breeding” such as cuttage and grafting, the planting behavior involved is neither “production” nor “propagation”. In addition, there is no evidence to prove that Hengda Management Office planted the “Beauty Elm” seedlings for the purpose of making profits. Therefore, this conduct is not subject to the regulation of the right of selling, and is not in line with the situation of “reusing the breeding materials of the authorized variety in producing that of another variety”. To sum up, the simple planting behavior does not belong to the scope that is subject to Article 28 of the Seed Law. Although not so many legal provisions are involved in the trial of the case, some disputes and ambiguities still exist in the judicial practice. We believe that the trial of this case is of positive guidance to clarify the understanding and application of “production” and “reproduction” behaviors provided in Article 28 of the Seed Law, and it is conducive to the interpretation of legal provisions and the unification of judicial standards in adjudication.

Lihua Mao Doctor of Laws, senior judge, the Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China.

Wuxi Guowei Ceramic Electric Appliances Co., Ltd. and Jiang X v. Changshu Linzhi Electric Heating Device Co., Ltd. and Suning Holdings Group Co., Ltd. (Dispute over Infringement of Patent Right to Utility Models): The Calculation of Patent Infringement Damages Li Zhu and Bo Zhang

Rule 1. According to the claims of the parties and case merits, when we calculate the damages on the basis of the gains which the infringer has obtained from the infringement, for the sued infringing products with multi units or multi patents, it is inappropriate to calculate the gains by simply multiplying total sales of the infringing products by profit rate. Under this circumstance, the contribution degree the patent in dispute made to profit shall be taken into consideration, and calculate the gains by “total sales of the infringing products × profit rate × the contribution degree made by patent technologies to product value”. The contribution degree made by patent technologies to product value can be decided in view of the importance of this patent in dispute to products, and other elements. 2. Under the circumstance of separable infringement, when it comes to the calculation of damages, there can be accurate damages calculated by patentees’s losses and the infringers’ gains, there can also be losses which cannot be calculated accurately. For those which can be accurately calculated, the damages through Collegiate Panel: Li Zhu, Lihua Mao and Shu Tong (Edited by Wenyan Ding; translated by Lin Sun and Yi Zheng) L. Zhu (B) · B. Zhang The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] B. Zhang e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_34

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the losses of patentees or the gains obtained by infringers shall be taken into account, while for the uncalculatable ones, statutory damages can be applied, in this way, the total damages can be the sum of the two parts.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance and Appellant in the Second Instance): Wuxi Guowei Ceramic Electric Appliances Co., Ltd. (hereinafter referred to as Guowei Ceramic Electric Appliances.) Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Jiang X Appellee (Defendant in the First Instance, Appellant in the Second Instance): Changshu Linzhi Electric Heating Device Co., Ltd. (hereinafter referred to as Linzhi Electric Heating Device Co.) Appellee (Defendant in the First Instance, Appellee in the Second Instance): Suning Holdings Group Co., Ltd. (hereinafter referred to as Suning Holdings Group Co.) 2. Procedural History First Instance: No. 510 [2013] Trial, Civ. Division, the Intermediate People’s Court of Nanjing City (dated Nov. 15 of 2015) Second Instance: No. 105 [2016] Final, Civ. Division, the Higher People’s Court of Jiangsu Province (dated Dec. 22 of 2016) Case Reopening: No. 111 [2018] Reopening, Civ. Division, the Supreme People’s Court (dated Jun. 26 of 2018) 3. Cause of Action Dispute over the infringement of patent right to utility models

Essential Facts Jiang X is the patentee who owns the utility patent numered ZL200920230829.5 which is “Heat-Conduction Aluminium Tube for PTC Heater and PTC Heater (hereinafter referred to the patent in dispute). Guowei Ceramic Electric Appliances is the Exclusive Licensee of the patent in dispute. Guowei Ceramic Electric Appliances and Jiang X filed a lawsuit, accusing Linzhi Heating Device Co. of producing and selling the PTC heaters for air conditioner which has infringed upon the patent right, and

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required them to stop its infringement, and compensate RMB 15,000,000 yuan for their economic losses and reasonable expenses. In the first instance trial, the Intermediate People’s Court of Nanjing City held that the sued infringing products shall be under the scope of protection of patent claim 2, and ruled that Linzhi Electric Heating Device Co. and Suning Holdings Group Co. shall stop their infringements and decided that Linzhi Electric Heating Device Co. compensate the economic losses and reasonable expenses of RMB 1 million yuan to Guowei Ceramic Electric Appliances and Jiang X. Guowei Ceramic Electric Appliances, Jiang X and Linzhi Electric Device Co., all appealed against the judgment. In the second instance, the Higher People’s Court of Jiangsu Province held that the sued infringing products are in want of implied technical features under the patent claim 2, hence cannot be protected under the scope of protection of the patent claim 2. Therefore, the court decided to set aside the judgment of the first instance and overrule the claims of Guowei Ceramic Electric Appliances and Jiang X. Guowei Ceramic Electric Appliances and Jiang X refused to accept it, and filed a petition for case reopening with the Supreme People’s court. The Supreme People’s Court decided to reopen this case via certiorari.

Issue The calculation of damages.

Holding During the reopening of the case, the Supreme People’s Court held that the interpretation to the scope of protection of patent claim 2 in this case is somewhat inappropriate. Then the Supreme People’s Court set aside the judgment of the second instance, and changed the amount of economic losses to RMB 9,377,867 yuan. After review, the Supreme People’s Court holds that: 1. On the Calculation of the Gains Which Linzhi Electric Heating Device Co. Obtained from Infringement First of all, on the caculation of total sales of infringing products manufatured by Linzhi Electric Heating Device Co. Guowei Ceramic Electric Appliances and Jiang X submitted the following evidence, the quantity and amount of products supplied by Linzhi Electric Heating Device Co. to Guangdong Midea Co., Ltd, the Purchasing Department of Hisense (Zhejiang) Air Conditioner Co., Ltd, Hisense (Shandong) Air Conditioner Co., Ltd, and the Purchasing Departments of TCL Air Conditioner Division. (1) On the evidence to prove Linzhi Electric Heating Device Co. supplied to Guangdong Midea Co., Ltd, the Purchasing Department of Hisense (Zhejiang) Air

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Conditioner Co., Ltd, and Purchasing Department of TCL Air Conditioner Division. Although the evidence issued by Guangdong Midea Co., Ltd and the Purchasing Department of TCL Air Conditioner Division recorded the material codes, it is hard to determine the proportion of the sued infringing products accounted for in the supply quantity in this case. Although the evidence issued by the Purchasing Department of Hisense (Zhejiang) Air Conditioner Co., recorded the amount of supply, it is hard to determine the proportion of the sued infringing products accounted for in this case, too. Therefore, it is difficult to take the three sets of evidence as the basis of calculating damages through the gains obtained from infringement. For the aforesaid three sets of evidence, the damages shall be calculated through statutory damages. (2) On the evidence to prove Linzhi Electric Heating Device Co. supplied to Hisense (Shandong) Air Conditioner Co. Hisense (Shandong) Air Conditioner Co., Ltd does not only submit evidence on the quantity and amount of 9 models of products supplied by Linzhi Electric Heating Device Co., but also submit tangible evidence for the 7 models of products concerned. It clearly indicates there is no difference in the aluminum tube structure of the heating units among all the 9 models. Hisense (Shandong) Air Conditioner Co., Ltd offered the quantity and sales of products which are supplied by Linzhi Electric Heating Device Co. With no evidence to the contrary offered by Linzhi Electric Heating Device Co., such quantity and sales can be presumed to belong to the infringing products in this case. According to evidence offered by Hisense (Shandong) Air Conditioner Co., Ltd, Linzhi Electric Heating Device Co. supplied 9 models of electric heaters to the Hisense bases in Pingdu, Huzhou, Shunde and Jiangmen from 2011 to 2015. And the total amount of products it supplied to Pingdu and Huzhou is RMB 125,755,180.53 yuan (tax-inclusive), and to Shunde and Jiangmen is RMB 6,688,496.74 yuan (tax-exclusive). After the deduction of corresponding value added tax, the total sales (tax-exclusive) obtained by Linzhi Electric Heating Device Co. through selling the sued infringing products to Hisense (Shandong) Air Conditioner Co., Ltd. is about RMB 114,371,557 yuan. In addition, on the profit rate at which Linzhi Electric Heating Device Co. sold the sued infringing products. Taking an overall consideration of the highest profit rate claimed by Linzhi Electic Heating Device Co. and the lowest profit rate claimed by Guowei Ceramic Electric Appliances, the profit rate of the sued infringing products is decided to be 15%. Finally, on the contribution degree the patent in dispute made to the sued infringing products. According to the beneficial effect recorded in patent specification in this case, the beneficial effects related to the technical proposal of the patent claim 2 include making product structure more compact, strengthening the combination of all accessories, enhancing heat conduction performance, reducing the safety risks caused by loose accessories, improving the reliability of products and reducing production cost, etc. Obviously, the patent in dispute plays an important role in market attractiveness of the PTC heater of Linzhi Electric Heating Device Co. When the aluminum tube for heat conduction was compressed, a semi-circled groove structure will form on both the left and right sides of it. This is how the technical proposal of patent claim 2 realizes the aforesaid beneficial effects. Besides, the PTC heater also includes other units, therefore, it is inappropriate to attribute all the profits of

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the sued infringing products to the patent in dispute. Without any justified reason, Linzhi Electric Heating Device Co. refused to appear in the court trial. Under such circumstance, the contribution degree the patent in dispute made to the profits of the sued infringing products sold by Linzhi Electric Heating Device Co. is decided to be 50%. Based on the above analysis, the profits obtained from infringement by Linzhi Electric Heating Device Co. during its selling of the sued infringing products to Hisense (Shandong) Air Conditioner Co., Ltd can be calculated as below: 114,371,557 × 15% × 50% = RMB 8,577,867 yuan. 2. On the Calculation of Damages Caused by the Supply Linzhi Electric Heating Device Co. Made to Guangdong Midea Co., Ltd., and the Purchasing Department of Hisense (Zhejiang) Air Conditioner Co., Ltd. and the Purchasing Department of TCL Air Conditioner Division As discussed above, the existing evidence is not sufficient to prove the proportion of the sued infringing products in the total sales sold by Linzhi Electric Heating Device Co. to the aforesaid three companies. The losses caused to Guowei Ceramic Electric Appliances and Jiang X are hard to be determined by the sales behaviors that Linzhi Electric Heating Device Co. made to the aforesaid three companies, and no reasonable patent royalty is available for reference. Therefore, the Supreme People’s Court determined the damages inccured by such sales behaviors according to statutory damages. Since the patent in dispute is utility model, and Linzhi Electric Heating Device Co. was engaged in manufacturing and selling the sued infringing products in a large scale, the court decided that Linzhi Electric Heating Device Co. shall compensate economic losses of RMB 800,000 yuan to the Patentee, Guowei Ceramic Electric Appliances and Jiang X, due to its sales behaviors to the aforesaid three companies. On June 26, 2018, the Supreme People’s Court set aside the decision of the second instance, and decided that Linzhi Electric Heating Device Co. shall compensate the economic losses of Guowei Ceramic Electric Apparatus Co., amounting to RMB 9,377,867 yuan.

Comment on Rule The decision of this case makes innovations in the determination mechanism for infringement damages, so it is very typical and instructive in determining damages. 1. On the Sued Infringing Products with Multi Units and Multi Patents, When Calculating the Damages, We Need to Consider the Contribution Degree that the Patent in Dispute Makes to the Profits of the Infringing Products The damages awarded for infringement on intellectual property right shall be proportional to its market value. As for the sued infringing products with multi units and

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multi patents, the overall sales profit can be obtained from multiplying the total sales of the infringing products by the profit rate of infringing products, which does not equal to the profit obtained by infringer’s infringement. It is because the profit of the sued infringing products does not only come from employing the technical proposal of patent, but also from other patents or units they used. Therefore, in calculating the damages, as for the sued infringing products with multi units or multi patents, the contribution degree which the patent in dispute makes to the profit of infringing products shall be taken into consideration. And it is calculated through “total sales of infringing products × profit rate × the contribution degree made by the patent technology to product value”. And in this case, Guowei Ceramic Electric Appliances and Jiang X proposed to calculate the damages by multiplying the total sales of infringing products by profit rate of infringing products, which is untenable. On the contribution degree that the patent in dispute makes to the profit of infringing produts, we can comprehensively take the following factors into consideration: the importance of the patent in dispute; and other patents or units the sued infringing products used, etc. In this case, the patent in dispute plays an important part in the market attractiveness of PTC heater of Linzhi Electric Heating Device Co. At the same time, since the PTC heater also includes other units, it is inappropriate to attribute all the profits of infringing products to patent in dispute. At last, the court decided the contribution degree the patent in dispute made to the profit Linzhi Electric Heating Device Co. obtained from its infringing products is 50%. 2. For Separable Infringement Behaviors, the Damages Can be Calculated by Profit Obtained from Infringement and Statutory Damages Respectively When calculating the damages, sometimes the infringement behaviors can be separated. For example, if the sued infringing products are sold to different subjects, the sued infringement behaviors targeting at different subjects will be separable. Therefore, the amount of damages can be calculated separably. As for the evidence offered by patentee, if the evidence can show the sales amount of the sued infringing products, we can calculate the profit obtained from infringement by total sales amount of products, profit rate, and contribution degree. As for the evidence which could not show specific sales amount of the sued infringing products, we shall determine damages according to statutory damages. Then we can determine the final amount of damages by the sum of the two. In this case, the total sales of the infringing products sold by Linzhi Electric Heating Dveice Co., Ltd, claimed by Guowei Ceramic Electric Appliances and Jiang X, includes the following supply amounts, Linzhi Electric Heating Device Co., Ltd supplies to Guangdong Midea Co., Ltd, the Purchasing Departement of Hisense (Zhejiang) Air Conditioner Co., Ltd, Hisense (Shandong) Air Conditioner Co., Ltd, and the Purchasing Departement of TCL Air Conditioner Division. And evidence offered by Guangdong Midea Co., Ltd, and the Purchasing Departement of Hisense (Zhejiang) Air Conditioner Co., Ltd and the Purchasing Department of TCL Air Conditioner Division cannot show the supply amount of the sued infringing products in this case. Therefore, as for the evidence showing Linzhi Electric Heating Device Co. supplied to Hisense (Shandong) Air Conditioner Co., Ltd, the quantity and sales of products supplied by Linzhi Heating Device Co. can

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be proved to belong to the infringing products in this case. Therefore, the amount of damages shall be calculated by profit earned from infringement. As for the supply to Guangdong Midea Co., Ltd, the Purchasing Department of Hisense (Zhejiang) Air Conditioner Co., Ltd and the Purchasing Department of TCL Air Conditioner Division, since the evidence is not sufficient to prove the proportion the sued infringing products took up in the total sales of Linzhi Electric Heating Device Co. to the abovesaid three companies, the statutory damages shall be applied to calculate the damages. In the end, about RMB 9,500,000 yuan is decided to compensate the patentee for its losses. This is an intellectual property infringement case by the Supreme People’s Court with the highest amount of damages in recent years, embodying the judicial policies which strictly protect the intellectual property and adhere to the orientation of market value in intellectual property damages. At the same time, this decision offers guidance in fully protecting the patentees, practically strengthening patentees’ sense of gain, and implementing the instructions of the Central Party Committee at the core of the General Secretary, Xi Jinping, on strictly protecting intellectual property.

Li Zhu Doctor of Laws, senior judge, Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China. Bo Zhang Juris Master, assistant judge, the Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China.

Xixia Longcheng Special Materials Co., Ltd. v. Yulin Intellectual Property Bureau, Shenmu Tianyuan Chemical Co., Ltd. of Shaanxi Coal and Chemical Industry (Dispute over Administrative Resolution of Patent Rights): Identification and Resolution on Procedure Violations in Administrative Enforcement of Patent Law Yunpeng Ma

Rule 1. When a member of collegiate panel has changed and then attached a signature on the a administrative decision, that behavior in essence means “a judge who heard the case but did not deliver the opinion, while some other judges delivered the judgment but never took part in hearing.” It constitutes a serious breach of legal procedures. Such circumstance is not influenced by subjective cognition of administrative counterparts, and will not be changed even if there is no objection from administrative counterparts. Neither does it fall within the circumstance of “a minor violation in administrative enforcement procedure which entails a revocation of an adminstrative action”.

Collegiate Panel: Jian Li, Zhihong Zhang and Weike Du (Edited by Wenyan Ding; translated by Lin Sun and Yi Zheng) Y. Ma (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_35

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2. Administrative law enforcement officials shall have corresponding qualifications for law enforcement, which is an integral component of legal qualifications for administrative subjects and necessary requirements for exercising administration strictly in accordance with laws and regulations. In principle, the collegiate panel which made the administrative decision shall be constituted by staffs of an administrative agency with proper qualifications for administrative enforcement of patent law. Even if a law enforcement official has to be dispatched from other areas, a formal and complete document procedure shall be followed. 3. The contents of patent claims are the sole standard used to define the scope of protection for patent rights, while instructions and attached drawings are only used to explain the contents of claims. When employing instructions and attached drawings to explain the patent claims, the specific description of certain implementations shall not be read into the patent claims.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Xixia Longcheng Special Materials Co., Ltd (hereinafter referred to as Longcheng Special Materials Co.) Appellee (Defendant in the First Instance, Appellee in the Second Instance): Yulin Intellectual Property Bureau Appellee (The Third Party in the First Instance, The Third Party in the Second Instance): Shenmu Tianyuan Chemical Co., Ltd. of Shaanxi Coal and Chemical Industry (hereinafter referred to as Shenmu Tianyuan Co.) 2. Procedural history First Instance: No. 00267 [2015] Trial, Adm. Division, the Intermediate People’s Court of Xi’an City, Shaanxi Province (dated Nov. 30 of 2015) Second Instance: No. 94 [2016] Final, Adm. Division, the Higher People’s Court of Shaanxi Province (dated Jun. 6 of 2016) Case Reopening: No. 84 [2017] Reopening, Adm. Division, the Supreme People’s Court (dated Dec. 25 of 2017) 3. Cause of Action Dispute over administrative resolution of patent rights

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Essential Facts In the case of Longcheng Special Materials Co. v. Yulin Intellectual Property Bureau and Shenmu Tianyuan Co. of Coal and Chemical Industry, the Appellant accused that the manufacturing and using equipment by the Shenmu Tianyuan Co. of has infringed on the Appellant’s utility model patent, numbered No. ZL201020586802.2 “Internal-coal and external-heating coal material decomposing equipment” (hereinafter referred to as the patent in dispute). On that ground, the Appellant requested for an administrative ruling of Yulin Intellectual Property Bureau. After the examination, Yulin Intellectual Property Bureau determined that the corresponding technical features of the sued infringing equipment did not constitute equivalent features of the patent in dispute, such as a “sealed furnace wall” and “propelling and decomposing pipelines for coal materials”. The former did not fall into the scope of protection of the latter, so Shenmu Tian Yuan Co. has not infringed on the patent in dispute. The sued administrative decision was made by a collegial panel including Gou X, a staff of Baoji Intellectual Property Bureau, but there is no formal official document on the decision of dispatching him to take part in the administrative handling of the patent in dispute. Besides, in the oral hearing transcript, there is no record showing that Yunlin Intellectual Property Bureau had informed Longcheng Special Materials Co. and Shenmu Tianyuan Co. of the formal identity of Gou X, nor the reason to dispatch him to the collegial panel. Yunlin Intellectual Property Bureau has actually conducted two oral hearings for the dispute over patent infringement of the patent in dispute, during the second one, the parties are informed that the members of the collegial panel are different from the members who attached their signatures in the administrative decision. Longcheng Special Materials Co. was dissatisfied with the administrative decision, and filed an administration proceeding with the people’s court. The Intermediate People’s Court of Xi’an City, Shaanxi Province held that the dispatching of administrative law enforcement officials within the system belonged to an internal affair of administrative organs, and did not violate the internal communication system. This is because Yulin Intellectual Property Bureau was short handed, it transferred a staff from Baoji Intellectual Property Bureau upon the approval of Shaanxi Intellectual Property Bureau, which is deemed to be proper and the sued administrative decision made herein does not violate legal procedures. In addition, there is no inappropriateness in determining the substantive issues of this infringement. Therefore, the claims of Longcheng Special Materials Co. were overruled. Longcheng Special Materials Co. was dissatisfied, and petitioned an appeal to the Higher People’s Court of Shaanxi Province, who in its second instance dismissed the appeal, and upheld the original judgment. Longcheng Special Materials Co. still was dissatisfied, and petitioned for case reopening to the Supreme People’s Court. And the Supreme People’s Court decided to reopen the case via certiorari.

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Issues 1. Whether the sued administrative decision has been made in violation of legal procedures; 2. Whether the laws and regulations applied in the first and second instances are wrong.

Holding Upon review, the Supreme People’s Court holds that: 1. On Procedural Problems of the Sued Administrative Decision Firstly, Yulin Intellectual Property Bureau signed the sued administrative decision although the members of collegiate panel have changed. Such behavior in essence means “a judge who heard the case but did not deliver the opinion in judgment, while some other judges who has delivered the judgment but never took part in hearing.” which constitutes a serious and obvious violation in legal procedure. Secondly, the collegiate panel of Yulin Intellectual Property Bureau shall be comprised of staffs with proper qualifications for patent administrative enforcement. Even if a law enforcement official has to be called upon from other areas under special circumstances, a formal and complete document procedure shall be followed. The evidence submitted by Yulin Intellectual Property Bureau has no direct relation with this case, so they can not be used as legal and effective basis to support Gou X to take part in the collegiate panel that made the sued administrative decision. Whether the parties involved deny the identity of Gou X or not, the legality of the sued administrative acts cannot be justified. To sum up, there are flaws in the procedure of making the sued administrative decision. 2. On the Identification of Comparisons on Infringements in the Sued Administrative Decision If there is no limit for the claim 1 of the patent rights in dispute, we shall not apply the description of the rotary furnace wall in instruction to define the sealed furnace wall of claim 1. The interspace in the sued infringing equipment will not lead to a substantial change in the overall heating function and heating effects of coal pipelines. Patent claim 1 does not limit the quantity and location of the propelling and decomposing pipelines for coal materials. Under this premise, its methods, functions and effects have no substantial difference with the sued infringing equipment which only has one rotary furnace wall as its propelling and decomposing pipelines. Thus, there are mistakes in the explanation of the sued administrative decision for “sealed furnace wall” and “propelling and decomposing pipelines for coal materials”.

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Therefore, the Supreme People’s Court decided to reopen the case, adjudicated to set aside the judgments of the first instance and the second instance, and ordered Yulin Intellectual Property Bureau to make a new administrative decision.

Comment on Rule 1. The Making of the Sued Administrative Decision Violated the Legal Procedure, and Shall be Reversed First of all, for the dispute over the patent infringement between Longcheng Special Materials Co. and Shenmu Tianyuan Co. upon the request of Longcheng Special Materials Co., Yulin Intellectual Property Bureau in fact was in the center of the decision in deciding whether Shenmu Tianyuan Co. constituted patent infringements. Since the identification and determination of patent infringements involved drawing the boundary for patent rights, the vital interests of the parties, and scientific and technological innovations, they need to be guaranteed by a strict and standard dispute settlement procedure. In handling this dispute over the patent infringements, Yulin Intellectual Property Bureau should have sticked to a rigorous, standardized, open and equal procedure principle. However, in this case, Ai X, a member of collegiate panel signed in the sued administrative decision, has been changed into Feng X. Such change in essence means “a judge who heard the case but did not deliver the opinion in judgment, while some other judges who has delivered the judgment but never took part in hearing.” Such a circumstance goes against the purpose of administrative enforcement in accordance with law, and reduces the trust of social public for the subjects of administrative law enforcement. For this reason, his case was still unsettled after being judged by the Intermediate People’s Court and the Higher People’s Court. As for the aforementioned important and basic procedure items, Yulin Intellectual Property Bureau never exercised enough prudence and duty of care, and such a mistake itself constituted a serious and obvious violation in legal procedure. Apparently, it does not belong to what Yulin Intellectual Property Bureau called, the circumstance of “a minor violation in administrative enforcement procedure which needs not to be revoked”. Second, the sued administrative act is an administrative resolution of the dispute over the patent infringements made by Yulin Intellectual Property Bureau. Such an administrative resolution was made in the name of Yulin Intellectual Property Bureau, and was implemented by a five-member collegiate panel. Administrative law enforcement officials shall have corresponding qualifications for law enforcement. This is an integral component of legal qualifications for administrative subjects and necessary requirements for exercising administration strictly in accordance with laws and regulations. In principle, the one who made the sued administrative decision, namely, the collegiate panel of Yulin Intellectual Propery Bureau, shall be comprised of its staffs with qualifications of patent administrative enforcement. All the parties confirmed

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that law enforcement region recorded in Patent Administrative Enforcement Certificate was within the scope of bearer’s working area. Yulin Intellectual Property Bureau argued that it was only established for a short time with insufficient law enforcement officials and inadequate experience, so some experienced law enforcement officials needed to be dispatched from other areas to hear this case. Even if as it argued, the following situation “a judge who heard the case but did not deliver the opinion in judgment, while some other judges who has delivered the judgment but never took part in hearing” shall not be allowed. To be clear, it did not mean the dispatch of law enforcement officials required no formal and complete document procedure. Otherwise, we cannot guarantee a standard and serious procedure of administrative law enforcement, which is harmful to standardize the administrative law enforcement, and can not strengthen the responsibility of administrative law enforcement. However, in this case, Yulin Intellectual Property Bureau never submitted any formal document for dispatching Gou X to hear this dispute. The so-called reply (copies) submitted by the Coordination and Protection Office of Shaanxi Intellectual Property Bureau is actually an internal request for instruction written by the office to the leaders of this bureau, with no document number and official stamp, which is too simple and casual. Therefore, the Supreme People’s Court did not accept it as a valid evidence to support Gou X to take part in the collegiate panel for making the administrative decision. As for the Reply on Dispatching Law Enforcement Officials in Individual Cases from Management Division of National Intellectual Property Administration of PRC to Shaanxi Intellectual Property Bureau, it was made on November 20, 2015 in form, which was made after the sued administrative decision, hence it cannot be used as an evidence to prove that Gou X can legally took part in the collegiate panel for making the administrative decision. In the reply, it said that the dispatch of law enforcement officials in this case did not violate relevant provisions of civil servant exchanges. Yet one of the issues in this case is whether the procedure of such dispatch is formal and complete, so such a reply has no direct relation with the items to be proven. Therefore, the reply cannot be used as the basis to support Gou X to take part in the collegiate panel which made the sued administrative decision, too. At last, to strengthen the judicial supervision on administrative enforcement of patent rights, and to strongly standardize and promote the administrative enforcement of administrative organs in accordance with law are important representations of displaying the guiding roles of judicial protection in intellectual property field, and are also important in strengthening the legal construction in intellectual property field and are of great significance in optimizing the legal environment for scientific and technological innovations. In this case, Yulin Intellectual Property Bureau claimed that it gave an oral notice to the parties of the specific identity of Gou X and the reason why Gou X took part in the collegiate panel, which finds no evidence to support. No matter Longcheng Special Materials Co. accepted the identities of collegiate panel members or not, this is not the premise and crucial element to evaluate the legality of administrative act in the reopening of the case. In particular, Ai X, as a member of collegiate panel, was changed to Feng X, and then Feng X signed

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in the sued administrative decision. Such behavior has already constituted a serious violation in legal procedures. This fact is not influenced by the subject cognition of administrative counterparts, and will not change even if the administrative counterparts held no objections. Therefore, it is proper for Longcheng Special Materials Co. to raise objections and claims concerning this problem during the reopening of this case. Yulin Intellectual Property Bureau and Shenmu Tianyuan Co. put forward that Longcheng Special Materials Co. held no objections to members of the collegiate panel, so the procedure was legal. Such a claim on procedure shall not be supported. 2. The Applications of Law in the Sued Administrative Decision in the First Instance and the Second Instance are Wrong, and Shall be Corrected (1) On the Explanation of Sealed Furnace Wall in Patent in Dispute According to the sued administrative decision, the description and operating principle in paragraph 0021 in the instruction of this patent shows that the sealed furnace wall is fixed to the propelling and decomposing pipelines for the coal materials. However, the clamp cover of the sued infringing equipment itself is not rotary at all, and the rotary furnace wall wrapped up by the clamp cover is rotary to the clamp cover. Therefore, the sealed furnace wall in the patent in dispute and the rotary furnace wall in the sued infringing equipment are different from each other in structures, functions and effects. However, the appellant court held that the scope of protection of the patent rights for invention and utility model shall be subject to their claims, while instructions and attached drawings could only be used to explain the claims, in accordance with Article 59 of the Patent Law . Obviously, the claims are the only standard to define the scope of protection of patent rights, while the instructions and attached drawings are only used to explain those claims. Therefore, when the instructions and attached drawings are used to explain the patent claims, the description of specific embodiments in instructions shall not be reada into the patent claims. Otherwise, it will unreasonably limit the scope of protection for patent rights. And patent claim 1 does not define whether the sealed furnace wall and the propelling and decomposing pipelines for coal materials are rotary, and paragraph 0021 in the instruction of the patent in dispute is a specific embodiment of technological plan of this patent, we shall not use the description of the rotary furnace wall to define the sealed furnace wall in patent claim 1. That is, whether the sued infringing equipment is rotary or not does not influence the identification of this case on patent infringement. According to the administrative decision, in order to enhance the efficiency of heat utilization and pyrolysis, the sealed furnace wall in the patent in dispute requires a continuous space in heat exchange unit, while the sued infringing equipment owns a heat exchange set comprised of three discontinuous rooms separated by three clamp covers in furnace wall. Therefore, their structures, effects and purposes are different. In fact, the furnace wall of the sued infringing equipment was wrapped up in sections by three clamp covers, and formed three separated sealed heat-exchange rooms. Their function is to heat coal materials in pipelines, and it is also the technical function meant to be achieved in the patent in dispute. Compared with the empty one-piece heating cavity in the patent in dispute, the three-section heating cavity in the sued

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infringing equipment is slightly different in heating effects. All the parties confirmed that “the total length of coal pipelines in the sued infringing equipment is 35 m, and the interspace between two clamp covers is about 2 m”. Generally speaking, a coal pipeline with an interspace of one tenth its length will not lead to a substantial change in its integral heating function and effects. As for this, Shenmu Tianyuan Co. of Coal and Chemical Industry did not produce any evidence to prove that the heating efficiency of its equipment is obviously lower than the technical plan of the patent in dispute. Both the sued administrative decision and Shenmu Tianyuan Co. claimed a safety problem of the sued infringing equipment in its process of improving pyrolysis. However, there is no relevant evidence on record to prove such a safety problem. Therefore, there are mistakes in the explanation made by the sued administrative decision for the sealed furnace wall of the patent in dispute. (2) On the Explanation of Propelling and Decomposing Pipelines for Coal Materials in Patent in Dispute According to the sued administrative decision, the propelling and decomposing pipe for coal materials of the patent in dispute is fixed within the sealed furnace wall, while the rotary furnace wall in the sued infringing equipment rotates relatively to clamp covers. Therefore, their structures and working principles are different. As for this regard, the reopening court held that patent claim 1 never defined the rotary of its propelling and decomposing pipelines for coal materials, so whether the furnace wall of the sued infringing equipment is rotary or not does not influence the judgment of patent infringement in this case. Yulin Intellectual Property, in the case reopening for new trial by the Supreme People’s Court, claimed that as said in the paragraph 0023 of the instruction and the attached drawings, the invention of the patent in dispute consists in employing several parallel closely-arranged pipelines to form propelling and decomposing pipelines for coal materials, but there is only one rotary furnace wall in the decomposing pipelines for coal materials in the sued infringing equipment. As for this, the Supreme People’s Court held that patent claim 1 never made further limit on the quantity and location of the propelling and decomposing pipelines for coal materials, but its dependent patent claim 5 recorded the features of internal-coal and externalheat coal decomposing equipment described in patent claims 1 and 2. Its features susbsisting in the described propelling and decomposing pipelines for coal materials are comprised of several parallel closely-arranged pipelines. A distribution plate is set at one end of such parallel propelling and decomposing pipelines which are closely arranged together. Such distribution plate is connected with a coal feed mouth, and a gathering plate is set at the other end of these pipes. In accordance with provisions on how to compile patent claims in the Rules for the Implementation of the Patent Law, the dependent claim shall further define the independent claim which it refers to. And the scope of protection for independent claim shall be greater than the one for dependent claim. Therefore, patent claim 5 defined that the propelling and decomposing pipelines for coal materials are comprised of several parallel closelyarranged pipelines, and can be deduced reversely that the propelling and decomposing

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pipelines for coal materials in its subordinate patent claim 1 do not require a lot of parallel closely-arranged pipelines. Besides, all the parties have confirmed that “both the propelling and decomposing pipelines for coal materials of the patent in dispute and the rotary furnace wall of the sued infringing equipment can be directly fed with coal.” From that, no matter what specific description was used for the equipment with a function of feeding coal to the sued infringing equipment directly, there is no substantial differences in methods, functions, and effects with the propelling and decomposing pipelines for coal materials. Therefore, there are some mistakes in the explanation made by the sued administrative decision for the propelling and decomposing pipelines for coal materials. 3. The Handling of Legal Procedures in Resolving the Patent Infringement Based on the situation of China’s existing patent legal system, the dispute over the patent infringement between Longcheng Speical Materials Co. and Shenmu Tianyuan Co. can be solved by civil litigation more effectively. In consideration of letting the parties accept the judgment and stop more actions, the court explained to Longcheng Special Materials Co. and asked whether the company chose to file a civil action with the people’s court in terms of the dispute over the patent infringement. Longcheng Special Materials Co. submitted a written opinion to the court, and insisted that Yulin Intellectual Property Bureau should make a new administrative decision in accordance with law. In addition, Shenmu Tianyuan Co. has submitted a written application on December 15, 2017 to the court handling the case reopening, and claimed that Patent Review Board has accepted its request for invalidating the patent in dispute, which means that the status of the disputed patent rights are not stable. As a valid patent is the premise for establishing a patent infringement, so it requested the court to suspend the hearing. As for this, the court handling new trial held that the evaluation report for utility model submitted by Longcheng Special Materials Co. during the procedure of administrative resolution showed that there are no flaws to object the granting of patent rights in all the claims of the patent in dispute. At present, the disputed patent rightsare still valid. And even if Patent Review Board has accepted the request for the invalidating the patent in dispute, the legal action shall not be necessarily suspended. Therefore, the claim of suspending the hearing of this case raised by Shenmu Tianyuan Co. shall not be upheld.

Yunpeng Ma Doctor of Laws, assistant judge, Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China.

Zhejiang Longda Stainless Steel Co., Ltd. v. A. P. Moller-Maersk A / S (Dispute over the Contract of Carriage of Goods by Sea): Application of Law Concerning the Consignor’s Right to Modify the Contract for Goods in Transit Ke Zhao

Rule Under contract of carriage of goods by sea, pior to carrier’s delivery of the cargoes to the consignee, the consignor has the right to request the modification of the contract in accordance with Article 308 of the Contract Law. But both parties should follow the principle of fairness in deciding their respective rights and obligations in accordance with Article 5 of the Contract Law. When the consignor exercises this right, the carrier may exercise certain right of defense. If the change of the contract of carriage makes it difficult to realize or would seriously affect the carrier’s normal operation, the carrier may refuse the consignor’s request to change port or return the goods. However, the consignor shall be informed in time of the reasons for its failure to perform.

Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): A.P. Moller-Maersk A/S (hereinafter referred to as Maersk) Collegiate Panel: Shumei Wang, Xiaohan Yu and Xiwu Huang (Edited by Zaiyu Guo; translated by Yujiao Shi) K. Zhao (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_36

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Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Zhejiang Longda Stainless Steel Co., Ltd. (hereinafter referred to as Zhejiang Longda Stainless Steel Co.) 2. Procedural History First Instance: No. 534 [2015] Trial, Civ. Division, Ningbo Maritime Court (Dated Mar. 4 of 2016) Second Instance: No. 222 [2016] Final, Civ. Division, the Higher People’s Court of Zhejiang Province (Dated Sept. 29 of 2016) Case Reopening: No. 412 [2017] Reopening, Civ. Division, the Supreme People’s Court (Dated Dec. 29 of 2017) 3. Cause of Action Dispute over the contract of carriage of goods by sea

Essential Facts In June 2014, Zhejiang Longda Stainless Steel Co. exported a batch of stainless steel seamless products from Port of Ningbo to Port of Colombo, Sri Lanka. The customs value of the transported goods was USD 366,918.97. Zhejiang Longda Stainless Steel Co. ordered space from Maersk through a freight forwarder. The goods involved in the case were loaded into 4 containers and shipped on June 28 of the same year. Zhejiang Longda Stainless Steel Co. required Telex Release at the time of departure. On July 9, 2014, Zhejiang Longda Stainless Steel Co. sent an email to Maersk through the freight forwarder, saying that it was found that the goods were transported to the wrong destination and required to change port or return the goods. Maersk replied on the same day that it could not arrange to change the port because the goods would arrive at the port of destination in less than 2 days; and that the return of the goods needed to be confirmed with the port of destination before reply. The next day, the forwarder of Zhejiang Longda Stainless Steel Co., asked if the goods could be returned by the same ship. Maersk replied on the same day, “The return by the same ship is not feasible. After the goods are unloaded at the port of destination, the current consignee needs to go through the customs formalities at the port of destination, and then apply to the local customs for return. Only after the approval of the customs could the return of goods be arranged”. On July 10 of 2014, Zhejiang Longda Stainless Steel Co. sent the message by email that “the goods need to be returned to Ningbo because the customs clearance could not be completed. Is there any other solution?” After that, Maersk did not reply to the email. The goods involved arrived at the port of destination on or about July 12, 2014. Maersk issued a full set of original B/L No. 603386880 to Zhejiang Longda Stainless Steel Co. on January 29, 2015 at its request. According to the bill of lading, the consignor was Zhejiang Longda Stainless Steel Co.; the consignee and the notifying

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party was Venus Steel PVT. Ltd.; the port of loading was Ningbo, China; and the port of discharge was Colombo. On May 19, 2015, Zhejiang Longda Stainless Steel Co. sent an email to Maersk saying that it had applied for return of goods as required by Maersk. Maersk later informed Zhejiang Longda stainless steel Co. that the goods involved in the case had already been auctioned. Ningbo Maritime Court of P.R.C. held that Zhejiang Longda Stainless Steel Co. failed to take effective measures such as self-service pickup of the goods, resulting in the goods involved being auctioned by the customs, and that the corresponding risk of goods damage should be borne by the company. On March 4, 2016, the court of first instance made a civil decision (No. 534[2015] Trial, Civ. Division, Ningbo Maritime Court of P.R.C.) dismissing the claims of Zhejiang Longda Stainless Steel Co.. After the trial of first instance, Zhejiang Longda Stainless Steel Co. filed an appeal. The Higher People’s Court of Zhejiang Province held that according to Article 308 of the Contract Law, Zhejiang Longda Stainless Steel Co. had the right to request port change or return of goods before the delivery of goods by Maersk. After Zhejiang Longda Stainless Steel Co. requested the return shipment, Maersk did not explicitly refuse to arrange the return shipment, nor inform Zhejiang Longda Stainless Steel Co. of dealing with it by itself. It should bear the corresponding compensation responsibility for the cargo damage and losses involved, and the proportion of liability was evaluated to be 50%. On September 29 of 2016, the court of second instance made a civil decision (No. 222 [2016] Final, Civ. Division) reversing the decision of first instance: Maersk should compensate Zhejiang Longda Stainless Steel Co. for the cargo damage and losses of USD 183,459.49 and the interest accrued thereon within 10 days from the date of service of the decision. Maersk refused to accept the decision of second instance and petitioned to the Supreme People’s Court for reopening of the case.

Issues 1. Whether Maersk should arrange for the return of goods involved or port change; 2. Whether Maersk has fulfilled the duty of prudent management of goods and whether it should be liable for the damage of goods of Zhejiang Longda Stainless Steel Co.

Holding On December 29, 2017, the Supreme People’s Court issued the civil decision (No. 412 [2017] Reopening, Civ. Division, the Supreme People’s Court), which held that it was not improper for Maersk not to change the port nor return the goods as instructed. The claims of Zhejiang Longda Stainless Steel Co. that Maersk failed to fulfill its duty of prudent cargo management were lack of supporting evidence. Therefore, the claims of Zhejiang Longda Stainless Steel Co. asking Maersk for compensation could not be established, so the decision of second instance was reversed and that of first instance was maintained.

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Comment on Rule Under contract of carriage of goods by sea, whether the consignor can invoke Article 308 of the Contract Law to claim the right to change the contract of carriage in the course of carriage has always been controversial. The case unifies the decision standards for the relevant difficult legal issues, and is also conducive to the improvement of maritime laws, with the following significance: First, it unifies the rules of adjudication. Based on the facts of the case, strict logical reasoning, the principle of fairness of the Contract Law and reasonable balance of the interests of all parties in the contract of carriage of goods by sea, it is determined that the application of Article 308 of the Contract Law in the carriage of goods by sea should be limited to a certain extent. If the change of the contract of carriage makes it difficult to achieve or will seriously affect the normal operation of the carrier, the carrier may refuse the request of the consignor to change the port or return the goods, but shall promptly notify the consignor of the reasons for the failure to perform. Second, it promotes the revision of maritime laws. In accordance with Article 89 of the Maritime Law, the consignor may require the dissolution of the contract before the ship sails at the port of loading. However, the maritime laws have not provided for the relevant circumstances in the course of maritime transport. Under such circumstance, the provisions of Article 308 of the Contract Law on the consignor’s right to change the contract of carriage can be applied. In practice, the transportation of goods by sea has the characteristics of large transportation volume, pre-determined voyage, relatively fixed route, etc. sometimes the consignor’s request for port change or return of goods is not only difficult to meet, but also hinders the normal operation of the carrier or causes great damage to the consignor or consignee of other goods. Under such circumstance, it is obviously unfair to require the carrier to obey the consignor’s request of changing the contract of carriage unconditionally, which is not conducive to the development of the shipping industry. The case will help to promote the continuous improvement of maritime laws along with the development of the shipping industry by making clear how Article 308 of the Contract Law is applied in the field of maritime transport. Third, it adheres to the principle of fair protection and builds a sound business environment. Maersk, one party hereto, is the largest container shipping company in the world. Its headquarters is located in Denmark, playing an important role in the shipping industry of countries under the Belt and Road Initiative. The other party hereto is a Chinese company. The decision hereof, based on the practice of cargo transportation by sea, adheres to the principle of fairness, equally protects the rights of parties at home and abroad, and highlights the good legal environment in China.

Ke Zhao Master of Laws, assistant judge, the Fourth Civil Division of the Supreme People’s Court of the People’s Republic of China.

Qu X v. Weihai Central Branch of China Continent Property & Casualty Insurance Co., Ltd., Shidao Branch of China Continent Property & Casualty Insurance Co., Ltd. (Dispute over Marine Insurance Contracts): The Liability of Insurance Compensation and the Determination of the Amount and Interest of Insurance Compensation Xiaohan Yu

Rule 1. The determination of insurance compensation liability involves accident cause, insurance coverage, exclusions of (contractual and statutory) insurance liability, influence degree of insurance risk, etc. As to whether the insurer should bear the insurance liability for a specific accident and the extent of insurance compensation liability, first of all, the cause of the accident and the insurance coverage should be analyzed to determine whether all or part of the accident causes fall within the scope of the insurance coverage; then, the validity of the exclusions agreed in the insurance contract and the reasons for the existence of legal exclusions should be examined, so as to determine whether the insurer has the right to refuse to pay compensation in accordance with the agreement or legal exclusions; finally, ultimate insurance compensation liability of the insurer should be determined according to the impact degree of insurance underwriting risk (causal relationship composition).

Collegiate Panel: Xiaohan Yu, Xuefeng Ren and Xiwu Huang (Edited by Zaiyu Guo; translated by Yujiao Shi) X. Yu (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected]

© Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_37

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2. The “commencement” provided in Article 244 of the the Maritime Law shall refer to the departure of the ship and the start of the scheduled voyage, excluding the shifting of the ship in the port. However, if the shipowner, the master and the crew fail to pay due attention to the accidents caused by the organization and implementation of the ship’s berthing in port in response to typhoon, they shall be deemed to be negligent.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Qu X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Weihai Central Branch of Continent Property & Casualty Insurance Co., Ltd. (hereinafter referred to as Weihai Branch of Continent Insurance) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Shidao Branch of China Continent Property & Casualty Insurance Company Ltd. (hereinafter referred to as Shidao Branch of Continent Insurance) 2. Procedural history First Instance: No. 440 [2011] Trial, Civ. Division, the People’s Court of Rongcheng City, Shandong Province (dated Feb. 20 of 2012) Second Instance: No. 1542 [2016] Final, Civ. Division, the Higher People’s Court of Shandong Province (dated Sept. 13 of 2016) Case Reopening: No. 413 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated May 15 of 2018) 3. Cause of Action Disputes over marine insurance contracts

Essential Facts On May 25, 2011, Qu X entered into two insurance contracts with Shidao Branch of China Continent Property & Casualty Insurance Co., Ltd. on the two ships of “Lurongyu 1813” and “Lurongyu 1814”, where it was agreed that the insurance type was comprehensive insurance; the insurance value of the ship was RMB 4.857 million yuan, and the insurance amount was RMB 3 million yuan; the insurance period was 12 months from 0:00 on May 26, 2011 to 24:00 on May 25, 2012. The two

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insurance contracts agreed to adopt the Insurance Clauses of Ocean Fishing Vessels of China Continent Property & Casualty Insurance Co., Ltd. (hereinafter referred to as the involved insurance clauses). Article 2 (scope of liability) of the involved insurance clauses states that the insurance includes total loss insurance and comprehensive insurance. Among them, the comprehensive insurance covers 6 types of responsibilities and expenses, including all or part of the losses of the insured fishing vessels caused by the following three reasons and the rescue expenses caused by the three reasons: (1) natural disasters and accidents such as storm, typhoon, lightning, drift ice, earthquake, tsunami, flood, volcanic eruption, grounding, reef, sinking, collision, fire, explosion of boiler or other equipment, oil pipe rupture, etc.; (2) potential defects in the hull and machinery; (3) negligence of the master, chief mate, crew, pilot or repairman. Article 3 (exclusion liabilities) of the involved insurance clauses states that the insurer shall not be responsible for compensation for the losses, expenses and liabilities listed in the 8 items, among which item 1 and item 2 are : the losses caused by the insured fishing vessel’s lack of seaworthiness; the losses caused by the negligence of the owner and his representative and the intentional acts of the owner and his representative and the master. In the involved insurance clauses involved in the case, the third part (exclusion liabilities) is printed in bolder font than other clauses. Qu X, in the first instance, claimed that the exclusion clauses had no effect on the ground that Shidao Branch failed to explain the exclusion clauses to him. Shidao Branch did not provide evidence to prove that it clearly stated the exclusion clauses and the special agreement in the insurance policy to Qu X when entering into the insurance contract. The port of registry of “Lurongyu 1813” and “Lurongyu 1814” ships is Shidao Port, Shandong Province. They were built in June 1999. Each ship is 30.62 meters long and 6.3 meters wide. The ship is made of steel with main engine power of 220 KW. Each ship weighs 120 gross tons and 42 net tons. After the two ships entered the fishing off-season on June 1, 2011, they carried out hull maintenance and on-board mechanical maintenance at the fishing wharf of North Port of Yandunjiao, Rongcheng City, Shandong Province. The main engine of “Lurongyu 1813” ship was lifted out of the cabin for maintenance on June 20. Qu X learned from the weather forecast that Typhoon Meari was approaching, and decided to move the two ships to the South Wharf of Yandunjiao to avoid the wind while the wind was not strong. At about 19:00 on June 25, 2011, Qu X, together with the captain Wu Huaqiao and the chief mate Meng Fanchao, tried to drive the two ships to the South Wharf by the power of the “Lurongyu 1814” ship alone. Later, on the way to the South Wharf, due to the failure of the steering gear, the two ships broke down and waited for rescue. During this period, the wind gradually increased. At about 0 o’clock on June 26, under the action of typhoon and waves, the anchor cables of the two ships broke, and they were out of control. At about 3:00 a.m. on June 26, the two ships were hit by the waves and ran aground on the east side of the sea cucumber pool of Rongcheng Yantai Cape aquatic products Co., Ltd. According to the first instance of Qingdao Maritime Court of P.R.C., the ship involved in the case suffered a storm or typhoon in the process of avoiding the typhoon and ran aground on the reef, resulting in total loss, which belongs to the

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scope of insurance compensation stipulated in the insurance contract, and the insurer shall bear the liability for compensation. On January 5, 2016, the Court made a civil decision (No. 240 [2012] Trial, Civ. Division, Qingdao Maritime Court of P.R.C.): Shidao Branch paid Qu X a certain insurance compensation of RMB 6 million yuan and interest; Weihai Central Branch was responsible for the supplementary payment of the above compensation. Qu X, Weihai Central Branch and Shidao Branch all appealed against the decision of first instance. According to the decision of second instance by the Higher People’s Court of Shandong Province, the accident involved in this case was caused by the negligence of the ship owner first, and then by the influence of the typhoon. The absence of either reason would not result in the accident, and it was difficult to determine which reason was more direct, effective and decisive. Weihai Central Branch and Shidao Branch should pay the insurance premium to Qu X according to the proportion of 50%. On September 13, 2016, the Court made a civil decision (No. 1542 [2016] Final, Civ. Division, the Higher People’s Court of Shandong Province): (1) Shidao Branch shall pay the compensation of RMB 3 million yuan to Qu X together with the interest accrued thereon from January 1, 2013 to the date of payment determined in the decision (calculated according to the benchmark interest rate of loan in the same period of the People’s Bank of China); (2) Weihai Central Branch shall be liable for the supplementary payment of the compensation stated in the first item of the decision. Qu X refused to accept the decision of second instance and petitioned to the Supreme People’s Court for reopening of the case.

Issue Determination of insurance compensation liability, insurance compensation amount and interest thereon.

Holding The Supreme People’s Court held that the case was a dispute over the marine insurance contract. Qu X agreed to insure the ship insurance with Shidao Branch in the form of actual payment of insurance premium, and both parties entered into an insurance contract. In addition to the clauses in the contract exempting the insurer from liability, the other clauses in the contract are basically legal and effective. The determination of insurance compensation liability involves accident causes, insurance coverage, exclusions (contractual and statutory) and the influence degree of insurance risks. As to whether the insurer should bear the insurance liability for a specific accident and the extent of insurance compensation liability, first of all, the cause of the accident and the insurance coverage should be analyzed to determine whether all or part of the accident causes fall within the scope of the insurance coverage; then, the

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validity of the exclusions agreed in the insurance contract and the reasons for the existence of legal exclusions should be examined so as to determine whether the insurer has the right to refuse to pay compensation in accordance with the agreement or legal exclusions; finally, ultimate insurance compensation liability of the insurer should be determined according to the impact degree of insurance underwriting risk (causal relationship composition). Qu X, as the owner of “Lulongyu 1813” and “Lulongyu 1814”, learned that Typhoon Meari was close to the port where the two ships docked, and decided to move the berthing on June 25, 2011 to avoid typhoon damage. This decision was reasonable. In the process of moving and berthing, the two ships ran out of control and suffered total loss due to the action of sea storm. In the cause of accident and loss, the typhoon has a direct and important impact. According to the fact that a ship’s engine room was flooded due to no one’s attention during the berthing process, there was also a reason for improper human response in the process of the accident. The accident involved in the case is caused by the typhoon, negligence of the ship owner and negligence of the captain’s crew, among which typhoon is the main cause. The insurance clauses involved in the case list three reasons for the comprehensive insurance coverage, the first of which is natural disasters and accidents such as storms, typhoons, strandings and rocks. The “accident” is generally understood as an accident not due to the intention or fault of the parties, but due to reasons other than the will of the parties. According to this, it can be determined that the first reason does not include the negligence or willfulness of the parties concerned; the second reason is the potential defects of the hull and machinery, and the accident involved does not concern this one; the third reason is the negligence of the captain, chief mate, crew, pilot or ship repair personnel, and the scope of the negligence personnel does not include the owner himself. The above-mentioned three reasons indicate that the negligence of the relevant personnel is specifically listed in the insurance clauses involved in the case, which also confirms that the first reason does not include the negligence of the parties. The insurance clauses involved in the case clearly indicate that the owner’s negligence is not covered by the listed insurance coverage. The three causes listed in Article 2 (scope of liability) of the involved insurance clauses are the risks covered by the insurance. Therefore, it can be concluded that among the three causes of the accidents involved in the case, the typhoon and the negligence of the captain’s crew belong to the risks covered, while the negligence of the shipowner is not. Shidao Branch did not provide evidence to prove that it clearly stated the exclusions to Qu X when signing the insurance contract. Qu X claimed that the exclusions in the insurance clauses involved in the case were not effective and should be supported. Article 244 (1) of the Maritime Law states: “Unless otherwise stipulated in the insurance contract, the insurer shall not be liable for the loss of or damage to the insured ship arising from any of the following causes: (1) Unseaworthiness of the ship at the time of the commencement of the voyage, unless where under a time policy the insured has no knowledge thereof; (2) Wear and tear or corrosion of the ship.” The “seaworthiness” as stipulated in this Law means that a ship is suitable for the voyage of a scheduled voyage in all respects, has the ability to bear the general maritime risks that may be encountered in the voyage, and keeps the ship in a safe state of navigation. The reason why the requirement of seaworthiness of ships in this

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law is limited to “commencement of the vovage” is that in the scheduled voyage, the risk that ships may encounter is greater than that in the port, and the activities of ship repair, loading and unloading in the port, objectively, are difficult to maintain a state suitable for outbound navigation. Therefore, the “commencement” as stipulated in Article 244 of the Maritime Law shall refer to the departure of a ship from the port and the beginning of a scheduled voyage, excluding the berthing of a ship in the port. In the shipping practice, the ship changes from anchoring, mooring and grounding to non anchoring, non mooring and non grounding, which can be categorized as being on the voyage, but not all the status of being on the voyage fall within the scope of commencement as stipulated in Article 244 thereof. During the period of berthing repair of the two ships involved in the case, Qu X arranged the ships to move in the port to avoid the typhoon, instead of arranging the ships to leave the port and start the scheduled voyage. Such port moving and berthing cannot be determined as the “commencement of the voyage” stipulated in Article 244 (1) (1) of the Maritime Law. Shidao Branch’s claims of exemption of insurance compensation liability according to the law are lack of factual basis and should not be supported. The accident in this case is caused by the joint action of the insured risk (the typhoon and the negligence of the captain and the crew) and the uninsured risk (the negligence of the owner), of which typhoon is the main cause. According to the impact of the above risks (causes) on the occurrence of the accident, it is determined that Shidao Branch shall bear 75% of the insurance compensation liability for the accident involved. Accordingly, on May 15, 2018, the Supreme People’s Court made a civil decision (No. 413 [2017] Reopening, Civ. Division, the Supreme People’s Court) : (1) reverse the decision of second instance ; (2) change the first item of the decision of first instance as follows: Shidao Branch pays Qu X a certain insurance compensation of RMB 4.5 million yuan and the interest thereon (from February 18, 2012, calculated according to the benchmark interest rate of similar loans of the People’s Bank of China for the same period to the date of payment determined in the judgment); (3) maintain the second item of the decision of first instance.

Comment on Rule This case is a typical ship insurance contract dispute case, after three levels of trial, the analysis of understanding and handling results are not the same. The reopening decision of this case has played a guiding role in the application of trial ideas and rules. In terms of the ideas of handling the case, the basic issues involved in the determination of insurance compensation liability are the overall effectiveness of the contract (not excluding that most of the terms of the contract are valid but some of them are not effective or invalid), the cause of the accident, the insurance coverage, the exclusions, the causal relationship, etc., which must be taken into consideration when handling similar cases. But in individual cases, there will be different emphasis due to different consensus and dispute points of the parties. The purpose of clarifying

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the argumentation level of basic problems is not only to solve this case, but also to provide reference guidance for the handling of similar cases. In contrast, the problems of the decision in first instance are that the insurance exemption clauses are not effective without confirming the coverage; the problems in the second instance decision are that neither the coverage nor the effectiveness of the exemption clauses are recognized, and the typhoon and the negligence of the shipowner are the two causes of insurance respectively. The common defect of the first instance and the second instance decision is that they fail to deal with all the basic problems of the case and establish a reasonable argumentation framework, and then fail to follow the logic rules. The reasoning chain of the judgment is not complete and strict, and the probability of the judgment being challenged is bound to increase. How to “shape” and improve the thinking of decision is the most important task for judicial workers to summarize and improve. The reopening decision of the case provides exemplary guidance. The first task of judging cases is to determine the fundamentals and argumentation framework correctly and reasonably. The next work is to implement several key points. The main points of this case include: accident causes, insurance coverage agreed in the insurance policy (whether it includes typhoon, negligence of the ship owner, negligence of the captain and crew), whether the agreed exemption clauses take effect, whether the legal exemption agreed by the insurer is established, insurance liability bearing, determination of insurance compensation and interest. On these issues, the reopening decision has been proved one by one, without any more words. There are only three points to be added here: first, the determination of the causes of insurance accidents in the insurance contract disputes should be based on the insurance underwriting risks and the reasons for exemption, combined with the relevant evidence and facts of the whole case such as the maritime investigation report, and should not be confined to the cause analysis in the accident investigation report of the maritime administrative organ. Because the reason analysis of this kind of investigation report’s starting point and purpose are not entirely for the treatment of insurance disputes. Second, concept is the starting point of logical reasoning, and the clear and accurate definition of basic concepts cannot be ignored in the reasoning and demonstration of judgment. For example, the meaning of “commencement” must be determined in this case. Undeniable words have polysemy. For the meaning of a specific concept, it is necessary to make a reasonable explanation according to the context of its legal text and even the specific terms in the text, combined with the literal meaning of the concept, relevant context, legislative purpose and other factors. Third, as neither the Insurance Law nor the Maritime Law prescribes the principle of proximate cause, how to deal with the loss of the insured caused by both the underwriting risk and the non underwriting risk (including the reasons for exemption) together? In terms of life insurance, Article 25 of the Judicial Interpretation on Several Issues about the Application of the Insurance Law (III) stipulates that “If the loss of the insured is difficult to be determined due to the insured accident or non insured accident or exemption, and the parties request the insurer to pay the insurance benefits, the people’s court may support it in accordance with the corresponding proportion.” From the perspective of the trend of the judicial interpretation

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to determine the compensation rules, the judicial practice of China’s insurance law is inclined to adopt the theory of proportional causality gradually developed in recent years in order to break the logic paradox of “all or no compensation” under the “principle of proximate cause”. The reopening of the case follows this judicial trend, and the insurer’s liability for compensation is determined according to the proportion of the underwriting risk to the cause of the loss.

Xiaohan Yu Master of Laws, senior judge, the Second Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Shipping Insurance Operation Center of PICC v. Shipbuilding Plant of Taizhou Sanfu Ship Engineering Co., Ltd. (Dispute over Shipbuilding Insurance Contract): Clarification of the Meaning of Seagoing Vessels and Interpretation of Insurance Clauses Xiaohan Yu

Rule 1. In principle, ships or vessels regulated in the Maritime Law shall be limited to those that are basically completed and capable of seafaring or navigation, except for the mortgage of ships or vessels under construction as provided in Article 14 of the Maritime Law; whether the ships or vessels insured by the shipbuilding insurance belong to the ships or vessels provided in the Maritime Law shall be determined in stages according to whether they are capable of seafaring or navigation. Disputes over the insurance contract of shipbuilding resulting from any event related to the insurance and the causes occurring in the stage of construction and design before the ship or vessel is basically completed shall be resolved in accordance with the Insurance Law, rather than the Maritime Law. 2. Any controversy between two parties to an insurance contract shall first of all be interpreted according to the commonsense understanding. In the first sentence of Article 3 “Scope of Liability” of the Shipbuilding Insurance Clauses of the People’s Insurance Company of China (2009 Edition) (hereinafter referred to as Shipbuilding Insurance Clauses, 2009), which is widely used in the insurance community in China, stating that “the Insurance company shall be liable for the following losses, expenses or liabilities of the insured ship”, the term “loss, Collegiate Panel: Xiaohan Yu, Honglei Yang and Xiwu Huang (Edited by Zaiyu Guo; translated by Yujiao Shi) X. Yu (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_38

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expense or liabilities” is a figure of speech of anthropomorphism or metonomy of the ship, which is commonly used in shipping practice to deem the ship as the owner, operator or builder of the ship and other relevant interested parties. Thus it can be understood that the term “loss, expense” incurred refers to the loss and expense incurred by the insured, but not that of the insured ship. Only when “loss” is directed toward a ship (thing) can that be limited to the physical damage; whereas when “loss” is directed against a person, the term of “loss or damage” may include not only the tangible physical damage but also invisible or intangible economic loss, unless otherwise specified. Therefore, the “loss due to faulty design of any part of the insured ship” covered in the shipbuilding insurance contract can include economic loss of the insured other than physical damage to the insured ship. 3. By issuing an insurance policy for shipbuilding insurance with a shipbuilding contract number, the insurer has in effect made it clear that the insurance is based on the text of the shipbuilding contract and that the scope of liability (covered risks) is determined in accordance with the terms and conditions specifided in the insurance policy and the contents of the insurance policy. The insurer is entitled to refuse to pay compensation for losses in excess of the insured’s liability under the shipbuilding contract if the insured were to discover an error in the ship’s or vessel’s design; and the insured may negotiate a separate claim with the buyer of the ship or vessel about the loss that exceeds the reasonable expectations of the parties to the insurance contract based on the shipbuilding contract text.

Case Information 1. Parties Appellant in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): Shipping Insurance Operation Center of the People’s Insurance Company of China (hereinafter referred to as PICC Shipping Center) Appellee in the Reopening of the Case (Plaintiff in the First Instance, Appellee in the Second Instance): Taizhou Sanfu Ship Engineering Co., Ltd. (hereinafter referred to as Sanfu Ship Engineering Company) 2. Procedural History First Instance: No. 1635 [2012] Trial, Civ. Division, Shanghai Maritime Court of P.R.C. (dated Oct. 24 of 2014) Second Instance: No. 11 [2015] Final, Civ. Division, the Higher People’s Court of Shanghai City (dated Jul. 13 of 2016) Case Reopening: No. 242 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Dec.26 of 2017)

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3. Cause of Action Dispute over shipbuilding insurance contract

Essential Facts On May 14, 2011, Taizhou Sanfu Ship Engineering Company insured a shipbuilding insurance with PICC Shipping Center for the disputed vessel or ship. On May 17 of the same year, PICC Shipping Center issued a shipbuilding insurance policy (Shipbuilding Insurance Clauses, 2009) to Taizhou Sanfu Ship Engineering Company. The policy stated that, the policyholder and the insured are Taizhou Sanfu Ship Engineering Company; the insurance item is 3#16900T bulk carrier; the contract or dock number is SF080103; the duration of insurance lasts from May 18, 2011 to October 17, 2012; the insured value and total sum insured is RMB 185,948,620 yuan, with the deductible being RMB 140,000 yuan. Article 3 “Scope of Liability” of on the back of the insurance policy in question states: The Company shall be liable for the following losses, liabilities and expenses in respect of the insured ship: 1. those incurred during the construction, commissioning and delivery of the insured ship at the shipyard, including the costs and expenses incurred from all material, machinery and equipment included in the insured value, and those incurred during loading, unloading, transport, storage and installation of the said equipment within the shipyard as well as during launching, entering and leaving the dock and berthing of the vessel due to the following reasons, ... and 5. Loss incured from faulty design in any part of the insured vessel. Article 4 “Exclusion of Liability” of the Shipbuilding Insurance Clauses, 2009 states: The Company shall not be liable for the following: ...; 2. The cost of repairing, modifying, replacing or rebuilding the incorrectly designed part itself and any cost or expenses incurred to improve or change the design ...; 6. Penalties under the construction contract and consequential damages due to rejection and other causes ...; 8. Other losses, liabilities and expenses not covered by the scope of liability (covered risks) in the said insurance policy. After discovering the design error of the vessel or the ship, Taizhou Sanfu Ship Engineering Company signed a Memorandum of Understanding No. 3 with the buyer, Hermione Three Maritime Limited (hereinafter referred to as Hermione Shipping Company) on March 10, 2012, agreeing to reduce the price by USD 2.86 million. Taizhou Sanfu Ship Engineering Company filed an insurance compensation claim under this basis. Shanghai Maritime Court of P.R.C. held in the first instance that the loss caused by the ship’s design error was covered by PICC Shipping Centre’s insurance, and that PICC Shipping Centre should compensate RMB 18,038,878 yuan for the reduced price negotiated by Sanfu Ship Engineering Company with the shipowner due to the ship’s draught design error. On October 27, 2014, the Court rendered the decision (No. 1635 [2012] Trial, Civ. Division, Shanghai Maritime Court of P.R.C.), indicating that

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PICC should compensate RMB 18,038,878 yuan plus interest to Taizhou Sanfu Ship Engineering Company. After the first instance trial, PICC Shipping Center filed an appeal. The second instance court, the Higher People’s Court of Shanghai City basically agreed with the first instance decision, but held that the first instance decision had erred in not withdrawing the deductible amount stated in the insurance contract, so the amount of RMB17,898,878 yuan should be compensated by PICC Shipping Centre to Taizhou Sanfu Ship Engineering Company. On July 13, 2016, the Court issued the decision (No. 11 [2015] Final, Civ. Division, the Higher People’s Court of Shanghai City), specifying that PICC Shipping Cneter should make a compensation of RMB 17,898,878 yuan together with interest to Taizhou Sanfu Ship Engineering Company. PICC Shipping Centre refused to accept the second instance decision and applied to the Supreme People’s Court to reopening the case for new trial.

Issue Clarification of the meaning of seagoing ships and interpretation of insurance clauses.

Holding The Supreme People’s Court (SPC) held that the disputed case was an insurance contract dispute over shipbuilding insurance. According to the claims raised by both parties in the reopening of the case, the focus of the reopening subsists in the application of the law, the scope and exclusion of insurance liability, the design error of the vessel or the ship, the compensation for damages and the trial procedure. In principle, ships or vessels regulated in the Maritime Law shall be limited to those that are basically completed and capable of seafaring or navigation, except for the mortgage of ships/vessels under construction as provided in Article 14 of the Maritime Law; whether the ships or vessels insured by the shipbuilding insurance belong to the ships/vessels provided in the Maritime Law shall be determined in stages according to whether they are capable of seafaring or navigation. Disputes over the insurance contract of shipbuilding resulting from any event related to the insurance and the causes occurring in the stage of construction and design before the ship is basically completed shall be resolved in accordance with the Insurance Law (2009 revision), rather than the Maritime Law. The term “loss, expense or liability” in the insurance coverage refers to the loss and expense incurred by the insured, but not that of the insured ship. Conceptually, “tangible (physical) damage” (damage) contrasts with “intangible (economic) damage”. Only when “loss” is directed toward a ship (thing) can that be limited to the physical damage (damage); whereas when “loss” is directed against a person, the term of “loss or damage” may include not only the tangible physical damage but also the invisible or intangible economic loss,

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unless otherwise specified. Thus it follows that “loss” for the purposes of the insurance policy at issue includes both tangible physical damage (damage) and intangible economic loss. The direct loss covered by the insurance policy in question includes direct physical loss and direct economic loss. The decisions reached at the first and second instance trial concluded that the economic loss caused by the faulty design of the ship fell within the scope of the insurance coverage of the shipbuilding insurance, which is sufficiently factually and legally jsutified. That the wrongly estimated weight of the empty vessel in the design stage results in the ship’s or vessel’s deadweight tonnage not reaching the agreed standard, was determined to be a design error. The shipbuilding insurance policy issued by PICC Shipping Center on May 17, 2011 contains the shipbuilding contract number SF080103, which in fact makes it clear that the insurance policy is based on the shipbuilding contract and determines the scope of insurance liability (covered risks) according to the matters stated in the insurance policy and the insurance terms and conditions. With regard to the insured risk at issue in this case, the “loss due to faulty design of any part of the insured ship or vessel” covered in the shipbuilding insurance contract can be further clarified in three aspects. Firstly, with regard to the loss, as the said shipbuilding contract is the basis for the parties to conclude the insurance contract and establish reasonable expectations, the loss should be limited to the loss the insured have to sustain in accordance with terms and conditions of the shipbuilding contract. Secondly, in terms of the causation for the loss, as mentioned above, as stated in Item 6 of Article 4 “Exclusion of Liability” of “the Shipbuilding Insurance Clauses, 2009 states, “all the indirect loss caused by the rejection or other reasons” means that insurance coverage in question does not cover all the indirect loss but only the direct loss. Together with contractual basis of the insurance contract concluded between the two parties, the loss covered by the insurance should be limited to the loss arising from the event or matters under the shipbuilding contract. If the loss is caused by factors other than the shipbuilding contract, it is an indirect loss, which is not covered by the insurance policy. Thirdly, in terms of the legal effect, if the insured negotiates with the shipbuilding party in addition to the shipbuilding contract on the basis of which the insurance contract is concluded and significantly increases its liability, this can be regarded as a “significant increase in the degree of danger in the subject matter of insurance” as provided in Article 52 of the Insurance Law. If the insured fails to notify the insurer in time according to the insurance contract, the insurer can refuse to compensate for the increased loss in accordance with the law. If Taizhou Sanfu Ship Engineering Co. intends to include the increased loss caused by the separate negotiation with the buyer in the insurance contract to claim compensation, which is equivalent to an attempt to increase the insurance coverage risk, but Taizhou Sanfu Ship Engineering Co. has not provided evidence to prove that it has notified PICC Shipping Center of the separate negotiation in time, PICC Shipping Center has the right to refuse to pay compensation to Taizhou Sanfu Ship Engineering Co. for the increased loss. The amount that PICC Shipping Center should pay to Taizhou Sanfu Ship Engineering Co. is calculated at RMB 5,640,640.45 yuan [the loss caused by the design error in ships/vessels under the shipbuilding contract, RMB 5,780,640.45 yuan (USD 916,500) minus the insurance deductible of RMB 140,000 yuan]. Accordingly,

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on December 26, 2017, the Supreme People’s Court issued the decision numbered No. 242 [2017] Reopening, Civ. Division, the Supreme People’s Court, stating that PICC Shipping Center should pay RMB 5,640,640.45 yuan together with interest to Taizhou Sanfu Ship Engineering Company as compensation for the loss.

Comment on Rule The present case is the first one involving the interpretation of the Shipbuilding Insurance Clauses, 2009, which is widely used in the Chinese insurance market. The reopening of the case for new trial serves as guideline for other similar disputes in the national court system, but its typical significance exceeds the scope of “handling the case on its own”. The comment is made as follows: 1. Summing up the Experience of Reopening the Case for New Trial Can Further Deepen the Understanding of the Regularities of Maritime Trial as Well as the Understandinng of the Maritime Law As a specialised branch of trial, a maritime trial has its own peculiarities in terms of application of law, which is highlighted by the fact that the applicable law is relatively complex and includes a large number of international treaties and domestic laws, thus requiring the boundaries of appling the law to be clarified at two levels, firstly by making a clear demarcation of the boundaries between international treaties and domestic law, and then by making a clearcut distinction between the Maritime Law and the General Rules of Civil Law, the Property Law, the Contract Law, and the Insurance Law. These distinctions are generally clear, but are sometimes made more difficult by such factors as conceptual ambiguity or vagueness, which can lead to problems of misapplication in practice. Conceptual discernment is the starting point for distinguishing precisely the regulated scope of various laws. The same concept may not have exactly the same meaning in different legal texts, thus it is necessary to look into the specific meaning of a particular legal text. As far as the Maritime Law is concerned, more is transplanted from international maritime treaties, rules and practices, of which more than half (more than 150 articles) of the provisions can be found directly in the relevant international conventions, and the provisions in the Maritime Law transplanted from treaties are basically the Chinese translation of the provisions of the Conventions or treaties.Though basic requirements for translation are “faithfulness and elegance”, this is easier said than done, and the current Chinese translations of international maritime treaties are generally flawed with a few inaccuracies or omissions. Take the meaning of the “seagoing vessel” in this case for example, the term “seagoing vessel” as provided in the Maritime Law is basically the same as the expression “seagoing vessel” commonly used in the English text of most international maritime treaties. The English word “seagoing” literally means “fit for sea navigation”, not being at sea; translating the English “seagoing vessel” into Chinese “海船” (seagoing vessel) is a way of saying “seagoing vessel”. This creates ambiguity as to whether it is a ship at sea or a ship capable of navigation.

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As a judge specialising in maritime trials, it can be an embarrassment if he or she cannot correctly identify the concept of a “seagoing ship” that he or she frequently encounters in his or her job, which in the larger sense, has an impact on the accuracy of the application of the law and the international influence of maritime justice. There are a large number of similar problems in maritime trials, and it is not just a question of the concept of a “seagoing vessel”. Summing up the experience and lessons learned in this case, the most important thing to emphasise is that it is of fundamental importance for the fair administration of justice that maritime justice practitioners pay attention to the basic concepts and specific provisions in the text of maritime treaties and the Maritime Law and do some research into the origin of the law. 2. The Reopening Decision of this Case is of Demonstrative Significance for How to Interpret the Contract As for the rules (requirements, ways and means) of interpreting the contract terms, Article 30 of the Insurance Law and Article 125 of the Contract Law have provided for some principled regulations, so the judges must exert efforts to improve their ability of interpreting the contract terms in specific applications, and must overcome the shortcomings of not daring, not wanting and not knowing how to interpret the contract. Interpreting the terms of the contract is the basic skill required for adjudicating contract disputes. For the terms of the insurance contract, we should pay attention to the basic connotation of Article 30 of the Insurance Law: (1) the principle of interpretation provided in this article is applicable when there is a dispute between the parties to the insurance contract, but not applicable when there is no dispute between the parties to the insurance contract; (2) when it is applied, it should be interpreted first of all according to the ordinary sense, and not directly “interpreted in favor of the insured and beneficiary” in the absence of such interpretation; when the definitive interpretation can be made according to the ordinary sense rule, it is no longer necessary to be “interpreted in favor of the insured and beneficiary”; and (3) the phrase “shall be interpreted in favor of the insured”, i.e. “there are more than two interpretations of the terms of the contract”, may be taken to mean that the terms of the insurance contract can be interpreted in favor of both the insurer and the insured according to the ordinary sense rule. Some cases in judicial practice have shown that some judges do not follow the ordinary sense rule of interpretation and prefer to directly interpret in favor of the insured, probably the latter is relatively simple and easy to follow, but it should be noted that the latter is the judge’s “weapon of last resort” and should not be used easily or frequently. If the judge prefers or frequently chooses to interpret the contract in favor of the insured, to a certain extent, he has already shown his weakness or lack of confidence in his ability to interpret the terms of the contract. In the judgment in this case, such usual methods of contract interpretation as grammatical interpretation, contextual interpretation, or purposive interpretation, and etc.are followed to offer a general understanding of the disputed clause (See the reasoning section for details), which at least has demonstrated the judge’s determination and confidence in interpreting the contract clause

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in a reasonable manner. The judge’s innermost certainty, formed through rigorous logical reasoning, is the basis for clear interpretation and full reasoning. 3. The Reopening Decision of this Case also Offers Guidance for the Production of Judicial Documents In trying a case, judges have to be more attentive to such important functions as exhibition, restraint and persuasion in the judicial opinions or documents. As a final product of judicial process, the quality of this end product depends on the proficiency in making judicial documents. Strictly regulating the proficiency in producing judicial documents is a fundamental constraint to ensure the correctness and reasoning of the decision. The production of the reopening judgment in this case has pinpointed the following characteristics: (1) in terms of overall layout, the format is standardized, both complexity and simplicity is made appropriate, especially the weight of the reasoning in the judgment is highlighted. By summarizing and refining the facts and reasoning found in the first and second instance judgments, the judgment made in the reopening process is compressed into 1/3 length of the first or second instance judgments to highlight the dominance and weight of the reopening; on this basis, further focus on writing the reasoning takes up 1/3 length of the entire judgment, with reasoning section standing out in the judgment. (2) The hierarchy, logic and rationality of the reasoning section attempts to meet the basic requirements of logical reasoning. As for the application of the law, the judgment fully reflects the completeness and rigor of the syllogism of deductive reasoning; as for the determination of loss, the judgment overcomes the limitation of reasoning from a single point of view and conducts multi-level and multi-faceted analysis and reasoning of the scope of loss, causation and legal effects, thus greatly enhancing the persuasive power of the reopening process. In short, the persuasive power of the judgment made in the reopnenig process chiefly subsists in the logical power manifested from rigorous reasoning. No matter how complicated the issue is, the power of logic is “persuasiveness”, as in the logical reasoning that “man always dies, Socrates is a man, therefore, Socrates is sure to die”. No matter how strong the feeling or preference, the result is inevitable to come out. As judges struggle for certainty about the rules of law and the application of law, an appreciation of logic and logical thinking is vital.

Xiaohan Yu Master of Laws, senior judge, the Second Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Liu X v. Wenjiang District Public Security Bureau of Chengdu Public Security Bureau of Sichuan Province (An Administrative Penalty Case): On Proportionating Punishment to Crime Xiaobin Wang

Rule 1. In law enforcement, public security organs shall comprehend the spirits of the relevant provisions in the Public Security Administration Penalties Law and the Administrative Penalty Law accurately, and follow the principle of “proportionating punishment to crime”, in order to apply laws accurately, avoid the casualty, and obvious inappropriateness and tort. The people’s court shall place weight on guaranteeing the lawful rights and interests of administrative counterparts, and shall be especially prudent in handling penalty cases which go against the personal rights and interests of citizens, in order to faithfully fulfill its judicial function, manifest fairness and justice, and correct illegalities against administrative laws. 2. As stated in Article 70 of the Public Security Administration Penalties Law, “serious circumstances” means that “a person who provides conditions for gambling for the purpose of making profits or participates in gambling with a relatively large amount of money, shall be detained for more than five days or be fined not more than RMB 500 yuan; under serious circumstances, he shall be detained for not less than 10 days but not more than 15 days and shall, in addition, be fined not less than RMB 500 yuan but not more than 3,000 yuan.” And such “serious circumstances” shall be applied with comprehensive discretion during the enforcement of administrative law and judicial practice, all the facts involved in illegal acts, nature of such acts, specific circumstances, degree of social harm and so on shall be taken into consideration. Usually, if the behavior Collegiate Panel: Xiaobin Wang, Wei Yan and Lei Tong (Edited by Deqiang Han, translated by Lin Sun) X. Wang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_39

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of playing Mahjong is obviously an amusement activity, and the total gambling capita involved is only RMB 500 yuan for three persons (about RMB 200 yuan per person), that gambling by those persons will not necessarily lead to a 12days detainment, and such circumstance shall not be deemed as the “serious circumstance” provided in the aforesaid laws.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Liu X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Wenjiang District Public Security Bureau of Chengdu Public Security Bureau of Sichuan Province 2. Procedural History First Instance: No. 13 [2011] Trial, Adm. Division, the People’s Court of Wenjiang District, Chengdu City, Sichuan Province (dated Dec. 1, 2011) Second Instance: No. 42 [2012] Final, Adm. Division, the Intermediate People’s Court of Chengdu City, Sichuan Province (dated Mar. 14, 2012) Application for Reopening the Case: No. 64 [2012] Supervision. Adm. Division, the Intermediate People’s Court of Chengdu City, Sichuan Province (dated Jul. 31, 2012) Petition: No. 33 [2013] Supervision, Adm. Division, the Higher People’s Court of Sichuan Province (dated Apr. 24, 2013) Petition: No. 125 [2014] Supervision. Adm. Division, the Supreme People’s Court (dated Jan. 19, 2015) 3. Cause of Action Administrative penalties

Essential Facts At around 5:30 pm. on August 19, 2011, Liu X, Wang X and Ren X (the latter two have already been dealt with in other accusations) were discovered and seized by Wenjiang District Public Security Bureau of Chengdu Public Security Bureau of Sichuan Province when they were playing mahjong in a private room on the second floor of a tea house named “The Golden Coast” in East Yangliu Road, Wenjiang District, Chengdu, Sichuan Province. The total amount of money for gambling is

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RMB 575 yuan, in which RMB 205 yuan of Liu’s was detained on the scene in this case. Then, Wenjiang District Public Security Bureau subpoenaed Liu X to receive inquiry and investigation, and immediately take over the detained money on the same day. And next day, the bureau made its No. 8473 [2011] Decision of Administrative Penalty for Liu X, and decided to detain Liu X for 12 days and fined RMB 500 yuan in accordance with Article 70 of the Public Security Administration Penalties Law. Before the decision was made, Liu X was informed of the facts, reasons, and basis for the proposed decision of administration penalty, and her right of statement and right to defense in accordance with the law. In the early morning of August 20, the bureau sent Liu X to the detention house, and informed her family members of relevant penalties in time. Liu X refused to accept it, and brought an administrative action to Wenjiang District People’s Court of Chengdu, Sichuan Province, and requested to revoke the above administration penalty. The court of the first instance made its Administrative Decision (No. 13 [2011] Trial, Adm. Division, the People’s Court of Wenjiang District, Chengdu City, Sichuan Province), upholding the No. 8473 [2011] Decision of Administrative Penalty made by Wenjiang District Public Security Bureau of Chengdu, Sichuan Province. Liu X filed an appeal with the Intermediate People’s Court of Chengdu City, Sichuan Province. And the court of the second instance made its Administrative Decision (No. 42 [2012] Final, Adm. Division, the Intermediate People’s Court of Chengdu City, Sichuan Province) on March 14, 2012, dismissing the appeal and sustaining the trial judgment. Liu X still refused to accept and petitioned a retrial to Intermediate People’s Court of Chengdu City, Sichuan Province. The Intermediate People’s Court of Chengdu City made its Notice of Overruling the Petition (No. 64 [2012] Supervision, Adm. Division, the ,Intermediate People’s Court of Chengdu City, Sichuan Province) on July 31, 2012. Liu X still refused to accept and filed a petition with the Higher People’s Court of Sichuan Province. And the Higher People’s Court of Sichuan Province then made its Notice of Overruling the Petition (No. 33 [2013] Supervision, Adm. Division, the Higher People’s Court of Sichuan Province) on April 24, 2013. Liu X still refused to accept and filed a petition with the Supreme People’s Court, and requested to set aside the decisions made by the first instance and the second instance, and revoke the Administration Penalty.

Issues 1. Whether the substantive ruling of this case is in conformity with the principle of “proportionating punishment to crime”; 2. How to understand “serious circumstances” in a gambling provided in the Article 70 of the Public Security Administration Penalties Law; 3. How to perceive the problems concerning the application of laws and regulations in this case; 4. How to determine the problems existing in administrative procedure of this case?

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Holding Upon review, the Supreme People’s Court holds that, both the administrative decisions No. 13 [2011] Trial, Adm. Division, the People’s Court of Wenjiang District and No. 42 [2012] Final, Adm. Division, the Intermediate People’s Court of Chengdu City upheld the original Decision of Administrative Penalty made by Wenjiang District Public Security Bureau to detain Liu X for 12 days and fine her RMB 500 yuan. After the reopening of the case, the Supreme People’s Court holds that there might be illegal or obviously unfair circumstances existing in such Decision of Administrative Penalty. In accordance with Article 63 (2) in the Administrative Procedure Law of the People’s Republic of China, and Articles 72 and 77 in the Judicial Interpretation of the Supreme People’s Court on Several Issues in Implementing the Administrative Procedure Law of the People’s Republic of China (repealed), and through the discussion of the Adjudication Committee of the Supreme People’s Court, the ruling is as below: (1) instruct the Higher People’s Court of Sichuan Province to retry the case; (2) suspend the execution of original decisions pending the retrial. On June 27, 2018, the Higher People’s Court of Sichuan Province made its Reopening Administrative Decision (No. 5 [2017] Reopening, Adm. Division, the Higher People’s Court of Sichuan Province), to set aside the decisions of the first instance and second instance, and revoke the Decision of Administration Penalty made by Wenjiang District Public Security Bureau of Chengdu Public Security Bureau.

Comment on Rule The court of the first instance held that this administrative penalty was made on the basis of clear facts, sufficient evidence, legal procedure and correct application of law. Liu X played mahjong with her relatives and friends, winning and losing some money for entertainment. She claimed it is only a kind of entertainment activity in accordance with No. 30 [2005] Notice on Several Issues about the Application of Law in the Handling of Gambling Cases, and shall not be punished for such entertainment activity. However, according to Article 2 of the Regulations of Sichuan Province on Banning Gambling, “any activity involving stake of property is gambling”. Therefore, the court held that it was proper for Wenjiang District Public Security Bureau to lay penalty on Liu X and uphold the Decision of Administration Penalty. Wenjiang District Public Security Bureau made a Decision of Administration Penalty for a detention of 12 days and a fine of RMB 500 yuan on the basis of Article 70 of the Public Security Administration Penalties Law. The court of the second instance holds that such decision is made on the basis of clear facts and sufficient evidence. And the bureau conducted a procedure of examination and

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approval and performed its notification obligation in accordance with the law after it accepted the administrative penalty case of Liu X. The procedure is legal and valid. Therefore, the court dismissed the appeal and sustained the original decisions. However, the reasons and conclusions are denied by the Supreme People’s Court in its Administrative Ruling (No.125 [2014] Supervision, Adm. Division, the Supreme People’s Court) during its petition examination. After discussions, the Adjudication Committee of Supreme People’s Court held that there may be illegal or obviously unfair situations existing in decisions made by the first and second instances. Therefore, it directed the Higher People’s Court of Sichuan Province to conduct a retrial for this case. And the decision for this case was finally modified. This case reveals some legal issues from the following four aspects: 1. Whether the Substantive Ruling of this Case is in Conformity with the Principle of “Proportionating Punishment to Crime” This case is typically “a detention for gambling with a petty amount”. Article 5 (1) of the Public Security Administration Penalties Law provides a principle that “a penalty for administration of public security shall be based on facts, the nature and circumstances of the act committed against the administration of public security and shall evaluate the extent of the harm to the society.” At the same time, both Articles 4 and 5 of the Administrative Penalty Law set down the principles of “proportionating punishment to crime” and “the combination of education and penalty”. Moreover, Article 4 (2) thereof provides that “Administrative penalty shall be set and implemented on the basis of facts, and shall consider the nature and circumstances of act committed against the administration of public security and the extent of harm to the society.” The aforementioned two laws clearly confirm the principle of “proportionating punishment to crime” as a basic principle to govern other specific articles, which demonstrates the consideration of many elements, namely, legislative intent, the legal effects, social effects and political effects of the law enforcement. Relevant penalties shall be made in accordance with such principle. As a specialized organ to maintain public security, public security organs undertake the important responsibilities of cracking down on crimes and handling general acts against law. As a criminal investigation organ, public security organs can submit the case it investigated to procuratorial organs for public prosecution. Then the people’s court shall make its judgment following the principle of “suiting punishment to crime”. This also reflects the principle of “proportionating punishments to crimes” to some degree. And as an administration organ to maintain public security, public security organs enjoy the power of administrative penalty. During their administrative enforcement of law, there may be some acts which do not constitute a crime but shall be punished in accordance with the Public Security Administration Penalties Law and the Administrative Penalty Law. At this point, they shall strictly apply the principle of “proportionating punishment to crime” in choosing the ways of punishment (warning, fining, detention, etc.), and the ranges of punishment, such as the specific amount of fine. Otherwise, there may be some general violations against law or obviously unfair situations. In this case, to adhere to the principle is to make clear the nature of the gambling behavior of Liu X, and to implement correct punishment of such

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behavior, and the principle of “proportionating punishment to crime” shall be taken into account in the view of ways and ranges of penalty when deciding “administrative detention for 12 days, and a fine of RMB 500 yuan” in this case. In the context of the administrative law, the principle of “proportionating punishment to crime” is often comparatively analyzed under the fundamental principle of the proportional justice. The basic meaning of proportional justice is that administrative organs shall implement their administrative acts in a way of giving consideration to the realization of administrative goals and the protection of rights and interests of administrative counterparts. If the realization of administrative goal may do harm to the rights and interests of administrative counterparts, we shall minimize such adverse effects in a minimum scope and limit, and try to keep them in an appropriate proportion.1 The proportional justice principle in a narrow sense is also called the principle of least damage, which means that the administrative organs shall fit and match their goals and methods during their implementation of their administration acts, they shall not take excessive methods beyond the needs of realizing the goals, and shall minimize the losses of administrative counterparts to the lowest level.2 Therefore, the principle of “proportionating punishment to crime” shall be deemed as a sub-principle of the proportional justice under the scope of administrative punishment. And the latter is the supporting point and theoretical analysis method for the former. The proportional principle is a regulation principle including constitutive requirements and legal effects. As a calibrator, this principle is instructive and operable in correcting the balance of “crime” and “punishment”. The key of reviewing “proportional justice” lies in the balance review, namely, whether the interests of administrative counterparts damaged by such method balances the goal it tends to achieve (the public interests it wants to protect). On the value level, value measurement is the root and ultimate pointing of both the “proportional justice” and “proportionating punishment to crime”. From its emphasized angle, the proportional justice emphasized that only when equivalent public interests are guaranteed, shall the limits to fundamental rights of citizens be deemed justifiable. While the principle of “proportionating punishment to crime” emphasized that the protection and supervision on administrative organs’ implementation of their administrative management shall maintain the public order and social order, also shall protect the lawful rights and interests of citizens, legal persons and other organizations. So the two principles are interconnected. There are three sub-principles of the proportional justice, namely, appropriateness, necessity and balance, all of which can also be deemed as the constitutive requirements of “proportionating punishment to crime”. If the effects of choice for penalty decision meet three sub-principles at the same time, such a decision will meet the principles of proportional justice and “proportionating punishment to crime”, so it is legitimate and reasonable. And if it fails to meet any of the three sub-principles, such a decision will fail to meet the

1 参见姜明安主编: 《行政法与行政诉讼法》 ,北京大学出版社、高等教育出版社2007年版,

第71页。

2 参见[德]哈特穆特•毛雷尔: 《行政法学总论》 , 高家伟译,法律出版社2000年版,第106

~ 107页。

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principle of proportional justice. Therefore, the punishment is inappropriate to the offence. So in this sense, they are equal. Meanwhile, when the principle of “proportionating punishment to crime” is broken, one circumstance can be determined to be administrative violation or administrative tort in ordinary sense. Generally, when there are explicit statutory punishment and range basis, the judicial organs adhering to a review standard of “legality” have relatively small room for discretion. As for general administrative violations, decisions of “confirming the violations” or “setting aside” will usually be made in judicial practice, in addition to decisions of “confirming it is null and void” for some serious violation circumstances (such as with no legal authority and obviously going beyond one’s authority). And the other situation can be judged as being “obviously unfair”. Usually, there is no explicit substantial regulation (sometimes it appears to be procedural regulations) basis for such kind of circumstance.Especially where the administration organs own greater power of discretion, for protecting the lawful rights and interests of administrative counterparts and supervising the administrative organs to exercise administration strictly in accordance with the law, judicial organs could decide it is an “obviously unfair” decision under a review standard of “rationality”, and “modify” the decision before the Administrative Procedure Law come into force as of May 1, 2015. The legal basis behind it is the Subparagraph 4 of Article 54 in the Administrative Procedure Law of 1989: “If an administrative penalty is obviously unfair, it may be modified by judgment.” However, there have been a lot of controversies concerning “obviously unfair” circumstances in both the theoretical cycle and practice cycle for a long time, and the inclined opinions is to cover it under the scope of administration discretion.Normally there are two processes of deduction: one is the administrative decision is unfair, and the other is the unfairness shall be obvious. The former concerns the method of judgment, namely, we shall consider the appropriateness of administrative acts in terms of what aspects; while the latter concerns the measurement of judgment, namely, the measure for the specific limits of judicial review. It needs to be emphasized that the revised Administrative Procedure Law of 2014 no longer preserved the expression of “obviously unfair”, but replaces it with “obviously inappropriate”, which is more suitable to the actual situations in judicial decision and reasonable cognition of common people. In accordance with Article 77 of the revised Administrative Procedure Law, “where an administrative punishment is obviously inappropriate, or there is any other administrative act involving errors in determining or recognizing an amount, a people’s court may enter a judgment to modify it.” Therefore, the present context has changed into whether it constitutes the “obvious inappropriateness”. In this case, either from the angle of the “proportional justice” or “proportionating punishment to crime”, public security organs undertake their functions of maintaining social security order, protecting public security and the lawful rights and interests of citizens, legal persons and other organizations.Therefore, we need to regulate and guarantee public security organs and police during their fulfillment of their duty of security administration in accordance with law. On the other hand, administrative punishment shall be limited in accordance with the goal of administrative organs, and minimize the damages caused to administrative counterparts to the lowest level.

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It shall be very prudent to impose punishment of restricting citizens’ freedom as administrative detention. In terms of the actual situations, the gambling activity of Liu X only involved a petty amount, did small harm to society, and did not cause great damage to local security order and public safety of Chengdu. Therefore, such punishment of detention for 12 days and a fine of RMB 500 yuan is obviously inappropriate, and did not conform to the principle of “proportionating punishment to crime”. The consideration of it shall not only be established on legislative intents and spirits, and shall also face to the feelings and recognition of the general public. If it’s clear any one with general sense can recognize or feel the degree of inappropriateness of such administration punishment, it will be necessary to correct such punishment. 2. How to Understand the “Serious Circumstances” of Participating in a Gambling Provided in Article 70 of the Public Security Administration Penalties Law In accordance with Article 70 of the Public Security Administration Penalties Law, “a person who provides conditions for gambling for the purpose of making profits or participates in gambling with a relatively big amount of money, shall be detained for more than five days or be fined not more than RMB 500 yuan; if the circumstances are serious, he shall be detained for not less than 10 days but not more than 15 days and shall, in addition, be fined not less than RMB 500 yuan but not more than RMB 3,000 yuan.” However, how to consider the “serious circumstances” here? This law itself does not further provide clear and specific guidance, so it shall be determined by factoring in all elements relevant to such illegal gambling cases comprehensively, such as the nature, circumstances and degree of social harm. The purpose for doing so is to make judges not to be limited by statute. When making the decision, “we shall factor in all the special circumstances which cannot be foreseen by legislators, and all the relevant elements when hearing administrative cases justly and reasonably. Meanwhile, such consideration shall weigh all the conflicting and valuable elements comprehensively and dialectically,3 not a simple listing. Specifically, it includes legal factors and discretionary factors. The term “legal discretionary circumstances” refers to all kinds of facts which are provided clearly in laws, regulations and rules, etc., and shall be taken into consideration when administrative subjects make their administrative discretion. Article 70 of the Public Security Administration Penalties Law is applied in this case. And the “serious circumstances” in the latter half article is the further explanation of the first half, to indicate definitely there are basically two kinds of serious circumstances: the first one is for the purpose of profits; and the second is to involve a large amount of money. In other words, “providing conditions for gambling for the purpose of profits” or “the amount of money for gambling is large enough” to achieve the severity in accordance with law. Such acts may constitute the “serious circumstances”, and shall be handled more severely. If there is explicit statutory quantification for “the purpose of profits” or “a large amount for gambling”, it will be much easier to determine. When there is no statutory standard, it is up to the discretion. In this case, the public 3

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security organ confirmed that the amount of gambling for Liu X, Ren X, and Wang X play mahjong in a teahouse is RMB 575 yuan. And combining the economic status of their own and local area, as well as the consumption level accepted by the public, there is no explicit quantification standard in law, so it is hard to determine whether such an amount constitutes the “serious circumstances”. The term “discretionary circumstances” refers to the facts which can make practical influences on interest balancing of administrative discretion, but have not been stipulated in formal administrative regulations. Therefore, such facts can be considered and applied flexibly when the administrative subjects make their decisions.4 By sorting relevant cases in judicial practice, the following elements shall be covered: one is the subjective factors, including the subjective viciousness of committing an illegal acts and the subjective attitude of admitting the mistake and repentance. For example, the following circumstances may constitute the “serious circumstances”, such as to pursue huge profit not for entertainment, or to cheat people to engage in gambling, or the person who has been punished by gambling engages in gambling again. The other is objective factors, such as the scale factors (the amount of gambling money, the number of participants, and time of duration, etc.), the background factors (locations, and site of occurrence), and previous record factors. If they gamble in public area or public transportation overtly, gamble for many times, and gamble for an excessive amount, such circumstances may constitute the “serious circumstances”, too. In this case, the illegal acts happened in Chengdu, Sichuan. Playing mahjong is a kind of daily entertainment with local features. Therefore, it is inappropriate to identify such activities as illegal, otherwise it may damage the perceptiveness on legitimacy of common people. Besides, it happened in a teahouse with only a few people involving. There must be different from what happened in underground casinos with a lot of people. And the elements which are taken consideration into the above practice could be the reference for determining circumstances, types of punishment and ranges of choice. At the same time, some regulation files also offered some helpful references for “serious circumstances”. In accordance with Article 9 of the Notice on Several Issues about the Application of Law in the Handling of Gambling Cases, “playing mahjong, cards, or having other entertainment activities with relatives, winning or losing some money, but not for the purpose of profits, shall not be punished.” Factoring in all the aforesaid regulations and the specific circumstances of this case, in determining it is gambling in form of playing mahjong alone, when local folk customs, the amount of money, and the relationship among the three persons (the husband of Liu X is the cousin of another administrative counterparts) were taken into consideration, such administration penalties are obviously too heavy and do not meet the above requirements. In accordance with the Discretion Standard of Public Security Organs of Sichuan Province on Administrative Punishment, “when the money for gambling confiscated on the site is more than RMB 1,000 yuan and less than RMB 4,000 yuan, such an amount shall be deemed as a large amount.” And the amount in this case alone does not meet the above definition of “a large amount of money for gambling”. 4 参见周佑勇: 《论行政裁量的情节与适用》 ,载 《法商研究》 2008年第3期。

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In short, the interest balancing in administration decision shall be based on facts of specific cases. And all kinds of circumstances of legal facts and discretionary facts which may influence the conclusion of decisions shall be considered fully and comprehensively.5 More prudence shall be given to areas of the protection of human rights especially when it concerns personal freedom. Administrative organs shall exercise administration in accordance with law, and strictly abide by the principle of legal punishment. Judicial review shall show respect and play its practical effects to the judgment of administrative organs, to achieve sufficient arguments in supervising administrative acts, apply correct laws and regulations, make proper interpretations to flexible legal language, and judge the administrative procedure under the requirements of legality and justification. Combined with the relevant provisions and specific circumstances in this case, it is insufficient for local public security organs to decide such behavior as the “serious circumstances”, due to the local practice, the amount of money, and the relationship among all the participants, etc. 3. How to Perceive the Problems Concerning the Application of Laws and Regulations in this Case In terms of the application of laws and regulations, the court of the first instance applied Article 2 of the Regulations of Sichuan Province on Banning Gambling. It explicitly states that “any activity involving stake of property is gambling. any kind of gambling is illegal, and must be strictly prohibited and resolutely forbidden.” Therefore, it is proper for Wenjiang District Public Security Bureau to punish Liu X for gambling. The aforementioned regulation, as a local regulations issued in 1989, plays a really positive role in local security administration. However, it defines all activities with property stake as gambling literally. Its determination on the nature may be relatively broad, and it contradicts with the Public Security Administration Penalties Law, its superordinate law. In the Public Security Administration Penalties Law, it clearly states that “providing conditions for the purpose of profits, or taking part in gambling with a large gambling fund. Furthermore, the regulation has already been abolished by Standing Committee of Sichuan Provincial People’s Congress on July 23, 2016. The court of the first instance applied such regulation to analyze this case to define the nature of their acts of playing mahjong and confirm the legality of such punishment. It is lack of persuasion. And the court of the second instance applied the “serious circumstances” provided in Article 70 of the Public Security Administration Penalties Law to support the sued penalty decision in this case. This also shows obvious problems in applying laws. The “serious circumstances” shall be considered based on the analysis made from the angle of administration discretion during the administrative enforcement of law. Except that, it shall also be analyzed through judges’ understanding and interpretation of laws, the accuracy and scientific nature of law application, as well as other relevant available analysis tools. As for the uncertain legal concepts with discretion, when they are taken into legal relationship, we can also examine and weigh

5 周佑勇: 《论行政裁量的情节与适用》 ,载 《法商研究》 2008年第3期。

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it comprehensively in virtue of teleological interpretation, systemic interpretation, and historical interpretation, etc. First of all, as for the teleological interpretation, there are two sides of legislative intent for the Public Security Administration Penalties Law: (1) It maintains social security order, guarantees public security, and protects the lawful rights and interests of citizens, legal persons and other organizations. (2) It regulates and guarantees public security organs and police to fulfill its duty of security administration. The social harm of Liu X’s behavior has not approached the degree of seriously disturbing the social security order. In addition, as for the systemic interpretation, in accordance with Article 5 (1) of the Public Security Administration Penalties Law, “a penalty for administration of public security shall be based on facts and fit the nature and circumstances of the act committed against the administration of public security and the extent of harm done to the society.” While in Paragraph 3, it stipulates that “in dealing with cases of public security, the principle of combining education with penalty shall be upheld.” Besides, both administrative detention and fine are some kinds of administration penalties. When applying them to punish illegal acts which break social security, we have to abide by the provisions in the Administrative Penalty Law, too. And in Articles 4 and 5, it also has provisions on the principles of “proportionating punishment to crime” and “combining education with punishment”. Liu X was given a punishment of administrative detention for 12 days, and a fine of RMB 500 yuan in this case. Combined with the above systematic design, such a punishment obviously goes against the above principles and is too heavy. In addition, Ministry of Public Security issued the Notice on Several Issues about the Application of Law in the Handling of Gambling Cases in 2005. Although it is only a normative document under the regulations, it can be used for reference in the judicial review of the people’s court, and owns certain guiding significance in handling illegal gambling cases. At last, the “proportional principle”, especially its sub-principle of the “minimum damage”, can be a direct reference in applying the provision of “serious circumstances” in this case. The interpretation and application of the “serious circumstances” stipulated in Article 70 of the Public Security Administration Penalties Law, directly involving inappropriate restrictions on personal freedom. Therefore, it obviously goes beyond necessary legal limits and go against the principle of “proportionating punishment to crime”. In sum, the Supreme People’s Court directed a retrial and ruled that there may be some “illegal or obviously unfair” circumstances in decisions of the first instance and the second instance. And the Higher People’s Court of Sichuan Province in its retrial modified the decision, and held that the punishment made by Wenjiang District Public Security Bureau of Chengdu was too heavy and is erroneous application of laws or regulations. Therefore, it shall be set aside in accordance with law. Such a modification follows the legislative spirit, which is in favor of guaranteeing the lawful rights and interests of citizens, such as personal rights and property rights, so it is appropriate.

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4. How to Determine the Problems Existing in Administrative Procedure of this Case In this case, the results of administration penalty do not meet the legal requirements of “serious circumstances”. Except that, there are also problems in implementing administrative procedure. For example, there is evidence showing Wenjiang District Public Security Bureau announced its Decision of Administrative Penalty to Liu X on August 19, 2011 (and the transcript she signed was on August 19). However, the Decision of Administrative Penalty was signed on August 20, 2011. At the same time, from the evidence offered by Liu X and analysis of evidence produced in the original judgment, the aforementioned bureau never offered Proof of Service to court to prove it has served such Decision of Administrative Penalty to Liu X formally. Therefore, courts of the first instance and second instance held that there were certain “flaws” in punishment procedure. And the aforesaid circumstances shall be judged comprehensively, combined with the reasonableness of physical punishment in judicial practice, before the Administrative Procedure Law was modified. Some “flaws” herein are not defined to be illegal. After the modification of the Administrative Procedure Law come into force as of May 1, 2015, in accordance with Article 74, “where the alleged administrative act falls under any of the following circumstances, the people’s court shall enter a judgment to confirm the illegality of the alleged administrative act but not to revoke it… (2) A petty violation of the statutory procedures in implementing an administrative act will not have any actual impact on the plaintiff’s rights.” The above provision strengthened judicial discretion to a certain extent. That is, the people’s court can still decide some “petty procedure violations” are illegal even if they produce no actual impacts on plaintiff’s rights. Obviously, the requirements of procedural justice are important tendency for the development of modern rule of administrative law. To sum up, as an administrative penalty case, this case shows both the tangible and procedural legality shall be taken into consideration by public security organs during its administrative enforcement of law and the judicial acts of the people’s courts. Also, it shows public security organs undertake important responsibilities in protecting social security and developing economy and society. When the administrative enforcement behavior goes against such principles as “proportionating punishment to crime”, and do inappropriate harm to the lawful rights and interests of citizens, legal persons and other organizations, the people’s courts shall understand its position of judicial function, make supervision and correction powerfully in accordance with law, adhere to the principle of “on the basis of facts and laws”, to promote a unification of legal effects, social effects and political effects.

Xiaobin Wang Doctor of Laws, senior judge, Administrative Division of the Supreme People’s Court of the People’s Republic of China.

Liu X v. The People’s Government of Yicheng District, Zhumadian City, Henan Province and Renmin Sub-district Office, Yicheng District, Zhumadian City, Henan Province (Administrative Compulsory Demolition): The Lessee of a Directly Administered Publicly-owned Housing Has an Interest in Compulsory Demolition of the Leased Publicly-owned Housing Lei Tong

Rule The right to lease a publicly-owned housing directly administered by a housing authority (hereinafter referred to as directly administered publicly-owned housing) is conferred by the State to secure the right of residence of citizens, and involves significant property interests. Unlike equal civil subjects who establish leasehold by entering into tenancy contracts, lessees of directly administered publicly-owned housings acquire the right to lease directly administered publicly-owned housings by applying to a competent administrative agency. By virtue of this right, the lessee of directly administered publicly-owned housings may, at a low rent, live in the housings and enjoy the right to occupy and use the housing for a long period of time, with an economic status similar to that of a housing owner. Therefore, given the special status of the lessee, and the direct and significant impact the expropriation may have on the rights and interests of the lessee, the expropriating authority shall, in the course of expropriating directly administered publicly-owned housings, offer Collegiate Panel: Lei Tong, Wei Yan and Zhigang Zhang (Edited by Deqiang Han; translated by Jialiu Xiao) L. Tong (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_40

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adequate protection for the lawful rights and interests of the lessee. Where the lessee holds that the indemnification decision and/or demolition are in infringement of his/her lawful rights and interests, the lessee may be found to have an interest in such administrative actions.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Liu X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellant in the Second Instance): the People’s Government of Yicheng District, Zhumadian City, Henan Province (hereinafter referred to as People’s Government of Yicheng District) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Renminjie Sub-district Office, Yicheng District, Zhumadian City, Henan Province (hereinafter referred to as Renminjie Sub-district Office) 2. Procedural History First Instance: No. 118 [2016] Trial, Adm. Division, the Intermediate People’s Court of Zhumadian City, Henan Province (Henan 17) (dated Dec. 13 of 2016) Second Instance: No. 455 [2017] Final, Adm. Division, the Higher People’s Court of Henan Province (dated Jun. 24 of 2017) Case Reopening: No. 223 [2018] Appeal, Adm. Division, the Supreme People’s Court (dated Apr. 26 of 2018) 3. Cause of Action Administrative compulsory demolition

Essential Facts Liu X leased a publicly-owned housing administered by Indemnificatory Housing and Directly Administered Publicly-owned Housing Administration of Zhumadian City (the former Directly Administered Publicly-owned Housing Administration of Zhumadian City), which is located at No. X, Xiangyang Street, Yicheng District. On April 1, 2003, Indemnificatory Housing and Directly Administered Publicly-owned Housing Administration of Zhumadian City entered into a publicly-owned housing tenancy contract with Liu X. Liu X built a private housing on the land where the said

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publicly-owned housing was located without going through any legal formalities to acquire the lawful right to use the housing he built. On January 27, 2016, No. X, Xiangyang Street, Yicheng District was included into the 2016 Shantytown Renovation Plan of Henan Province. On March 30, 2016, People’s Government of Yicheng District made the Decision on Housing Expropriation under Old-city Renovation Project of Xiangyang Huayuan Community, Renminjie Sub-district Office (No. 5 [2016] Office of Housing Expropriation. Yicheng District Government) to include No. X of Xiangyang Street, Yicheng District into the old-city renovation project of Xiangyang Huayuan Community, Renminjie Sub-district Office, and issued the Expropriation Compensation and Resettlement Plan for Old-City Renovation Project of Xiangyang Huayuan Community, Renminjie Sub-district Office and an announcement on the expropriation. It is clearly stated in the announcement that the expropriating authority is the Office of Housing Expropriation of Yicheng District and the entity enforcing the expropriation is Renminjie Sub-district Office. On June 21, 2011, Renminjie Sub-district Office entered into the Agreement on Publicly-owned Housing Indemnification for Old-city Renovation with the former Directly Administered Publicly-owned Housing Administration of Zhumadian City. On October 8, 2014, Indemnificatory Housing and Directly Administered Publicly-owned Housing Administration of Zhumadian City issued a demolition notice. On December 10, 2015, Indemnificatory Housing and Directly Administered Publicly-owned Housing Administration of Zhumadian City, in association with Headquarters of Old-city Renovation Project of Xiangyang Huayuan Community under Renminjie Sub-district Office, issued the lessees of directly administered publicly-owned housings in Courtyard No. X, Xiangyang Street with a notice that a directly administered publiclyowned housing lessee who, together with his family or families, owns no housing would be given priority to lease public rental housings after going through relevant formalities with the Headquarters of Old-city Renovation Project of Xiangyang Huayuan Community if he moves out within 10 days after the notice is issued; a directly administered publicly-owned housing lessee who built any housing on any of the publicly-owned housing lands within the said community would be entitled to an indemnity as provided in document No. 89 [2012] Zhumadian City Government if he agrees to demolition of the housing(s) he built. Liu X and Renminjie Sub-district Office failed to reach an agreement on the matter of indemnification and resettlement. On April 9, 2016, Headquarters of Old-city Renovation Project of Xiangyang Huayuan Community under Renminjie Sub-district Office asked Liu X to, in consultation with other lessees, select a housing appraisal agency out of the ones designated by Renminjie Sub-district Office. Liu X refused the proposal. On July 27, 2016, Fengda Real Estate Appraisal & Consultation Co., Ltd in Henan Province. appraised the housing leased by Liu X. On July 28, 2016, Renminjie Sub-district Office compulsorily demolished the housing leased and the housing built by Liu X. Liu X filed a complaint to the court of first instance, requesting the court to find that the People’s Government of Yicheng District and Renminjie Sub-district Office conducted the compulsory demolition in violation of law. On December 13, 2016, the court of first instance rendered a decision which found the administrative action of People’s Government of Yicheng District, i.e. compulsorily demolishing

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the housing built by Liu X, illegal. Both Liu X and People’s Government of Yicheng District appealed against the decision of first instance. On June 24, 2017, the court of second instance rendered a decision, dismissing the appeal and affirming the court of first instance. Liu X applied to the Supreme People’s Court for case reopening.

Issue Whether a lessee of a directly administered publicly-owned housing has plaintiff capacity to file an administrative litigation in respect of the compulsory demolition of the directly administered publicly-owned housing he leases.

Holding The Supreme People’s Court holds that the right to lease a directly administered publicly-owned housing is conferred by the State to secure the right of residence of citizens, and involves significant property interests. Unlike equal civil subjects who establish the right to lease a house by entering into tenancy contracts, lessees of directly administered publicly-owned housings acquire the right to lease directly administered publicly-owned housings by applying to a competent administrative agency. By virtue of this right, the lessee of a directly administered publicly-owned housing may, at a low rent, live in that housing and enjoy the right to occupy and use that housing for a long period of time, with an economic status similar to that of a housing owner. Therefore, given the special status of the lessee, and the direct and significant impact the expropriation may have on the rights and interests of the lessee, the expropriating authority shall, in the course of expropriating directly administered publicly-owned housings, offer adequate protection for the lawful rights and interests of the lessee. Where the lessee holds that the indemnification solution and/or demolition are in infringement of his/her lawful rights and interests, the lessee may be found to have an interest in such administrative actions. For the purpose of this case, the housing at issue is a publicly-owned housing directly administered by the People’s Government of Zhumadian City. The Appellant in the reopening of the case, after entering into the publicly-owned housing tenancy contract with Indemnificatory Housing and Directly Administered Publicly-owned Housing Administration of Zhumadian City, may lease publicly-owned housings as provided in relevant laws. The expropriating authority failed to reach an agreement on indemnification and resettlement with the Appellant, and compulsorily demolished the directly administered publicly-owned housing in question without going through any legal procedures, which had factual impacts on the lawful rights and interests of the Appellant. Therefore, the Appellant has an interest in the action of compulsorily demolishing the directly administered publicly-owned housing he leased, and the lawsuit filed by the Appellant in the reopening of the case meets

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requirements pertaining to lawsuit filing. The decision of first instance holds that the Appellee in the reopening of the case’s action of compulsorily demolishing the publicly-owned housing does not infringe upon the lawful rights and interests of the Appellant, while the decision of second instance holds that the Appellant does not meet relevant requirements or have the capacity to file a lawsuit against expropriation of the publicly-owned housing he leased, and therefore the decision of first instance was to be vacated due to erroneous application of the law. In addition, the court of first instance merely states in its reasons of decision that the Appellee ’s action of compulsorily demolishing the publicly-owned housing in question does not infringe upon the lawful rights and interests of the Appellant. Nevertheless, the court of first instance did not explicitly rule with respect to the Appellant’s request for finding that the Appellee’s action of compulsorily demolishing the publicly-owned housing in question was illegal, which was an omission of the claim. The court of second instance failed to rectify the omission. In conclusion, the Appellant’s application for case reopening falls within the circumstances under Article 91 of the Administrative Procedure Law of the People’s Republic of China (hereinafter referred to as the Administrative Procedure Law). Subject to Article 92 (2) of the Administrative Procedure Law and Article 118 (2) of the Judicial Interpretation on the Application of the Administrative Procedure Law, the Supreme People’s Court rendered a ruling to instruct the Higher People’s Court of Henan Province to retry the case.

Comment on Rule 1. Defining “Having an Interest in a Matter (Stakeholder Interest)” in Administrative Litigations Article 25 (1) of the Administrative Procedure Law provides that a person subject to an administrative action or any other person who is a citizen, a legal person, or any other organization with an interest in the administrative action shall have the right to file a complaint against the administrative action. In the theory of administrative litigation, “having an interest in a matter” is a fundamental concept whose definition immediately determines whether an administrative dispute of the parties involved may enter the domain of judicial review. To judge whether a citizen, legal person or any other organization “has an interest” in an administrative action, one usually needs to consider three basic elements: whether a right exists; whether the right in question is the plaintiff’s lawful right; and whether the right may be infringed upon by the administrative action against which a complaint is filed. With respect to expropriation of housings on the state-owned lands, Article 2 of the Regulations on the Expropriation of Buildings and Compensation on Stateowned Land provides that in case of expropriation of housings built on state-owned lands and owned by an entity or individual, the object of indemnification shall be the owner of the housing expropriated. Generally speaking, expropriation of a housing results in loss of ownership of the housing, therefore the action of expropriation

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is directly aimed at owners. The ownership of a publicly-owned housing vests in the State or any entity. Therefore, the court of second instance held that Liu X, as the lessee of a housing on a state-owned land, was not a party subject to the administrative action, and he might file a claim against the lessor in respect of his civil rights and interests through civil procedures. However, this cognition merely touches upon the surface of the problem and is not a practical interpretation of “having an interest in a matter (stakeholder interest)”. The essence of “having an interest in a matter(stakeholder interest)” lies in the direct correlation of rights. In a legal relationship, an administrative action affects citizens, legal persons or other organizations in different dimensions. To determine whether the party who files an administrative litigation has an interest in the administrative action, one needs to find out whether the administrative action is directly related to the filing party, namely whether the administrative action factually infringes upon the rights of the filing party or hinders the proper exercise of such rights. It is irrational to merely consider the nominal identity and legal status of the filing party. After all, administrative litigations are designed to protect the lawful rights and interests of citizens, legal persons or other organizations, and ensure that they may seek remedies from the judicial power of the State after their lawful rights and interests are infringed upon. 2. The Status of a Directly Administered Publicly-owned Housing Lessee is Similar to that of a Housing Owner, Therefore a Directly Administered Publiclyowned Housing Lessee Shall be Entitled to Raise a Claim or Counterclaim For the purpose of this case, Liu X, after entering into the publicly-owned housing tenancy contract with Indemnificatory Housing and Directly Administered Publiclyowned Housing Administration of Zhumadian City, may lease publicly-owned housings as provided in relevant laws. Since then, Liu X has been enjoying the right to live in that housing for a long period of time and at a low rent. Unlike leasehold established under tenancy contracts between equal civil subjects, the right to lease a directly administered publicly-owned housing is a special kind of leasehold because the economic status of a directly administered publicly-owned housing lessee is similar to that of a housing owner. In contrast to Liu X, the owner of publicly-owned housings assumes an administrative duty to administer publicly-owned housings. The expropriating authority failed to reach an agreement on indemnification and resettlement with Liu X, and compulsorily demolished the directly administered publicly-owned housing in question without going through any legal procedures, which had factual impacts on the lawful rights and interests of Liu X. Therefore, the court may find that Liu X has an interest in the action of compulsorily demolishing the directly administered publicly-owned housing he leased, and confer Liu X plaintiff capacity.

Lei Tong Doctor of Laws, senior judge, the Fourth Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Liang X v. The People’s Government of Napo County and the Collective of Nahuaitun, Dekang Village, Dulong Township, Napo County (Third Party) (Dispute over Administrative Forestry Registration): Restrictions on Self-rectification of Administrative Agencies by Cancellation or Revocation Junyong Xiong

Rule From the viewpoint of administration work in strict accordance with the law, all defective administrative actions may be rectified by cancellation or revocation. However, from the perspective of administrative efficiency and effectiveness, with a view of protecting reliance interests of the parties subject to administration and avoiding administrative disputes, administrative agencies shall take reasonable care and rectify defective administrative actions by cancellation only when the defect of such administrative actions may affect the substantive outcome. If an administrative action contains merely a minor defect that does not affect the substantive outcome and exerts no factual influence on the rights of the interested parties or a defect that is curable by taking remedial measures such as rectification by supplementation of legal elements, or cancellation of the said administrative action may cause significant losses to the national, social, and/or public interests, the administrative agency shall consider rectification in other manners.

Collegiate Panel: Junyong Xiong, Gang Cao and Bin Gong (Edited by Deqiang Han; translated by Jialiu Xiao) J. Xiong (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_41

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Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Liang X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): the People’s Government of Napo County Third Party: Nahuaitun Production Squad of Dekang Village, Delong Township, Napo County (hereinafter referred to as Nahuaitun Production Squad) 2. Procedural History First Instance: No. 105 [2016] Trial, Adm. Division, the Intermediate People’s Court of Baise City, Guangxi Zhuang Autonomous Region (Guangxi 10) (dated Aug. 17 of 2016) Second Instance: No. 1143 [2016] Final, Adm. Division, the Higher People’s Court of Guangxi Zhuang Autonomous Region (dated Apr. 14 of 2017) Case Reopening: No. 7 [2018] Reopening, Adm. Division, the Supreme People’s Court (dated Feb. 28 of 2018) 3. Cause of Action Administrative forestry registration

Essential Facts In September 1994, Liang X, in association with Napo County Finance Bureau, planted cinnamon in the forest at Genghushan. In 2010, the People’s Government of Napo County carried out the reform of collective forest right system in an all-around way. Between August and October 2010, staffs of the Task Force for Collective Forest Right System Reform (hereinafter referred to as the Reform Task Force) of the People’s Government of Napo County organized the farming households of Nahuaitun Production Squad to conduct a site survey in which the farming households identified their own forest lands and each of the trees on such forest lands, excluding 102.1 mu of Genghushan forest lands (including the disputed lands) and the cinnamon thereon. The Reform Task Force then affirmed that the right to use Genghushan forest lands vests in the collective of Nahuaitun Production Squad, and prepared the Site Forest Right Boundary Settlement Table, which was publicized on August 6, 2010. During the publication, the farming household of Liang X and other farming households of Nahuaitun Production Squad did not raise any objection. On

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August 16, 2010, Liang X entered into the Contract for Management of Collective Forest Lands by Household Contractors with Nahuaitun Production Squad for contractor management of part of the disputed forest land(s). On August 29, 2010, Department of Forestry of Napo County, after receiving the application of 53 households of Nahuaitun Production Squad for forest right registration and issuance (replacement) of forest right certificates, publicized the Announcement prior to Forest Right Registration and Issuance of Forest Right Certificates in a total of 43 pages. During the publication, four households including the household of Liang X turned to Huang X, the then headman of Nahuaitun Production Squad, on September 15, 2010, claiming that they had each missed a piece of forest land at Daling during the site survey. Huang X signed the Report submitted by Liang X et al., and agreed that the four households including the household of Liang X may report the issue to Office for Collective Forest Right System Reform of Delong Township (hereinafter referred to as the Reform Office of Delong Township). The Reform Office of Delong Township, after debriefing the four households including the household of Liang X, adopted their claim but, instead of following the legal procedure of making a new announcement, submitted the materials relating to the reform directly to Department of Forestry of Napo County, which also submitted such documents directly to the People’s Government of Napo County for issuance of forest right certificates. On October 5, 2010, the People’s Government of Napo County issued to Liang X the Forest Right Certificate in question. Later, the expropriation of part of the disputed forest lands due to road construction gave rise to a dispute between Nahuaitun Production Squad and Liang X et al. The parties concerned applied to the People’s Government of Napo County for mediation. On February 2, 2015, the People’s Government of Napo County rendered an administrative decision, contending that the four forest right certificates obtained by Liang X et al. in respect of the disputed forest lands were directly related to the affirmation of relevant rights and the matter needed to be re-verified and reexamined, therefore ruling that the procedure of right affirmation be suspended. On August 5, 2015, the People’s Government of Napo County made the Decision on Revocation of the Right to Use Part of the Parcels Specified on the Forest Right Certificate Conferred on the Household of Liang X (No. 6 [2015] People’s Government of Napo County, hereinafter referred to as Revocation Decision No. 6) to revoke the right to use the disputed parcel(s) under the Forest Right Certificate in question held by Liang X, and other decisions to revoke the right to use disputed forest land parcels under the forest right certificates held by the other three farming households. On February 28, 2016, Liang X filed an administrative litigation, requesting vacation of Revocation Decision No. 6 in accordance with relevant laws. On August 17, 2016, the court of first instance rendered a decision, rejecting the claim of Liang X. Liang X appealed against the decision of first instance. On April 14, 2017, the court of second instance rendered a decision, dismissing the appeal and affirming the court of first instance. After the decision of second instance took effect, Liang X, on the grounds that the dispute over the right to use the disputed parcel(s) under the Forest Right Certificate in question was a dispute over the right of land contractor management, applied to

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the Supreme People’s Court for case reopening, requesting that the decision of first instance, decision of second instance, and Revocation Decision No. 6 be vacated.

Issue Whether it is necessary to rectify the illegal certification procedure followed by the People’s Government of Napo County.

Holding The Supreme People’s Court holds that the People’s Government of Napo County, without investigating and verifying the Report submitted by the four farming households including the farming household of Liang X, and without following the legal procedure to publicize the registration of disputed parcels of land specified on the Forest Right Certificate in question held by Liang X, issued to Liang X the said Forest Right Certificate on the sole basis of reform-related materials submitted to it, therefore the certification procedure was illegal. The fact-finding under Revocation Decision No. 6, decision of first instance, and decision of second instance that People’s Government of Napo County’s registration and certification without publicizing the information on the disputed parcel(s) specified on the Forest Right Certificate in question was in violation of the legal procedure is grounded on relevant facts and therefore shall be acknowledged. The People’s Government of Napo County committed minor procedural violations in the course of registration and certification, but the violations do not need to be rectified by cancellation. By conferring forest right certificates, an administrative agency on one hand affirms the owner of collective forest lands and the planted trees, and on the other hand affirms that individuals or organizations may carry out land contractor management on forest lands. Firstly, Nahuaitun Production Squad does not dispute that trees on the disputed forest land(s) are owned by Liang X, and other villagers of Nahuaitun do not claim ownership of the said trees. While Nahuaitun Production Squad contends that the Contract for Management of Collective Forest Lands by Household Contractors held by Liang X was in breach of relevant legal procedures and problematic in other aspects, neither the collective of Nahuaitun nor other villagers of Nahuaitun have applied for arbitration or filed a litigation in respect of the dispute over the contractor management of the disputed land(s). The said Contract for Management of Collective Forest Lands by Household Contractors has not been amended or rescinded through any legal procedure and therefore remains in force. The Contract for Management of Collective Forest Lands by Household Contractors , which was used as evidence, is lawful and valid, therefore the right to use the disputed parcel(s) under the Forest

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Right Certificate in question conferred by the People’s Government of Napo County on Liang X derives from a lawful source. Secondly, the purpose of publication in the course of conferring a forest right certificate is to advise the interested parties of relevant records such as the location and number of trees and the location, four boundaries, forest category, and area of forest lands for which the interested parties applied for registration, urge the interested parties to raise objections in a timely manner in case of any inaccuracy, thereby resolving possible disputes over relevant rights before certification. The Department of Forestry of Napo County conducted publication twice in August 2010, and it was explicitly stated during such publication that the owner of the disputed forest land(s) was Nahuaitun Production Squad. Other villagers affiliated to Nahuaitun Production Squad did not raise any objection or issue in respect thereof or claim any rights therein either. Liang X et al. raised an objection during the publication by the Department of Forestry of Napo County and the collective of Nahuaitun Production Squad, during the publication regarding certification, acknowledged that Liang X et al. may use and carry out contractor management on the disputed forest land(s), meaning that both parties do not have any conflict over the rights in the disputed land(s). Thirdly, Liang X et al. objected to the contents publicized by the Department of Forestry of Napo County and claimed the right to use the disputed land(s) by virtue of the Contract for Management of Collective Forest Lands by Household Contractors between them and Nahuaitun Production Squad, which was essentially an application for registration of the disputed land(s). The headman of Nahuaitun Production Squad signed the Report issued by Liang X et al. and delivered the Report to the Reform Office of Delong Township, which constitutes a preliminary review of the registration application. Therefore, the fact-finding of Revocation Decision No. 6 that the Reform Task Force did not carry out any reinvestigation and verification is inconsistent with relevant facts. In conclusion, the People’s Government of Napo County followed a defective procedure in conferring the forest right certificate in question does not affect any substantive rights of Nahuaitun Production Squad and other villagers of Dekang Village. Even if Nahuaitun Production Squad contends that the Contract for Management of Collective Forest Lands by Household Contractors held by Liang X et al. is problematic, the contract shall be rescinded or amended through negotiation, arbitration, or litigation following relevant legal procedures. Without lawful rescission of or modificatoion to the contract held by Liang X et al., the People’s Government of Napo County made the decision to revoke the forest right certificate in question, which does not help to solve the dispute over rights in the disputed land(s) and on the contrary results in uncertainty of the said rights and therefore may probably escalate the dispute. The Revocation Decision No. 6 by the People’s Government of Napo County made improper fact-finding and erroneous application of the law and therefore shall be rectified. The decisions of first instance and second instance, both of which denied the claim of Liang X, shall also be rectified. Subject to Article 119 and Article 122 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,

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this court vacates the decisions of first instance, decision of second instance, and Revocation Decision No. 6.

Comment on Rule The issue in this case is whether a procedurally illegal administrative action needs to be rectified by cancellation or revocation. The legal force of an administrative action consists in presumed validity, definitive force, binding force, and enforceability. An administrative action takes effect immediately after it is made. In general, an administrative action shall not be modified or cancelled. However, in case of an illegal or improper administrative action and an administrative action whose further existence becomes inappropriate due to a change of facts or the law, the administrative agency concerned has the right and duty to make self-rectification. The purpose of self-rectification is to avoid administrative disputes, eliminate uncertainty as to the legal force of an administrative action as soon as possible, maintain the stability of administrative legal relations and bolster public recognition of and trust in administrative agencies. In the current absence of explicit legal provisions, administrative agencies modify an administrative action by cancellation, supplement of legal elements, modification, abolishment, and termination. Certainly, in case of an illegal or problematic administrative action, cancellation is the most universal means of rectification, but under certain circumstances cancellation cannot fundamentally solve the administrative dispute and may cause more trouble to the parties concerned. In administrative litigations, a decision may not only vacate an illegal administrative action, but also hold the same illegal or null and void. Likewise, cancellation, among other means of self-rectification by administrative agencies, should not be overused in rectification of illegal administrative actions. An administrative agency needs to select a lawful and effective means of rectification in consideration of the reason why the administrative action was made in violation of law, the status quo of the administrative action, and valid laws and regulations appertaining thereto. From the viewpoint of administration work in strict accordance with the law, all defective administrative actions may be rectified by cancellation. However, from the perspective of administrative efficiency and effectiveness, with a view of protecting reliance interests of parties subject to administration and avoiding administrative disputes, administrative agencies shall take reasonable care and rectify defective administrative actions by cancellation only when the defect of such administrative actions may affect the substantive outcome. If an administrative action contains merely a minor defect that does not affect the substantive outcome and exerts no factual influence on the rights of interested parties or a defect that is curable by taking remedial measures such as supplement of legal elements, or cancellation of the said administrative action may cause significant losses to the national, social, and/or public interests, the administrative agency concerned shall consider rectification in other manners.

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1. An Administrative Action Based on Erroneous Finding of Underlying Facts Should be Rectified Primarily by Cancellation or Revcocation Provided that the Administrative Agency Has Taken into Account the Potential Damage or Losses Thereby Incurred to Other Lawful Rights and Interests The basic elements of a lawful administrative action are appropriate fact-finding (especially the finding of underlying facts); lawful procedures for making the administrative action; appropriate legitimacy of the administrative action. In case of erroneous finding of underlying facts, cancellation or revocation is the most convenient and effective means of rectification. Whether it is necessary to make a new administrative action depends on the merits of each case. It should be noted that in the principle of adopting the means of cancellation without prejudice to lawful interests of other parties, “lawful interests of other parties” means national, social, and/or public interests and the rights of a bona fide third party. Although there is no explicit reference to bona fide third parties in the Administrative Procedure Law, bona fide third parties fall into the scope of public interests, which is also explicitly provided in relevant judicial interpretations. Article 11(3) of the Rules on Several Issues about the Trial of Housing Registration Cases provides that, if the sued housing registration action is illegal and vacation of the action by decision will cause heavy losses to public interests or the housing has been acquired by a bona fide third party, a decision shall be rendered to hold the registration action illegal without vacating the same. For example, in a housing registration case, A’s housing is registered under the name of B without going through all legal formalities due to the housing registration authority’s failure to fulfill its obligation of prudent examination. The registration infringes upon the lawful right of A, who is not aware of the infringement. Then B sells the housing to C, who, as a bona fide purchaser, goes through the lawful formality of changing registration and obtains the ownership of the housing. If A requests the housing registration authority to cancel the registration made at the request of B and C, the housing registration authority shall not adopt the means of cancellation in self-rectification because the housing has been lawfully sold to and registered under the name of C. While the previous registration is illegal, the administrative agency shall not rectify the defect by cancellation, and shall be liable for compensation as per the fault on its part during the registration with B. 2. If an Administrative Action is Procedurally Illegal, the Means of Rectification By the Administrative Agency Concerned Shall Be Determined by Severity of the Procedural Violation A court shall render a decision as per the severity of the procedural violation. As stated in Article 70 of the Administrative Procedure Law, it is a general rule that a court renders a decision to vacate the administrative action and require the administrative agency concerned to take a new administrative action in case of a procedural violation, but not all procedural violations give rise to cancellation. Article 74 (1) (1) of the Administrative Procedure Law provides that “[where] an administrative action is in minor violation of this law and does not factually affect the plaintiff’s

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rights, the competent people’s court shall render a decision to affirm the illegality of the administrative action without vacating the same administrative action.” This is the case where a breach of the law is recognized but the administrative action remains valid. Likewise, the means of self-rectification by an administrative agency depends on the merits of each case. In general, a minor procedural violation of an administrative action does not factually affect the rights and obligations of the parties concerned and therefore does not necessarily results in cancellation of the administrative action by the administrative agency concerned. If a procedurally illegal administrative action may be improved by taking remedial measures or upholding a procedurally illegal administrative action does not infringe upon substantive rights and interests of other parties, the administrative agency concerned may reserve the administrative action. In this case, no other persons claimed the substantive rights in the disputed land(s) during the publication procedure in question and the said rights derive from lawful sources, therefore cancellation of the original administrative action merely due to lack of republication apparently would go beyond the limit of self-rectification by an administrative agency and damage the presumed validity of the administrative action. Self-rectification by administrative agencies should be more focused on material and obvious procedural violations and if a procedural violation causes erroneous fact-finding, which further causes an administrative action to be infringing upon lawful rights and interests of the parties concerned, the administrative action shall be cancelled and substituted with a new administrative action for the purpose of rectification. 3. An Administrative Agency Carrying out Self-rectification Needs to Consider Other Factors and Has an In-depth Study of Relevant Issues As mentioned, an administrative agency shall cancel an administrative action in case of erroneous finding of underlying facts or a major and apparent procedural violation, while in some other cases, an administrative agency needs to consider factors in all aspects such as whether it may still carry out self-rectification if the administrative action is upheld in administrative reconsideration and found lawful by an effective decision. In general, an administrative action upheld by the organ of administrative reconsideration or found lawful by an effective decision is legally effective. Compared with an administrative action made by an administrative agency independently, an administrative action upheld in administrative reconsideration or found lawful by an effective decision features stronger presumed validity, definitive force, and credibility and therefore shall not be modified or cancelled by an administrative agency at will. The administrative reconsideration system is a mechanism of supervision of lower administrative agencies by higher administrative agencies with a view to rectify incorrect administrative actions, namely a system of internal supervision of administrative agencies. Usually, an administrative agency does not cancel an administrative action upheld in administrative reconsideration. In practice, cancellation usually applies to a case where a court, in judicial review of an administrative action upheld in administrative reconsideration, holds that the original administrative agency’s administrative action is problematic and suggests that the organ of administrative reconsideration

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cancel the upholding decision and the original administrative agency carry out selfrectification by cancelling the administrative action and taking a new administrative action. Usually, an administrative action found lawful by an effective decision does not involve self-rectification by the administrative agency concerned, but exceptions exist in practice. For example, in a dispute over land ownership between Wang X and Li X, the government, after a procedure of ownership affirmation, makes a decision to confer the ownership of the disputed land on Wang X. Li X applies for administrative reconsideration and litigation. The administrative action is upheld in reconsideration and the decision of first and second instance denied and dismissed Li X’s claim and appeal. The decision comes into force and Wang X acquired the ownership of the disputed land. After the decision of first instance and second instance take effect, Zhang X contends that the ownership affirmation decision confers on Wang X the ownership of part of a residential land owned by him and asks for rectification by the government since he was not aware of the dispute between Wang X and Li X and was not a party of the whole procedure. Under this circumstance, whether the administrative agency may carry out self-rectification is controversial. In theory, an administrative agency shall respect the affirmation by an effective decision under administrative laws, and self-rectification by an administrative agency shall not conflict with an effective decision. There may be two solutions in practice. Zhang X may resort to the judicial supervision procedure for vacation of the effective prior decisions by applying for case opening as an outsider to protect his lawful rights and interests. Another opinion is that the facts that the administrative agency was dealing with the dispute between Wang X and Li X; it was unnecessary to go through the publication and demarcation procedure since the land has not been registered after ownership affirmation; Zhang X was not aware of the administrative action and did not even participate in the whole process of court hearing; and the prior decisions affirmed the legality of the administrative action do not mean that Zhang X may not claim his right(s) in the land. Under this circumstance, as a result of a change of underlying facts, an administrative agency may, on the basis of correct fact-finding, settle the dispute by reaffirmation of relevant rights, and a party not satisfied with the reaffirmation decision may still file an administrative litigation. The prior decisions were rendered in respect of the dispute between Wang X and Li X, while the new administrative decision is made regarding the dispute between Zhang X and Wang X with a subject matter overlapping but not identical with that of the prior decisions. Limitations on fact-finding of and parties to the prior administrative decision result in incomplete fact-finding, therefore the situation may still be remedied by taking a new administrative action. Further exploration and study of a case-by-case basis are needed in practice to determine solutions to this problem.

Junyong Xiong Master of Laws, senior judge, the First Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Fu X (A) and Fu X (B) v. Yangpu Economic Development Zone Management Committee (Administrative Order of Housing Demolition and Relocation and Resettlement): Recognition by the Competent Administrative Agency of the De Facto Adoptive Relationship between the Persons Who Receive Housing Relocation and Resettlement Indemnities Yingxin Zhang

Rule 1. Where an adoptive relationship between the adoptive parent(s) and adopted child or children already exists before the Adoption Law came into force and no legal formality has been handled in respect thereof, such an adoptive relationship shall be treated as a lawful adoptive relationship if it is widely recognized by relatives, friends of the parties concerned or the public at large , or a relevant organization has affirmed that the parties concerned have lived together for a long period of time as the adoptive parent(s) and adopted child or children. 2. When examining the legality of an administrative action, a people’s court shall not include the evidence collected by an administrative agency after taking the administrative action as the basis for determining the legality of the administrative action against which the complaint is filed, unless the said evidence involves the interests of the state, the public interest or the lawful rights and interests of other parties. Collegiate Panel: Yingxin Zhang, Gang Cao and Junyong Xiong (Edited by Deqiang Han; translated by Jialiu Xiao) Y. Zhang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_42

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Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Fu X (A) and Fu X (B) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Yangpu Economic Development Zone Management Committee (hereinafter referred to as the Yangpu Management Committee) 2. Procedural History First Instance: No. 93 [2016] Trial, Adm. Division, the Second Intermediate People’s Court of Hainan Province (Hainan 97) (dated Aug. 24 of 2016) Second Instance: No. 493 [2016] Final, Adm. Division, the Higher People’s Court of Hainan Province (dated Dec. 6 of 2016) Case Reopening: No. 58 [2018] Reopening, Adm. Division, the Supreme People’s Court (dated Sept. 30 of 2018) 3. Cause of Action Administrative order of housing demolition and relocation and resettlement

Essential Facts Fu X (C), the biological father of the Appellant in the reopening of the case Fu X (B), is an outsider and a villager of a village at Haitou Township, Danzhou City, Hainan Province, where Fu X (B)’s permanent residence was registered after the birth of Fu X (B). On November 25, 2014, the original registration of Fu X (B)’s permanent residence was delisted because of his newer registration in another place. The permanent residence registration record of another Appellant in the reopening of the case Fu X (A) shows that Fu X (B) is Fu X (A)’s third son (adopted) without going through the legal adoption formalities. The construction under the Reconstruction & Extension Project of Sinopec Hainan Petroleum Refining Chemical Co., Ltd. gave rise to the need to relocate the housing and housing attachments owned by Fu X (A) within the scope of land expropriation. Article 31 of the Interim Measures on Housing Relocation, Resettlement, and Indemnification for Expropriation of Collectively-owned Lands in Yangpu Economic Development Zone (hereinafter referred to as the Interim Measures) provides that “[the] relocated person may split his household if his permanent residence is registered in Yangpu Economic Development Zone and he keeps on file a copy of the householder register of the 1992 population census and the housing register of the 1992 housing census: if the relocated person has more than one son, the son who has reached the legitimate age for marriage (22 years old) and is unmarried or married before the date of the announcement on relocation may separate from the household, but one of the sons shall form a household with his parents.” The three

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legitimate children of Fu X (A), excluding Fu X (B), have been resettled in different households. On October 7, 2013, Fu X (A) and Fu X (B) as a household entered into the Agreement on Housing Relocation, Indemnification and Resettlement in Yangpu Economic Development Zone (hereinafter referred to as the Relocation Agreement) with the Housing Relocation and Resettlement Office of Yangpu Economic Development Zone (hereinafter referred to as Yangpu Relocation Office). In December 2015, Fu X (A) and Fu X (B), as agreed in the Relocation Agreement, received a resettlement housing located at the row-house residential area of the relocated town to the east of Yangpu Economic Development Zone and the economic indemnity. In January 2016, Fu X (A) and Fu X (B) moved into the resettlement housing. On April 13, 2016, Yangpu Relocation Office made and served Fu X (A) and Fu X (B) with the Notice, in which Yangpu Relocation Office contended that Fu X (B) is not a lineal relative by blood of Fu X (A) and therefore shall not form a household with Fu X (A) when receiving the resettlement housing. Subject to Article 40 of the Interim Measures and Article 9 (4) of the Relocation Agreement, Yangpu Relocation Office orders Fu X (A) to handle relevant formalities with Yangpu Relocation Office to return the resettlement housing and refund the resettlement indemnity to Xinyingwanqu Sub-district Office before April 14, 2016. Fu X (A) and Fu X (B) filed a complaint, requesting the court to vacate the Notice made by Yangpu Management Committee on April 13, 2016. On August 24, 2016, the Second Intermediate People’s Court of Hainan Province rendered the administrative judgment numbered No. 93 [2016] Trial, Adm. Division, the Second Intermediate People’s Court of Hainan Province, holding that Yangpu Relocation Office, by issuing the Notice, required Fu X (A) to handle relevant formalities to return the resettlement housing and refund the economic indeminity based on clear fact-finding and solid and sufficient evidence, and therefore took the right action. The Second Intermediate People’s Court of Hainan Province denied the claim of Fu X (A) and Fu X (B). Fu X (A) and Fu X (B) appealed against the decision of first instance. On December 6, 2016, the Higher People’s Court of Hainan Province rendered the decision under administrative laws (No. 493 [2016] Final, Adm. Division, the Higher People’s Court of Hainan Province), holding that the fact-finding of the first instance was clear and the decision of first instance was correct and should be upheld in accordance with relevant laws. The Higher People’s Court of Hainan Province dismissed the appeal and upheld the decision of first instance. Not satisfied with the decision of second instance, Fu X (A) and Fu X (B) applied to the Supreme People’s Court for case reopening.

Issues 1. Whether Fu X (B) is a person who may receive the housing relocation and resettlement indemnities; 2. Whether Yangpu Relocation Office issued the Notice in violation of the law.

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Holding On November 27, 2017, the Supreme People’s Court made the administrative ruling numbered No.7535 [2017] Ruling, Adm. Division, the Supreme People’s Court, conducting case reopening. On September 30, 2018, the Supreme People’s Court rendered the decision under administrative laws numnbered No. 58 [2018] Reopening, Adm. Division, the Supreme People’s Court, holding that the decision of second instance, which found that Fu X (A) and Fu X (B) may not receive housing relocation and resettlement indemnities because no de facto adoptive relationship existed between Fu X (A) and Fu X (B) since Fu X (B), at the time of permanent residence registration, was registered as a person affiliated to the household of Fu X (A), was based on improper fact-finding and application of the law and therefore shall be rectified; the evidence collected by Yangpu Management Committee after issuing the Notice on April 13, 2016, such as the Household Registration Certificate, Resident Population Registration Form, and 2011–2013 Annual Bulletin on Subsidies, shall not be used as the basis for determining the legality of the Notice and therefore shall be found inadmissible; erroneous fact-finding led to a wrong decision, therefore the decision of second instance shall be rectified; Fu X (A) and Fu X (B)’s claim of vacating the Notice made by Yangpu Relocation Office on April 13, 2016 is grounded on relevant facts and laws and therefore shall be upheld. Subject to Article 89 (1) of the Administrative Procedure Law and Article 119 (1) and Article 122 of the Judicial Interpretation on the Application of the Administrative Procedure Law, the Supreme People’s Court rendered the decision hereunder: “This Court vacates (1) the decision under administrative laws No. 493 [2016] Final, Adm. Division, the Higher People’s Court of Hainan Province; (2) the decision under administrative laws No. 93 [2016] Trial, Adm. Division, the Second Intermediate People’s Court of Hainan Province; and (3) the Notice issued by Housing Relocation and Resettlement Office of Yangpu Economic Development Zone on April 13, 2016.”

Comment on Rule 1. On the Question of Whether Fu X (B) is a Person who May Receive the Housing Relocation and Resettlement Indemnities The Adoption Law was passed on December 29, 1991 after deliberation and came into force on April 1, 1992. Until then, China has not enacted any legal provision especially in respect of adoption. On August 30, 1984, the Supreme People’s Court issued the Opinions of the Supreme People’s Court on Several Issues Concerning the Implementation of Civil Policies and Laws (repealed in 2019), Article 28 of which provides that an adoptive relationship in respect of which no legal formality has been handled shall be treated as a lawful adoptive relationship if it is recognized by relatives, friends of the parties concerned or the public at large, or if a relevant organization confirms that the parties concerned have lived together for a long period

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of time as the adoptive parent(s) and adopted child or children. On March 26, 1992, the Supreme People’s Court issued the Notice of the Supreme People’s Court on the Study, Publicity and Implementation of the Adoption Law of the People’s Republic of China, Article 2 of which explicitly provides that adoptive relationships that occur after the Adoption Law comes into force shall be governed by the Adoption Law; where an adoption case is accepted by the court before the Adoption Law comes into force and has not yet been concluded when Adoption Law comes into force, or where the adoptive relationship occurs before the Adoption Law comes into force and the parties concerned apply for affirmation of the adoptive relationship after the Adoption Law comes into force, relevant provisions then in force shall apply in the trial; in the absence of relevant provisions, the case may be tried in accordance with the Adoption Law. In the case at hand, Fu X (A) and Fu X (B) contended that an adoptive relationship had existed between them before the Adoption Law came into force, and submitted evidence such as the Certificate issued by Chunming Neighborhood Committee and the Statement on Personal Information of Fu X (B) issued by a village committee of a village under Haitou Town, Danzhou City. As stated in the Certificate and the Statement on Personal Information of Fu X (B), Fu X (B) was adopted by Fu X (A) in 1986 and has been living with Fu X (A) at Chunming Community for over 30 years. This fact shows that the adoptive relationship between Fu X (A) and Fu X (B) has been affirmed in the certificate issued respectively by the competent grassroots mass organization of self-government at the former place and current place of permanent residence registration for Fu X (B). In addition, according to evidence such as the Form for Declaration of Population Resettled for Housing Relocation in Yangpu Economic Development Zone submitted by Yangpu Management Committee and the Form for Confirmation of Relocated Housing Indemnification Items and Resettled Population and the permanent residence registration record submitted by Fu X (A) and Fu X (B), the father-son relationship between Fu X (A) and Fu X (B) has also been affirmed by multiple authorities, including the residents group and housing relocation and resettlement group under Chunming Neighborhood Committee, Xin’ganchongqu Sub-district Office of Yangpu Economic Development Zone, and Public Security Bureau of Yangpu Economic Development Zone. In the absence of valid counterevidence, the above-mentioned evidence constitute corroborating evidence that a de facto adoptive relationship is already in existence between Fu X (A) and Fu X (B). Meanwhile, China had not enacted any legal provision especially in respect of adoption when Fu X (A) adopted Fu X (B) in 1986, therefore Fu X (A) and Fu X (B) did not have any fault, nor should they be blamed for not going through legal adoption formalities and not having a lawful adoptive relationship. Further, the said announcement on relocation was issued in July 2012 and Fu X (B) had his permanent residence registered at a jurisdiction under the administration of Yangpu Management Committee in 1997. There is no evidence that Fu X (B) registered his permanent residence in Yangpu Economic Development Zone in bad faith to qualify for housing relocation and resettlement indemnities. Under this circumstance and in light of the facts that Fu X (B)’s permanent residence, which was formerly registered at Baishadi Village, has been cancelled on November 25, 2014 by the competent

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public security organ due to repetition of names (both family or first names) ; Fu X (B)’s permanent residence is now registered under the household of Fu X (A), which means Fu X (B) is already a resident at a jurisdiction of Yangpu Economic Development Zone; and Fu X (B) and Fu X (A)’s domicile was within the scope of the land expropriation and housing relocation in question, Fu X (B) shall, as provided in relevant laws, be entitled to the same treatment as other jurisdiction residents of Yangpu Economic Development Zone. Therefore, Fu X (B) is a person who may receive housing relocation and resettlement indemnities due to land expropriation. Under the circumstances of this case, it would be difficult for Fu X (B) to obtain effective remedies in respect of his lawful rights and interests, and it would also be inconsistent with the legislative spirit and purpose of relevant laws if we deny Fu X (B)’s identity and status as a jurisdiction resident of Yangpu Economic Development Zone. In conclusion, the decision of second instance, which found that Fu X (A) and Fu X (B) may not receive housing relocation and resettlement indemnities because no de facto adoptive relationship existed between Fu X (A) and Fu X (B) since Fu X (B), at the time of permanent residence registration, was registered as a person affiliated to the household of Fu X (A), was based on improper fact-finding and application of the law, and therefore should be rectified. 2. On the Question of Whether Yangpu Relocation Office Issued the Notice in Violation of the Law Article 35 of the Administrative Procedure Law provides that, in the course of litigation, the defendant and an agent ad litem thereof may not themselves collect evidence from the plaintiff, a third person and/or a witness. Article 30 of the Judicial Interpretation of the Supreme People’s Court on Several Issues in Implementing the Administrative Procedure Law of the People’s Republic of China (repealed) provides that evidence collected by the defendant and an agent ad litem thereof after taking a specific administrative action shall not be included as the basis for determining the legality of the specific administrative action against which the complaint is filed. Subject to the above-mentioned provisions, a people’s court shall not, when examining the legality of an administrative action, include the evidence collected by an administrative agency after taking the administrative action as the basis for determining the legality of the administrative action against which the complaint is filed, unless the evidence collected does not concern the legality of any administrative action. If the evidence collected by the administrative agency after the administrative action is not used to prove the legality of the administrative action, the people’s court may admit it into such evidence. For the purpose of this case, the evidence collected by Yangpu Management Committee after issuing the Notice on April 13, 2016, such as the Household Registration Certificate, Resident Population Registration Form, and 2011–2013 Annual Bulletin on Subsidies is used to prove the legality of the Notice by Yangpu Relocation Office, i.e. prove the legality of the administrative action in question. The above-mentioned evidence collected by Yangpu Management Committee after the Notice of April 13, 2016 shall not be used as the basis for determining the legality of the Notice and therefore was found inadmissible in

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accordance with relevant laws. In conclusion, erroneous fact-finding led to a wrong decision, therefore the decision of second instance was rectified. Fu X (A) and Fu X (B)’s claim of vacating the Notice by Yangpu Relocation Office on April 13, 2016 is grounded on relevant facts and laws and therefore shall be upheld in accordance with relevant laws.

Yingxin Zhang Juris Master, senior judge, the First Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Joint-equity Economic Cooperative Union of Zhangxi Village and the Eighth Joint-equity Economic Cooperative of Zhangxi Village v. The People’s Government of Zhongshan City and Yang X (Third Party) (Dismissal of an Administrative Reconsideration Application): Divorce is Not a Legal Premise for Loss of Membership in a Rural Collective Economic Organization Xiujiang Guo

Rule Divorce is not a legal requirement for loss of membership in a rural collective economic organization, therefore a woman, who has not had her permanent residence registered elsewhere after divorce and continues to reside at the place where her former husband’s family is located, does not rightfully lose her membership in the collective economic organization of the village where she lives, and shall be entitled to the same rights as other villagers of the said village as long as she continues to fulfill her obligations as a villager. No villagers’ committee or collective economic organization may, in violation of such basic principles set forth in relevant laws and regulations as the equality between men and women and equal rights for villagers, infringe upon the lawful rights and interests of divorced women when formulating village rules and regulations, villagers pledges, bylaws, and property distribution schemes. Otherwise, the competent township government may remedy such infringement in accordance with relevant laws. Collegiate Panel: Xiujiang Guo, Bin Gong and Yuying Wang (Edited by Deqiang Han; translated by Jialiu Xiao) X. Guo (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_43

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Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Joint-equity Economic Cooperative Union of Zhangxi Village, Shiqi District, Zhongshan City (hereinafter referred to as Zhangxi Economic Cooperative Union) Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): The Eighth Joint-equity Economic Cooperative of Zhangxi Village, Shiqi District, Zhongshan City (hereinafter referred to as the Eighth Economic Cooperative of Zhangxi) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): the People’s Government of Zhongshan City, Guangdong Province (hereinafter referred to as the People’s Government of Zhongshan City). Third Party: Yang X 2. Procedural History First Instance: No. 61 [2015] Trial, Adm. Division, the Intermediate People’s Court of Zhongshan City, Guangdong Province (dated May 6 of 2016) Second Instance: No. 1030 [2016] Final, Adm. Division, the Higher People’s Court of Guangdong Province (dated Sept. 30 of 2016) Case Reopening: No. 5157 [2017] Appeal, Adm. Division, the Supreme People’s Court (dated Sept. 21 of 2017) 3. Cause of Action Dismissal of an administrative reconsideration application

Essential Facts Yang X was a villager from Pingnan County, Guangxi Province. On August 19, 1991, Yang X, due to marriage, transferred her permanent residence from the original place of permanent residence registration to the Eighth Production Squad of XX, and she has not since then registered her permanent residence elsewhere. On June 10, 1998, Yang X and Huang X divorced. On February 12, 2001, Yang X and Mo X (not a villager from Zhangxi Village) got married by going through legal registration procedures. Yang X owns 40% of the village-level shares (in Zhangxi Economic Cooperative Union), but the charter, supplementary charter, and comfortable housing project ownership determination scheme formulated by Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi state that “[if] a woman from outside the village marries a villager of this village and transfers her

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permanent residence to this village and marries another person from another village after divorce, she and her child or children who live(s) with her shall not be distributed any shares.” On September 22, 2014, Yang X filed a handling application with Shiqiqu Sub-district Office of the People’s Government of Zhongshan City, requesting the people’s government to (1) affirm that the provision under the charter, supplementary charter, and comfortable housing project ownership determination scheme of Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi that a female shareholder who fails to relocate and transfer her permanent residence after or immediately after divorce as provided in relevant provisions shall be deprived of her shares is in violation of relevant laws and regulations of the State, and to order Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi to revise the said provision; (2) affirm that Yang X owns 100% as per person of the comfortable housing project shares and village-level shares as a rural collective economic organization member of Zhangxi Economic Cooperative Union; (3) affirm that Yang X owns 100% as per person of the development shares as a rural collective economic organization member of the Eighth Economic Cooperative of Zhangxi; (4) order Zhangxi Economic Cooperative Union to retroactively pay Yang X the allocation under comfortable housing project shares and dividends of compensatory shares distributed for land expropriation due to light rail construction in a total amount of RMB 226, 631.03 yuan; (5) order Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi to contribute to the pension and medical insurance of Yang X for the period from January 1, 2008 to September 10, 2014. Shiqiqu Sub-district Office, after investigation, made Administrative Decision No. 65 (hereinafter referred to as Decision No. 65), contending that Yang X could not provide any evidence to prove that she had been conferred membership and corresponding rights by the members assembly of Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi or a competent authority by means of voting, and therefore denying Yang X’s request. Not satisfied with the administrative decision, Yang X applied for administrative reconsideration. The People’s Government of Zhongshan City made the administrative reconsideration decision No. 170 [2015] Reconsideration Decision, Adm. Division, the People’s Government of Zhongshan City (hereinafter referred to as Reconsideration Decision No. 170), contending that the provision under the charter and comfortable housing project ownership determination scheme of Zhangxi Economic Cooperative Union that “[a] woman who is from outside the village and marries a villager of this village and transfers her permanent residence to this village shall not be distributed any shares if she marries another person from another village after divorce” is in violation of Article 33 of the Law on Protecting Women’s Rights and Interests, therefore cancelling Decision No. 65 and requiring Shiqiqu Sub-district Office of the People’s Government of Zhongshan City to make a new administrative decision within a specified period of time. Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi filed an administrative litigation, requesting the court of first instance to vacate Reconsideration Decision No. 170.

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On May 6, 2016, the court of first instance rendered a decision, rejecting the claim of Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi. Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi appealed against the decision of first instance. On September 30, 2016, the court of second instance rendered another decision, dismissing the appeal and upholding the decision of first instance. Not satisfied with the decision of second instance, Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi applied to the Supreme People’s Court for case reopening.

Issues 1. Whether a farmer’s membership in a rural collective economic organization changes as a result of a change in his marital status; 2. Whether it is lawful to provide in rules and regulations for the village and villagers pledges that a woman who is from outside the village and marries a villager of this village and transfers her permanent residence to this village shall be deprived of her membership in a collective economic organization if she marries another person from another village after divorce.

Holding The Supreme People’s Court, after examination, held that Article 33 of the Law on Protecting Women’s Rights and Interests provides that no organization or individual may infringe upon the rights and interests of women in rural collective economic organizations on the grounds that they are unmarried, married, divorced, or widowed. Article 15(4) of the Provisions of Guangdong Province for the Administration on Rural Collective Economic Organizations provides that where the registration of a rural collective economic organization member’s permanent residence is cancelled, the membership of this member shall be accordingly cancelled. The Opinions on Practical Protection of the Right of Women in Rural Areas to Incomes on Contracting of Rural Land and Collective Incomes (No. 142 [2006] Office for Rural Work. Guangdong Provincial Committee of CPC) issued by the Office for Rural Work of Guangdong Provincial Committee of CPC, Women’s Federation of Guangdong Province, and the Public Complaints and Proposals Administration of Guangdong Province provides that a female rural collective economic organization member who, after divorce or death of her spouse, retains her permanent residence and fulfills her obligations as a villager at the place where her former husband’s family is located shall be entitled to the same rights and interests as men at the said place. It is clear from the above-mentioned provisions that divorce is not a legal requirement for loss of membership in a rural collective economic organization, therefore a woman, who has not had her permanent residence registered elsewhere after divorce and continues to

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reside at the place where her former husband’s family is located, does not lose her membership in the collective economic organization of the village where she lives, and shall be entitled to the same rights as other villagers of the said village as long as she continues to fulfill her obligations as a villager. No rules and regulations for the village, villagers pledges, bylaws, and property distribution schemes formulated by any collective economic organization of villagers may be in violation of such basic principles set forth in relevant laws, regulations, bylaws, and administrative regulations in force as the equality between men and women and equal rights for villagers. In this case, the relevant charters and scheme formulated by Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi provide that if a woman from outside the village marries a villager of this village and transfers her permanent residence to this village and marries another person from another village after divorce, she and her child or children who live(s) with her shall not be allocated any shares, which is in violation of the basic principles of equality between men and women and equal rights for villagers set forth in the said laws, regulations, bylaws, and prescriptive documents and constitutes discrimination against women who marries a villager of another village after divorce. Shiqiqu Sub-district Office failed to exercise its power of supervision in accordance with relevant laws after receiving Yang X’s application for supervision, therefore it is proper for the People’s Government of Zhongshan City to cancel Decision No. 65 by making Reconsideration Decision No. 170. Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi contend that they, in the second instance, denied the allegation that Yang X already enjoyed membership of Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi as a shareholder before her divorce with Huang X, therefore Yang X is not entitled to any villagelevel shares. However, as stated in Article 15 (4) of the Provisions of Guangdong Province for the Administration on Rural Collective Economic Organizations, the primary basis for determining whether a person enjoys membership of a rural collective economic organization is the registered permanent residence. Yang X, after her marriage with Huang X, registered her permanent residence under the Eighth Economic Cooperative of Zhangxi, therefore she enjoys membership of the Eighth Economic Cooperative of Zhangxi. If Yang X enjoys membership of the Eighth Economic Cooperative of Zhangxi under relevant laws, she has an equal right to shareholding in this collective economic organization, and shall not be deprived of such an equal right on the grounds that she is divorced and married to a villager from another village. Accordingly, whether or not Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi acknowledged Yang X’s membership as a shareholder in the second instance does not affect the fact-finding made in decision of second instance. The application for case reopening on this ground is unjustified. Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi further contend that even if it is found in the second instance that Yang X has the status of a shareholder of village-level shares, she shall not be presumed to enjoy other shareholding or shareholder status in the absence of any provision relating

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thereto in the charter. The Supreme People’s Court holds that village collective organizations may, as provided in relevant laws, decide independently on matters within the scope of self-government. However, such decisions shall be in conformity with the provisions of relevant laws, regulations, bylaws, and administrative regulations in force, and shall not deprive any members of a village collective organization of the fundamental rights to which they are entitled under the law. Should a resolution made by a village collective organization, in violation of relevant laws and/or regulations, infringe upon the lawful rights and interests of a villager, the villager may lodge a complaint with or report to the competent grassroots government and request for supervision. Article 36 (2) of the Organic Law of the Villagers’ Committees provides that the competent grassroots government, after receiving the report and application from the villager, is legally obliged to exercise its power of supervision and demand rectification of such infringement. In this case, Shiqiqu Sub-district Office failed to exercise its power of supervision in accordance with relevant laws after receiving Yang X’s application for supervision, therefore it is not illegal for People’s Government of Zhongshan City to cancel Decision No. 65 by making Reconsideration Decision No. 170. Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi shall, in accordance with Reconsideration Decision No. 170 and the decision of second instance in effect, forthwith rectify illegal provisions in the relevant charters and scheme to protect lawful rights and interests of women who marry villagers of other villages after divorce as provided in relevant laws. The Supreme People’s Court dismissed the case reopening application of Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi.

Comment on Rule In this case, the charter of Zhangxi Economic Cooperative Union and the charter, supplementary charter, and comfortable housing project ownership determination scheme of the Eighth Economic Cooperative of Zhangxi include a provision that “[if] a woman from outside the village marries a villager of this village and transfers her permanent residence to this village and marries another person from another village after divorce, she and her child or children who live(s) with her shall not be distributed any shareholding”, and Zhangxi Economic Cooperative Union and the Eighth Economic Cooperative of Zhangxi contend that Yang X’s capacity of collective economic organization shareholder should be established by a vote of the committee, general assembly or council of the Eighth Economic Cooperative of Zhangxi. The key issue in the reopening of the case is whether villagers’ charter for self-government may restrict land-related economic rights of women including women who marry villagers of other villages, and clarification of the access criterion for the membership of rural collective economic organizations.

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1. Villagers’ Charter for Self-government Shall not Restrict the Economic Rights and Interests of Women Who Marry Villagers of Other Villages or Women Who Marry Another Person after Divorce Article 27(2) of the Organic Law of the Villagers’ Committees provides that villagers’ charter for self-government, rules and regulations for the village and villagers pledges, and decisions by meetings of villagers or villagers’ representatives shall not conflict with the Constitution and relevant laws, regulations and policies of the State, and shall contain no content that infringes upon personal rights, democratic rights, and lawful property rights of villagers. Article 33 of the Law on Protecting Women’s Rights and Interests provides that no organization or individual may infringe upon the rights and interests of women in rural collective economic organizations on the grounds that they are unmarried, married, divorced or widowed. The Opinions on Practical Protection of the Right of Women in Rural Areas to Income on Contracting of Rural Land and Collective Income (No. 142 [2006] Office for Rural Work, Guangdong Provincial Committee of CPC) issued by the Office for Rural Work of Guangdong Provincial Committee of CPC, Women’s Federation of Guangdong Province, and the Public Complaints and Proposals Administration of Guangdong Province provides that a female rural collective economic organization member who, after divorce or death of her spouse, retains her permanent residence and fulfills her obligations as a villager at the place where her former husband’s family is located shall be entitled to the same rights and interests as men at the said place. The Organic Law of the Villagers’ Committees provides that meetings of villagers may, by formulating and amending villagers’ charter for self-government, rules and regulations for the village, and villagers pledges, agree on matters appertaining to the interests of villagers (including but not limited to matters of properties of village collective economic organizations and rights and interests of members thereof) following the majority rule. This law gives villagers extensive rights of selfgovernment and self-service, therefore a court shall, when dealing with issues relating to self-government of villagers, respect the rights of self-government of villagers’ committees and villagers’ assemblies. However, the respect for villagers’ rights of self-government is subject to restrictions, that is, villagers’ rights of self-government shall be exercised within the scope permitted by relevant laws and regulations. Women in rural areas including women who marry villagers of other villages are minorities and vulnerable groups in village collectives. As members of village collectives, they assume equal obligations as villagers and therefore must enjoy equal rights as local males. Divorce is not a legal requirement for loss of membership in a rural collective economic organization, therefore a woman, who has not had her permanent residence registered elsewhere after divorce and continues to reside at the place where her former husband’s family is located, does not lose her membership in the collective economic organization of the village where she lives, and shall be entitled to the same rights as other villagers of the said village as long as she continues to fulfill her obligations as a villager. No rules and regulations for the village, villagers pledges, bylaws, and property distribution schemes formulated by any collective economic organization of villagers may be in violation of such basic principles set

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forth in relevant laws, regulations, bylaws, and administrative prescriptive documents in force as the equality between men and women and equal rights for villagers. In this case, the relevant charters and scheme formulated by Zhangxi Economic Cooperative Union and Eighth Economic Cooperative of Zhangxi which provides that if a woman from outside the village marries a villager of this village and transfers her permanent residence to this village and marries another person from another village after divorce, she and her child or children who live(s) with her shall not be distributed any shares, are apparentrly in violation of the basic principles of equality between men and women and equal rights for villagers set forth in the said laws, regulations, bylaws, and administative regulations and constitute discrimination against women who marries a villager of another village after divorce. Therefore, the competent township government may rectify such violation in accordance with relevant laws. 2. The Registered Permanent Residence is the Basic Criterion for Determining Whether a Person Enjoys Membership of a Rural Collective Economic Organization As provided in Article 15 (4) of the Provisions of Guangdong Province for the Administration on Rural Collective Economic Organizations, the primary basis for determining whether a person enjoys membership of a rural collective economic organization is the registered permanent residence. The registered permanent residence is a mark of the identity of a rural resident and also the basis for ascertaining the resident’s eligibility for corresponding rights and interests. In this case, Yang X, after her marriage with Huang X, registered her permanent residence under the Eighth Economic Cooperative of Zhangxi, therefore she enjoys membership of the Eighth Economic Cooperative of Zhangxi. If Yang X enjoys membership of the Eighth Economic Cooperative of Zhangxi under relevant laws, she has an equal right to shareholding in this collective economic organization, and shall not be deprived of such an equal right on the grounds that she is divorced and married to a villager from another village.

Xiujiang Guo Master of Laws, senior judge, Administrative Division and the First Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Hong Kong Stoll Industrial (Group) Co., Ltd. v. The People’s Government of Taizhou City, the People’s Government of Hailing District, Taizhou City (Dispute over the Investment Attraction Agreement): The Determination of Administrative Agreements and the Concept of Trying Administrative Disputes Involving Consensual Agreements Baojian Geng and Qin Yin

Rule An administrative agreement generally includes the following elements: First, one party to the agreement must be the administrative subject; second, the administrative subject exercises the administrative authority; third, the purpose of the agreement is to achieve social common good or administrative goals; fourth, the main content of the agreement stipulates the relationship of rights and obligations in administrative law. Due to the complexity of administrative management and the diversity of the content in the agreement made by both parties, that an agreement is an administrative agreement or a civil one should not be determined only by its name, nor by a few or individual provisions, but should be determined by taking into comprehensive consideration the above elements and the main content of the agreement. Civil agreements and administrative agreements, civil litigation and administrative litigation generally only serve the functions of jurisprudence division and jurisdiction guidance. The trial of administrative agreement cases should abide by not Collegiate Panel: Baojian Geng, Yali Bai and Dongxu Ma (Edited by Deqiang Han; translated by Jing Duan) B. Geng · Q. Yin (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_44

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only administrative legal norms, but also civil legal norms that do not violate the mandatory provisions of administrative law and administrative procedure law. To distinguish between civil agreements and administrative agreements, civil litigation and administrative litigation, more consideration should be given to the convenience of trials, the effectiveness of dispute resolution, the authority of decisions and the consistency between courts of different hierarchy. Moreover, we should also consider what kind of litigation is more conducive to the supervision of administrative power and the safeguard of common good.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Hong Kong Stoll Industrial (Group) Co., Limited (hereinafter referred to as Hong Kong Stoll Industrial Corporation) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): People’s Government of Taizhou City Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): People’s Government of Hailing District, Taizhou City Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province 2. Procedural History First Instance: No. 00063 [2015] Trial, Adm. Division, the Intermediate People’s Court of Taizhou City, Jiangsu Province (dated Oct. 26 of 2015) Second Instance: No. 00736 [2015] Final, Adm. Division, the Higher People’s Court of Jiangsu Province (dated Dec. 12 of 2016) Case Reopening: No. 99 [2017] Reopening, Adm. Division, the Supreme People’s Court (dated Dec. 28 of 2017) 3. Cause of Action Dispute over the investment attraction agreement

Essential Facts Party A—Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province signed with party B—Hong Kong Stoll Industrial Corporation

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Investment Attraction Contract of the Industrial Project in X District and its Supplementary Agreement (hereinafter referred to as the Investment Attraction Agreement) on September 16, 2013 and December 15, 2013 successively. Hong Kong Stoll Industrial Corporation succeeded in the bid for the land on December 1st, 2014 and signed the Transfer Contract of the Right to Use State-owned Construction Land with the transferor Bureau of Land and Resources of X City, the transferee of which was a newly registered limited company. As Hong Kong Stoll Industrial Corporation believed that there was a failure to fulfill their obligations as agreed in the Investment Attraction Agreement on the part of People’s Government of Taizhou City, People’s Government of Hailing District, Taizhou City, and Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province, it filed an administrative lawsuit on May 18, 2015, requesting that: (1) People’s Government of Taizhou City, People’s Government of Hailing District, Taizhou City, and Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province immediately fulfill the Investment Attraction Agreement; (2) Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province make up the land price difference of RMB 16.25 million yuan and assume the corresponding liabilities for breach of contract. On October 26, 2015, the court of first instance made an administrative ruling (No. 00063 [2015] Trial, Adm. Division, the Intermediate People’s Court of Taizhou City, Jiangsu Province), rejecting the lawsuit of Hong Kong Stoll Industrial Corporation. On December 12, 2016, the court of second instance made an administrative ruling (No. 00736 [2015] Final, Adm. Division, the Higher People’s Court of Jiangsu Province), dismissing the appeal and upholding the ruling of first instance. After the ruling came into effect, Hong Kong Stoll Industrial Corporation was still dissatisfied with it and petitioned to the Supreme People’s Court for reopening of the case, requesting to reverse the rulings of the courts of first and second instance and order reopening of the case. The main facts and reasons were: (1) the Investment Attraction Agreement was signed between Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province and the Appellant in the reopening of the case. The content of the agreement involved a large number of administrative matters related to investment attraction, which met the needs of common good and fell under the category of administrative agreements as stipulated in the Administrative Procedure Law; (2) the Appellant filed the administrative lawsuit in terms of performance of the agreement, which met the conditions for accepting the administrative lawsuit; (3) Article 12 of the revised Administrative Procedure Law did not stipulate that after May 1, 2015, citizens, legal persons or other organizations could not bring administrative lawsuits against administrative agreements signed before May 1, 2015. Therefore, the facts determined in the rulings by the courts of first and second instance were wrong and the law applied was inappropriate.

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Issues 1. Whether the Investment Attraction Agreement in this case is an administrative agreement; 2. Should civil procedure or administrative procedure be applied to the settlement of disputes in this case; 3. Should this case be handled in accordance with the relevant provisions in the Administrative Procedure Law.

Holding The Supreme People’s Court holds that one party of the Investment Attraction Agreement in this case was the administrative subject, and the purpose of the Agreement was in line with the needs of common good. Administration Commission of Hailing Industrial Park, Taizhou City, Jiangsu Province mainly exercised the administrative powers prescribed in the Regulations on the Administration of Economic and Technological Development Zone in Jiangsu Province. Apart from the stipulations of relevant civil rights and obligations, the Agreement also included a large number of administrative rights and obligations that were difficult to be separated from the Agreement, which, in accordance with the law, fell within the scope of Article 11 (1) of the Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Administrative Procedure Law of the People’s Republic of China (abolished). In this case, Hong Kong Stoll Industrial Corporation, as the plaintiff of the first instance, had the right to choose in accordance with law as regards the litigation request, litigation type, litigation subject matter, etc.; and it had the right to file a lawsuit in terms of all or part of the content of the Investment Attraction Agreement. It was also allowed if Hong Kong Stoll Industrial Corporation chose to settle the dispute through civil litigation during the period of first-instance litigation following the guidance of the court of first instance. Under this circumstance, the court of a higher rank should respect the parties’ right to choose and should not overturn the effective ruling of the court of a lower rank only because of the qualitative problem of the agreement. Due to the consideration of litigation jurisdiction and other aspects, Hong Kong Stoll Industrial Corporation insisted on seeking relief through administrative procedure, so the people’s court should also respect it and accept and try the case as an administrative one. At the same time, for administrative agreements formed before May 1, 2015, if the two parties had not expressly stipulated that dispute resolution should be through arbitration or civil procedure prior to an administrative lawsuit filed by any citizens, legal persons or other organizations, as a party to the agreement, then the people’s court should accept the case pursuant to law. Therefore, the Supreme People’s Court ruled to reverse the rulings of the courts of first and second instance, and remand the case to the Intermediate People’s Court of Taizhou City, Jiangsu Province.

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Comment on Rule An agreement is a legal document made or reached by both parties through negotiation and consultation, which specifies their rights and obligations and is acknowledged and observed by both parties. Although specifying rights and obligations by means of the agreement is widely seen in the field of private law, it does not exclusively exist in the field of private law. In the field of public law, with the evolution of the state’s administrative ideas, the traditional relationship of command and obedience between the state and citizens has gradually shifted to one of service and cooperation, i.e., administrative agencies are deemed as the providers of public services and citizens as the active and effective participants and collaborators in the administration. Thus the agreement has been universally recognized and applied. When the administrative agency, within its remit prescribed by law, reaches an agreement to stipulate the rights and obligations with the private party through consultation based on the needs of administrative management or the realization of common good, such kind of agreements are generally referred to as administrative agreements. They are not only the result of consensus reached by both parties, but also the result of performing administrative duties on the part of the administrative agency; they have the attributes of being both administrative and contractual. Therefore, we should not emphasize the autonomy of will in private law or “contract over law (convention vincit legem)” only, nor emphasize administration pursuant to law or “being ultra vires leads to invalidity” only; rather, we should integrate the relevant factors such as the maintenance of common good, the protection of subjects’ interests in private law, the realization of administrative objectives, the autonomy of will of both parties to the agreement, and the effective settlement of disputes, and properly coordinate the corresponding regulations in both public and private laws. 1. The Difficulties in Determining Administrative Agreements It is based on a new regulation after the revision of the Administrative Procedure Law that administrative agreement disputes have been officially included in the scope of cases accepted by people’s courts as administrative complaints. In accordance with Article 12(1) (11) of the Administrative Procedure Law, agreement complaints concerning government concession agreement or a land and building expropriation compensation agreement fall within the scope of administrative cases accepted. In line with the implementation of the new law, Article 11 of the Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Administrative Procedure Law of the People’s Republic of China (abolished) formulated by the Supreme People’s Court at that time stipulated: “When the administrative agency, within its remit prescribed by law, signs an agreement that specifies the rights and obligations in the administrative law with citizens, legal persons and other organizations through consultation to realize common good or administrative management objectives, such kind of agreements fall within the scope of administrative agreements stipulated in Article 12(1) (11) of the Administrative Procedure Law.” As a legislative innovation, there are many difficulties in the acceptance and

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trial of administrative cases concerning agreements due to the lack of a clear definition of administrative agreements and the “congenital deficiency” of the legislative provisions such as forbidding “the government to sue the people”. The first problem is how to determine whether an agreement is an administrative agreement. According to theoretical research, the defining characteristics and identification criteria of administrative agreements generally include four aspects: (1) Particularity of the subject. Different from civil contracts, one party to an administrative agreement has to be an administrative agency that exercises public power, or an organization authorized by laws, regulations and rules, and other organizations that are authorized by the administrative agency to exercise the right to administer public affairs in accordance with law. (2) Common good of the objectives. Administrative agreements aim to achieve certain administrative objectives and social common good rather than to satisfy and realize the specific interests of the administrative agency per se. (3) Legality of conditions. The signing of an administrative agreement must be limited by legal conditions, that is, it must be done within the scope and in the process of the administrative agency exercising its administrative authority and performing its administrative duties. (4) Complexity of the content. Administrative agreements have the attributes of being both administrative and contractual. First, they are a kind of contracts that must embody the general features of the contract system including equality, voluntariness, consultation and consensus. Second, they are also a kind of administrative acts implemented by the administrative agency to achieve administrative management objectives. Thus at the same time they have the attributes of administrative acts such as statutory authority, due procedure, and administrative priority.1 It is these attributes that constitute the important differences between administrative agreements and traditional civil contracts. Some scholars have concluded that in judicial practices, administrative agreements can generally be defined from seven aspects: the legality of the subjects, the unequal statuses of the subjects, the premise of administrative duties, the priority of the administrative subject, administrative objectives, the application of the norms in administrative law, and the existence of rights and obligations in administrative law.2 However, judges tend to empirically “grasp one point and ignore the others” by means of distinguishing administrative and civil trials. As long as they find that the contract contains something for common good, involves administrative acts, concerns administrative priority, or that both parties to the contract have equal subject status, they would consider it as an administrative agreement or a civil contract. Taking as an example the following two cases related to disputes over investment attraction agreement, the decision of the debt dispute case between Daqing City, Zhen-Fu Real Estate Development Co. Ltd. and People’s Government of Daqing City points out: “The preferential policies involved in the case were unilaterally formulated by the municipal government. Zhen-Fu Corporation was not invited to attend the government’s office meeting and discuss the issue on an equal footing with the government, nor

1 参见贺小荣:《行政协议的创设与国家治理方式的转型》 ,载 《中国法律评论》2017年第1期。 2 参见叶必丰: 《行政合同的司法探索及其态度》 ,载 《法学评论》 2014年第1期。

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did it agree on the policies. The unilateral manifestation of intention by the municipal government was made without Zhen-Fu Corporation’s consensus. Therefore, the contract involved is not a civil contract signed by both parties through equal consultation.”3 The other case is Ningbo Wuzhouxing Group Co. Ltd., etc. V. the People’s Government of Shihezi City, etc. with regard to dispute over contract validity. The decision states: “The contract involved in the case was concluded by both parties by means of equal consultation. The Government of Shihezi City respected the other party’s opinions in the process of making the contract and did not unilaterally change or terminate the agreement, so it was not an administrative contract.”4 In practice, some decisions fail to take into account the complexity and flexibility of real life, simply using one or two elements to distinguish and define administrative agreements. They think the agreements that reflect the superiority of the administrative agency’s unilateral manifestation of intention and embody the administrative priority are administrative agreements5 ; On the contrary, the agreements reached through equal consultation and unanimous manifestation of intention are not administrative agreements.6 These two kinds of viewpoints both have room for discussion. Just as defining administrative acts cannot solve the problem of specifying the scope of cases accepted in administrative procedure once and for all, defining administrative agreements only demonstrates their main features from the level of legal interpretation, but cannot “automatically” identify administrative agreements. Specifically, we cannot identify administrative agreements simply on the basis of subject, thinking that all agreements concluded by administrative agencies are administrative agreements, or that agreements without the participation of an administrative agency must not be administrative agreements. Nor can we identify administrative agreements simply on the basis of remit (or duties), thinking that agreements concluded by administrative agencies beyond their statutory authority are not administrative agreements, or that the agreements concluded by administrative agencies to perform their duties are all administrative agreements. What’s more, we cannot distinguish between administrative agreements and civil contracts solely based on their objectives since contracts made by the subjects of private law in daily life may also serve to promote common good. So it cannot be simply concluded that all agreements promoting common good are administrative agreements. Another reason accounting for the difficulties in identifying administrative agreements lies in the integration of public law and private law. “In today’s society, there are a growing number of social relations and they can no longer be classified by private law or public law…The state’s intervention in the civil society and citizens’ 3 See

No. 47 [2006] Final, Civ. Division, the Supreme People’s Court. No. 57 [2014] Final, Civ. Division, the Intermediate People’s Court of the Eighth Division of Xinjiang Production & Construction Corps. 5 See No. 28 [2015] Trial, Adm. Division, the Intermediate People’s Court of Suining City, Sichuan Province. 6 See No. 00063 [2015] Trial, Adm. Division, the Intermediate People’s Court of Taizhou City, Jiangsu Province. 4 See

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participation in political life have in fact greatly transformed the original concepts and scope of public law and private law, which have infiltrated into all law departments as two ways to adjust social relations instead of being diametrically opposite.”7 “We cannot cut open public law and private law accurately with a knife just as we cut an apple into halves with a knife.”8 On the one hand, with the emergence and development of the idea of administrative supply and administrative welfare, private law has taken on some attributes of public law. The state, no longer acting only as a “night watchman”, has actively participated in the economic and social life, showing a considerable degree of public law intervention in the scope of autonomy of private law and freedom of contract so as to achieve substantive fairness. Consumer rights protection, corporate governance, and occupational safety of labor are all cases in point. On the other hand, modern administration shows extremely complex features in its purposes, means and content.9 It is not only necessary but also possible to achieve administrative tasks by private law, thus public law has been privatized. The spirit and principles of private law have penetrated into public law, and the norms of private law have also been widely applied in public law. For example, in the fields of public utilities, environmental protection, education, etc., individuals or private organizations have assumed the tasks of administrative supply, while ruling administrative areas like traditional police administration have also introduced adjustment methods in private law such as guidance and consultation to achieve administrative objectives. Therefore, not only general civil and commercial contracts may carry the attributes of public power, but also the ways of administrative management are constantly changing to a soft and agreeable fashion. It is often inconsiderate to distinguish between an administrative agreement and a civil contract simply by a certain characteristic of it. 2. Criteria of Administrative Agreements Reflected by Decisions in Individual Cases In addition to the attempts of local courts, the administrative cases concerning agreements tried by the Supreme People’s Court since 2017 such as the transfer of stateowned construction land use rights, investment attraction, compensation for land and housing expropriation, and asset transfer are quite worthy of attention. Although these decisions only represent individual cases, they generally reflect that cases involving rules of both public law and private law cannot be adjusted purely by private law, and cannot be regarded as pure private law contracts. If an agreement, judging by elements of its subjects, main content, and objectives comprehensively in accordance with the legal concept and statutory conditions, can be identified as an administrative agreement, then the relevant case would be generally judged as an administrative case. Specifically, these decisions seem to reflect the following criteria: First, sometimes an agreement concluded purely by subjects in private law can still be an administrative agreement and we need to “pierce its agreement veil”. 7 朱景文: 《中国特色社会主义法律体系:结构、特色和趋势》 ,载 《中国社会科学》 2011年第3期。 8 [德]卡尔·拉伦茨: 《德国民法通论》 ,王晓晔等译,法律出版社2003年版,第7页。 9 参见高秦伟: 《行政法中的公法与私法》 ,载 《江苏社会科学》 2007年第2期。

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In this regard, it is necessary to judge whether the subjects of the agreement have changed by taking into consideration elements including the content of the agreement, the administrative acts before and after, the relationship between one party and the administrative agency, the beneficiary subject and the purpose of the agreement. Second, when there are both public and private rules in the agreement or it is difficult to separate public law from private law, the agreement can be considered to have included the relation of rights and obligations in administrative law if one of the following conditions is met: (1) the agreement points to a specific administrative act on the part of the administrative agency in the future; (2) the agreement replaces a specific administrative act on the part of the administrative agency in the past; (3) the content of the agreement comes from clear provisions of administrative legal norms; (4) when the conditions allow, the administrative agency can exercise the right to unilaterally modify or terminate in accordance with the agreement. Third, administrative agreements usually include the realization of both common good and private interests, with the former being the most important one and the objective in nature. However, realizing common good or administrative objectives in general only refers to the purpose of the administrative agency to conclude an agreement; as for the private party, he/she should be allowed to realize private interests or achieve moderate benefits. Fourth, an agreement cannot be identified as a civil contract made between subjects in private law simply because it contains the content of “based on the principles of equality and voluntariness” and “through friendly consultation”. The reason is that consensus and equality are also the main features of administrative agreements. The agreement, as the legal act of both parties, is reached by their consensual manifestation of intention. This requires that the dispute types of administrative agreements should be constructed according to subjective litigation types, so as to differentiate from the traditional objective litigation types that center on the legality review of administrative acts. Fifth, it cannot be deemed that the types of administrative procedure are only limited to the four situations of “failure to perform pursuant to the law, failure to perform as agreed upon, illegal modification or rescission of administrative agreements” as stipulated in the Administrative Procedure Law. Instead, we should consider the plaintiff’s corresponding claims focusing on the validity, performance, modification and rescission, and responsibilities of the agreement, expand the aforementioned provisions to try to make them tolerant of administrative procedure, and prevent the agreement disputes of the same nature from being dealt with by administrative and civil procedures respectively, thus avoiding inconsistency between decisions under the administrative law and civil decisions. 3. Comparative Advantages of Trying Administrative Agreement Disputes through Administrative Procedure As administrative agreements are both administrative and contractual, the settlement of relevant disputes, in principle, can resort to arbitration award, civil procedure or administrative procedure. Generally speaking, administrative procedure has the following advantages:

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First, it is more beneficial to safeguarding common good. The purpose of concluding an administrative agreement is to achieve common good, thus dispute resolution should also aim at safeguarding the common good served by the agreement. Although civil procedure can review the validity of the agreement and whether it violates common good, it usually does not review the legality of the relevant administrative acts by the administrative agency and whether the corresponding laws and regulations conflict with the superordinate law. Administrative procedure, on the other hand, reviews the mandatory statutes made for administration and control as well as the legal acts under administration and control, that is, it first examines the legality of the terms agreed upon and their normative basis, and then takes it as the foundation to examine the contractual nature and legality of the performance on the part of the administrative agency, and to examine the legality of the unilateral modification or rescission of the agreement by the administrative agency. This reflects the objective order of the agreement. Meanwhile, out of special consideration of common good, the Administrative Procedure Law stipulates the decision system based on situations. For the agreement that violates the mandatory provisions of the law, if confirming the invalidity of it will obviously harm common good or cause huge social costs, or if the process of making it is slightly illegal, then the people’s court can rule to confirm its illegality, order to take remedial measures but retain the validity of the agreement. Therefore, the law provides greater discretion for administrative procedure considering the fact that public law contracts are mainly for the protection of common good. Second, it is more conducive to the unified implementation of laws. The system of administrative procedure is relatively complete in the selection between and application of superordinate law and subordinate law, new law and old law, special provisions and general provisions, local laws and regulations, and rules and regulations. The legality review of agreements often concerns the hierarchy of regulatory norms— laws, administrative regulations, local laws, rules, official documents, administrative orders, etc. The review in administrative procedure is more thorough with a stronger predictability of the decision.10 One of the guiding cases published by the Supreme People’s Court “Suzhou Branch of Luwei (Fujian) Salt Industry Import and Export Co., Ltd. v. Salt Administration Bureau of Suzhou City, Jiangsu Province (dispute over administrative punishment of salt industry)” also shows that judges, in fact, already have the right to choose and apply local laws and regulations in administrative proceedings.11 In the application of administrative and civil legal norms, the administrative procedure has formulated different rules of decision according to different situations such as priority application, direct application, supplementary application and differential application. Generally speaking, administrative legal norms are in a priority position, but civil legal norms can be directly applied when it comes to general legal norms that need to be observed by both public and private law. 10 See

the stipulations concerning the application of law in Minutes of the Supreme People’s Court Symposium on Trying Administrative Cases. 11 See. No. 27 [2009] Trial, Adm. Division, the People’s Court of Jinchang District, Suzhou City, Jiangsu Province.

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Where there are conflicts with the mandatory provisions of the Administrative Law and the Administrative Procedure Law, if the law expressly prohibits the making of administrative agreements, the invocation of civil legal norms should be restricted by the principle of legal reservation; otherwise they can supplement and be applied. If the content of the agreement belongs to different range of application of public and private law, then administrative and civil legal norms shall be applied differentially. Because one can invoke the corresponding civil legal norms in administrative procedure, there is no difficulty in the application of those norms to protect private interests. Moreover, the multi-level mechanism to review and apply regulations and orders that has been formed in administrative procedure is more conducive to the unified implementation of laws, regulations and rules. Third, it facilitates the supervision on administrative activities. “Administrative procedure is the court’s supervision on administrative activities.”12 The administrative agency can choose, based on its own judgment of common good, to perform its administrative duties by making administrative agreements with the private party. This way is also considered as exercising administrative discretion on the premise that it complies with the legal provisions concerning the authority, purposes, procedures and conditions of administrative activities. Civil procedure, usually as subjective litigation, determines its scope of trial dependent on the claims and counterclaims of the plaintiff and defendant, while paying less attention to the issues of objective order such as the organizational authority of the administrative agency. Even if those issues are taken into account, it would seem “powerless” because it has gone beyond the adjustment scope of general private law rules. For acts made by the administrative agency based on administrative priority, it is difficult to review their legality through civil procedure, which is also usually bound by the validity. Therefore, the administrative agency occupies an obvious dominant position compared to the private party in civil procedure. On the other hand, administrative procedure can strictly review the acts out of administrative priority, ensuring the administrative agency to exercise this right in accordance with the legal requirements in order to avoid the excessive expansion of administrative power that would cause damage to the market economy.13 Apart from the realization of subjective rights, administrative procedure also pays attention to the organization, authority and procedures of administrative agencies, examines the conditions for administrative acts related to the making, performance, modification and rescission of agreements, and finds out whether agreements are improperly linked with administrative objectives, etc. Therefore, administrative procedure can comprehensively supervise and check the making and performance of agreements on the part of administrative agencies, thus preventing power rent-seeking, insider trading and unfair competition more effectively. Fourth, it helps with overall settlement of disputes over administrative acts. The conclusion and performance of administrative agreements often involve multiple 12 王名扬: 《法国行政法》 ,北京大学出版社2016年版,第159页。 13 参见黄永维: 《跨越公法私法界限,构建行政协议诉讼新格局》 ,载 《行政执法与行政审判》 微

信公众平台: https://mp.weixin.qq.com/s/7V0UwAbX__7TeB9uZ3hAAw。

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administrative acts before and after, so administrative agreement disputes usually concern disputes over multiple administrative acts over a continuous period of time as well as related civil disputes. For instance, an investment attraction agreement mainly stipulates land supply and tax payment, and meanwhile it also involves matters related to industrial investment like labor, environmental protection, product quality control and infrastructure construction; a PPP agreement mainly concerns PPP project contract and franchise agreement, and meanwhile it also involves the financing contract signed by the project company with the lender, the insurance contract with the insurer, the engineering contract with the contractor, the operation service contract with the operator, the product or service purchase contract with the buyer, etc. Civil proceedings usually do not review the legality of administrative acts pursuant to the provisions of the Administrative Procedure Law, whereas administrative proceedings can not only do that, but also try relevant civil disputes in accordance with the Civil Procedure Law and other civil legal norms. Trial of administrative agreement disputes through administrative procedure helps to solve other corresponding administrative and civil disputes, and it can also avoid the inconsistency of different trial procedures, thus reducing the cost of administrative management. Fifth, it helps with the private party’s right of relief. Administrative procedure provides more convenience for the right of relief of the private party and the interested party in terms of the recognition of litigation rights, relief on the hierarchical trial system, litigation costs, litigation types, and burden of proof. Specifically, any interested party who participates in the conclusion of administrative agreements through competitive procedures such as bidding and auction, or believes that the administrative agreements between others or their performance damages his/her legitimate rights and interests is allowed to initiate administrative proceedings. As long as they do not violate the provisions of hierarchical jurisdiction and exclusive jurisdiction of administrative procedure, both parties to the agreement can decide upon mutual consent to settle the dispute under the jurisdiction of the people’s court in a certain place choosing from the places in actual relevance to the dispute including those where the defendant’s domicile is located, where the agreement is performed, where the agreement is concluded, where the plaintiff’s domicile is located, and where the subject matter is located. If the party of administrative agency is the people’s government above the county level, the case shall be under the jurisdiction of the intermediate people’s court pursuant to law, and may eventually be tried by the Supreme People’s Court, which is conducive to the unified application of laws. For disputes over the performance of the agreement, the unilateral modification and rescission of the agreement by the administrative agency, administrative proceedings will charge differently. The plaintiff, with lower litigation cost, is able to weigh the litigation types and choose a more favorable one. Although both parties shoulder the burden of proof to provide evidence for their own claims as provided in the Civil Procedure Law, the defendant still bears the burden of proof as regards the legality of relevant administrative acts in administrative procedure. At the same time, pursuant to the Regulations of the People’s Republic of China on the Disclosure of Government Information, administrative procedure also plays a more favorable role in protecting the rights of

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the private party when it comes to the disclosure of government decision-making information related to the agreement. 4. The Ideas to be Upheld in the Trial of Administrative Cases Concerning Agreements As a brand-new way of national governance, administrative agreements have been widely applied in the practices of administrative management, and administrative procedure should also evolve along with this change of administrative management. It should be noted that the emergence of administrative agreements indicates that the state’s management of the society is shifting from a simple “imperative” vertical mode to a positive one of flexible law enforcement based on “consultation and dialogue”,14 which marks the modernization of the national governance system and governance capacity. The trial of administrative agreement cases should center on this change and promote its development in due course. Therefore, administrative procedure should consider, on the one hand, how to give full play to the form of agreements in national governance and distribute all factors of production through market competition, trying to avoid the infringement of public power on equal competition; on the other hand, we should also give full play to the role of the government in order to prevent the bottom line of social fairness and justice from being endangered or eroded by free competition and thus deviating from the basic value pursuit of the human community. “Judicial ideas are systematic reflection on the functions and nature of judicature and what it should be.”15 The inclusion of administrative agreement disputes into the scope of cases accepted in administrative procedure will also bring new thoughts on the functions, positioning, nature and future development of administrative procedure. “There is an inherent close relation among contract law, administrative law and constitution. If one does not understand contract law, then it is difficult to truly understand administrative law and constitution… Law itself is a complete and open system with all branches being interconnected and inseparable.”16 Therefore, administrative trials of agreement cases should abandon the practice and thinking of one-dimensional review of traditional administrative acts, adhere to the legality review and safeguard common good, and at the same time, follow the basic principles and ideas in civil law such as good faith and autonomy of will. They should integrate the principle of reliance interest protection in administrative law with the principle of good faith in civil law and combine the administrative legal norms with corresponding civil ones effectively, thus sticking to law-based administration while keeping good faith and honesty, abiding by laws and regulations while respecting the autonomy of will of both parties, and safeguarding common good while enhancing transaction security, so as to strike a balance between the realization of administrative objectives and the protection of private rights. Specifically speaking:

14 参见贺小荣: 《行政协议:跨越公私法界限的意思自治》 ,载 《中国法律评论》 2017年第1期。 15 王申: 《理念、法的理念——论司法理念的普遍性》 ,载 《法学评论》 2005年第4期。 16 王利明: 《

“饭碗法学”应当休矣》 ,载 《法学家茶座》 2003年第4辑。

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First, the litigation structure mainly consists of subjective litigation and is supplemented by objective litigation. Theoretically, it is generally believed that the revised Administrative Procedure Law has established a litigation mode where subjective litigation plays the major role while balancing objective litigation. This kind of structure helps to achieve the dual purposes of protecting the legitimate rights and interests of private parties and supervising administrative agencies to administer pursuant to law. That is to say, the people’s courts have effectively relieved and protected the rights and interests of the people who filed lawsuits through effective supervision on administrative agencies to exercise their authority legally.17 But in practice, administrative procedure still mainly takes the form of revoking litigation, and the response to the plaintiff’s claims is mainly completed by reviewing the legality of administrative acts, which reflects a strong sense of objective litigation. So in fact, it is objective litigation that plays the major role in litigation structure and subjective litigation the supplementary role.18 An administrative agreement is formed by the private party and the administrative agency on the basis of equal consultation and consensual manifestation of intention. The status of the private party is equal to that of the administrative agency whose manifestation of intention only exists as that of one party to the agreement. Accordingly, administrative procedure should also embody this kind of subjectivity of both parties while being supplemented by the objective legality review on the contracting and performance of the administrative agency, that is, subjective litigation should take the main part and be supplemented by objective litigation. The litigation structure where subjective litigation plays the major role requires attaching great importance to the plaintiff’s claims, hearing and trying cases based on the claims, and examining comprehensively the systems including the burden of proof, the intensity of review, and the way of adjudication, so as to make up for the insufficient response of objective litigation to the plaintiff’s claims. Second, the object of trial is mainly “trial of relations” and supplemented by “trial of acts”. Administrative agreement disputes can be roughly divided into agreementbased disputes, administrative act disputes that can be separated from agreements, and disputes that mix agreement disputes with administrative act disputes. Among them disputes over agreements themselves play the major part. Traditional administrative procedure takes administrative acts as the object of trial, which is “litigation of acts” and “ultra vires litigation”; whereas administrative agreement procedure takes as the object of trial the legal relations formed, modified and terminated by the agreement, which is “litigation of relations” and “litigation of complete jurisdiction”. In “litigation of acts”, citizens, legal persons or other organizations are always plaintiffs and administrative agencies are always defendants; whereas in “litigation of relations”, both parties of the relation can be plaintiffs.19 Traditional administrative procedure is mainly about “trial of acts”, but the purpose of objective litigation supervising administration determines that it has no motivation for litigation categorization, thus

17 参见李广宇: 《新行政诉讼法逐条注释》 (上),法律出版社2015年版,第4~5页。 18 参见薛刚凌: 《行政诉讼法修订基本问题之思考》 ,载 《中国法学》 2014年第3期。 19 参见张莉: 《谈法国行政协议纠纷解决》 ,载 《人民司法》 2017年第31期。

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it is not conducive to the realization of litigation categorization.20 Administrative agreement procedure is mainly about “trial of relations”, which is implanted “the element of ultra vires litigation” at the same time. It requires the categorization of the litigation according to the plaintiff’s claims, thus forming different categories like the litigation of confirmation, the litigation of formation, the litigation of delivery and the litigation of compensation to correspond to different litigation rules. Third, the evaluation of the legality of the administrative subject should be based on both legal norms and the agreement. The decision should ensure that the agreement is fulfilled and the legal norms are observed. Specifically, the administrative agency has the discretion to conclude administrative agreements. As long as there are no prohibitive provisions in the law, it can decide independently the way of making administrative acts. In administrative agreements, public interests often coexist with private interests, with the former being the main purpose of the administrative agency to conclude agreements; while the private party is allowed to achieve private interests or moderate gains. As regards the issues of agreement validity, agreement performance, agreement revocation or modification, extensive internal relations exist between administrative and civil legal norms. The principle of reliance interest protection in public law and the principles of good faith and autonomy of will in private law can be effectively integrated with each other. As for the legal acts of both parties and their effects, the stipulations concerning matters like civil legal acts, proxy and civil liabilities in the General Provisions of the Civil Law of the People’s Republic of China and the Contract Law are relatively mature, which can be cited and referred to when judging administrative agreement cases. To guarantee administration in accordance with the agreement does not mean to exclude administration pursuant to law, rather, strict application of the principle of administration pursuant to law can better ensure its competitiveness in the agreement-making stage and the purposefulness of agreement performance. Generally speaking, administrative agreements concluded through legal procedures should be observed without arbitrary rescission or modification by the administrative agency. Therefore, when adjudicating administrative cases concerning agreements, we should fully implement the idea of balancing administration in accordance with the agreement and administration pursuant to law. Fourth, equal attention should be paid to signing agreements pursuant to law and encouraging transactions in determining the validity of agreements. If an agreement should be signed in the name of the people’s government, but often it is signed in the name of a functional department, administration commission, project headquarter or even platform company, the agreement should not be terminated on the grounds that the signing subject is unqualified as long as there are authorization regulations of the local people’s government. The clauses in the agreement that are not completely consistent with the current laws, regulations and rules should not be simply determined as illegal and invalid, but should be determined accordingly after considering the legal source status, intentions, objects and regulatory intensity of the corresponding mandatory provisions and weighing the conflicting interests, so 20 参见付荣、江必新: 《

论私权保护与行政诉讼体系的重构》 ,载 《行政法学研究》 2018年第3期。

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as to maintain the flexibility of the agreement. On the other hand, we should uphold the principle of encouraging transactions when determining the validity of an agreement. For one that violates mandatory provisions, but can be corrected or gain new qualifications through formalities such as approval and registration within a certain period of time, it can be considered as an agreement of undetermined validity instead of certain invalidity. Even if it is determined as invalid, we still need to examine the relationship between regulation and autonomy to confirm it is partially invalid or overall invalid, invalid backward or invalid from the beginning, relatively invalid or absolutely invalid. At the same time, the administrative agency should also bear the corresponding liabilities for contracting negligence at its fault. Fifth, it is necessary to combine and integrate compensation as agreed upon and statutory compensation, compensation for breach of contract and compensation for breaking the law in the aspect of assuming liabilities. When an administrative agency bears the corresponding liabilities for breach of contract and compensation, it should coordinate and apply properly the provisions of the Law of the People’s Republic of China on State Compensation, the Administrative Procedure Law, the General Rules of the Civil Law, the Contract Law and the Tort Law, trying to avoid confusing the state compensation liability caused by administrative tort with the compensation liability caused by administrative breach of contract, or simply replacing civil liability with state compensation liability. We should prevent the obvious unfair results in taking on the responsibilities for breach of contract because of the private party’s different choices in civil or administrative procedures. Moreover, we should prevent the administrative agency from evading legal responsibilities by agreement and thus seriously damaging the legitimate rights and interests of the private party, so as to realize the substantive fairness of the decisions. Sixth, the dispute settlement should mainly be based on holistic settlement, supplemented by respective settlement. The successive administrative acts by the administrative agency in compliance with the agreement should not be deemed universally as the administrative acts out of exercising administrative priority, but should be regarded as performance of the agreement by the administrative agency as a party to fulfill the delivery obligations or collateral obligations as agreed upon in the agreement. The disputes caused by this can be considered as disputes over performance of the administrative agreement, which can be resolved together through proceedings of administrative agreement performance and others. It is not appropriate to reduce the corresponding disputes into administrative act disputes one by one, and then prosecute, accept and try each individual case of administrative act separately. Otherwise, the mistake of “disputes are settled by the government but people are not satisfied; cases are closed but disputes continue” is bound to repeat itself. Although administrative agreements cannot stipulate that the administrative agency gives up the unilateral right to modify and terminate the agreement, the administrative agency must not abuse its administrative priority as it is the ultimate and necessary means to safeguard the common good. The exercise of administrative priority to terminate agreements should conform to the principle of proportionality, and the administrative

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agency should also bear corresponding compensation liability for the losses accrued thereof to the other party. Seventh, ways of relief should be mainly based on law with proper respect for the parties’ agreement. As both administrative procedure and civil procedure are mechanisms of judicial dispute resolution, in principle, only one can be applied to claims in the same legal relationship; and since the Administrative Procedure Law has already specified the scope of cases to be accepted and application proceedings of administrative agreement disputes, administrative proceedings would usually exclude civil proceedings. However, there is still room for discussion on whether arbitration is excluded from administrative procedure without exception. As a way to resolve disputes besides litigation, arbitration can reflect the requirements of market competition in a quick manner and also embody the professional judgment of law application in relevant fields. At present, under the premise that the Arbitration Law and the Administrative Procedure Law do not explicitly exclude solving administrative agreement disputes by arbitration, it is inappropriate to jump to conclusion that administrative agreement disputes cannot apply for arbitration. Of course, we should still adhere to judicial finality in acknowledging arbitration awards. After the arbitration award, if one party can provide corresponding evidence to justify the revocation of the award legally, he/she can still apply, in accordance with Article 58 of the Arbitration Law, to the intermediate people’s court in the place where the arbitration commission is based for revoking the award. In addition, according to the theory of Res Judicata, the private party can still file administrative lawsuits to solve the matters that are not involved or dealt with by the arbitration award, or to settle the claims that are not formed in the same basic legal relationship. Therefore, as an attempt to respect the parties’ right to choose through consultation and improve the efficiency of dispute resolution, the parties are also allowed to agree on arbitration pursuant to the provisions of Arbitration Law on the basis of judicial finality. In the future, we can also consider bettering provisions like the Judicial Interpretation of Several Issues about the Application of the Arbitration Law and the Rules on Several Issues about the Trial of Arbitration-Related Judicial Review Cases to expand the legal causes for applying for revocation of arbitration awards. If the arbitration award seriously damages the public interests, the parties can apply for judicial review of the arbitration; if a party is not satisfied with the ruling of the people’s court, we can consider establishing a system of limited second instance, that is, the cases accepted in the second instance are limited to those where the court of first instance intends to make a negative ruling on the arbitration, and meanwhile no procedure for reopening the cases would be set up. This is also the current practice in most countries.21 In this way, it can not only maintain the consensuality and efficiency of the “finality of the award” in arbitration, but also embody the principle of judicial finality and the court’s advantages in safeguarding public interests. 21 参见朱科: 《国际商事仲裁司法审查案件内部请示报告制度的转型》 ,载 《法学杂志》 2017年

第6期。

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Baojian Geng Doctor of Laws, senior judge, Administrative Division of the Supreme People’s Court of the People’s Republic of China. Qin Yin Juris Master, assistant judge, the Third Circuit Court of the Supreme People’s Court of the People’s Republic of China.

Zhou X (A) v. The Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province (Dispute over Administrative Compensation for Housing Demolition and Resettlement): Understanding of the “Direct Loss” in Subparagraph 8 of Article 36 of the State Compensation Law Xiaobin Wang

Rule 1. Pursuant to the Subparagraph 8 of Article 36 of the State Compensation Law, if other damage is done as a result of infringement on the property rights of a citizen, a legal person, or other organizations, compensation shall be paid for the direct losses. When it comes to land or house expropriation and demolition, and when determining the scope and amount of compensation for illegal demolition by the administrative agency, the “direct losses” stated in the State Compensation Law cannot be simply interpreted as the losses resulted from resettlement of the demolished houses, excluding the indemnity rights and interests that owners of the demolished houses should enjoy in the demolition and resettlement of rural houses. The abovementioned “direct losses” should be inclusive of both the loss from resettlement (i.e. the cost) after the demolition of houses and the indemnity rights and interests that owners of the demolished houses should enjoy in the demolition and resettlement of rural houses. Collegiate Panel: Xiaobin Wang, Baojian Geng and Yali Bai (Edited by Deqiang Han; translated by Jing Duan) X. Wang (B) The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_45

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2. In cases of expropriation and demolition, the amount of state compensation due to illegal administrative acts should not be smaller than the amount of money derived from the indemnity rights and interests for the resettlement of relevant property rights that the party originally deserved. The agency liable for compensation shall fully protect the legitimate rights and interests of the infringed, and give them necessary and appropriate care and arrangements as much as possible without violating the prohibitive provisions of laws and regulations, so as to demonstrate the punishment for illegal administrative acts and the care and compassion for the infringed.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Zhou X (A) Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province 2. Procedural History First Instance: No. 4 [2014] Trial, Adm. Division, the Intermediate People’s Court of Huzhou City, Zhejiang Province (dated Apr. 11 of 2016) Second Instance: No. 36 [2016] Final, Adm. Division, the Higher People’s Court of Zhejiang Province (dated Nov. 24 of 2016) Case Reopening: No. 163 [2018] Reopening, Adm. Division, the Supreme People’s Court (dated Nov. 8 of 2018) 3. Cause of Action Dispute over administrative compensation for housing demolition and resettlement

Essential Facts Zhou X (A) owned two houses in Zhangjiawan Natural Village, Chenbanqiao Village, Fenghuang Street, Wuxing District, Huzhou City (hereinafter referred to as Zhangjiawan Village), with the building area of 262.44 square meters and 238.88 square meters respectively. They were built by his uncle Zhou X (B) and his father Zhou X (C) in 1984. In 1992, Zhou X (A) purchased upon agreement the two houses involved in the case. Zhangjiawan Village began to demolish and reconstruct rural houses since 2010. Because it failed to reach an agreement of resettlement indemnities with

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Zhou X (A), the Demolition and Resettlement Office of the Economic Development Zone, an internal department of the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province, sent a written correspondence to Huzhou Huantaihu Group Co., Ltd. on March 13, 2012, stating that the village was included in the old village renovation project in the development zone, which concerned two of Zhou X (A)’s buildings with a total building area of 501.32 square meters (262.44 square meters and 238.88 square meters respectively), and the bungalow and makeshift house of Zhou X (C)—Zhou X (A)’s father, with a total building area of 38.95 square meters (26.95 square meters of the bungalow and 12 square meters of the makeshift house). Now due to the needs of the old village reconstruction work, these houses would be demolished first, and the indemnities for demolition and resettlement would be decided through discussion and consultation between the Demolition and Resettlement Office of the Development Zone and the households whose houses were to be demolished. In the same month, the Demolition and Resettlement Office of the Economic Development Zone organized personnel to forcibly demolish the houses involved. Zhou X (A) refused to accept the situation and thus filed an administrative lawsuit, requesting that the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province pay a compensation of RMB 8,271,780 yuan in accordance with the standards of house expropriation on state-owned land. On April 11, 2016, the court of first instance decided (No. 4 [2014] Trial, Adm. Compensation, the Intermediate People’s Court of Huzhou City, Zhejiang Province) that the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province pay Zhou X (A) RMB 499,617.9 yuan as compensation, dismissing his other claims. On November 24, 2016, the court of second instance decided (No. 36 [2016] Final, Adm. Compensation, the Higher People’s Court of Zhejiang Province) to dismiss the appeal and confirm the decision of first instance. After the decision came into effect, Zhou X (A) petitioned to the Supreme People’s Court for reopening of the case, requesting to reverse the decisions of the courts of first and second instance and to get the compensatory payment of RMB 27,071,280 yuan from the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province pursuant to the law.

Issues 1. Whether the compensation amount of the decision of first instance can comprehensively and objectively reflect the overall value of the houses involved in the case; 2. How to understand the scope of “direct losses” provided in Subparagraph 8 of Article 36 of the State Compensation Law?

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Holding Upon review, the Supreme People’s Court holds that the core issue in this case is whether it was fair and reasonable for the court of first instance to rule that the Appellee, Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province, should pay the Appellant Zhou X (A) RMB 499,617.9 yuan as compensation. This case, in nature, is one of administrative compensation rather than administrative indemnity. The former refers to the compensation liability borne by the state when the legitimate rights and interests of the private party are damaged due to illegal administrative acts by the administrative agency; the latter refers to the indemnity responsibility borne by the state for the losses to the legitimate rights and interests of the private party due to the legal administrative acts on the part of the administrative agency and its staff in the process of managing the state and social public affairs. In another case in which Zhou X (A) sued the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province for administrative coercion, the Intermediate People’s Court of Huzhou City, Zhejiang Province, made a decision under the administrative law (No. 22 [2014] Trial, Adm. Division, the Intermediate People’s Court of Huzhou City, Zhejiang Province) on April 11, 2016, confirming that the administrative act of forcibly demolishing the house of Zhou X (A) by the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province was illegal on the grounds that the Commission forced the demolition involved without producing an exigent notice through legal procedures or listening to the opinions of the parties concerned. That decision has already taken legal effect. This case concerns disputes over administrative compensation caused by the confirmed illegal house demolition by force on the collective land, which mainly involves three main problems: First, the compensation amount of the decisions of first instance and second instance is difficult to comprehensively and objectively reflect the overall value of the houses involved in the case. Judging from the evaluated cost price of the demolished houses, there is no obvious impropriety in the compensation amount of RMB 499,617.9 yuan evaluated by the court of first instance, but it cannot meet the requirement of comprehensively reflecting the overall value of the houses involved. Second, the scope of “direct losses” stipulated in Subparagraph 8 of Article 36 of the State Compensation Law should also include the indemnity rights and interests that the Appellant should enjoy in house demolition and resettlement, in addition to the losses from resettlement of the demolished houses, i.e., the costs. Third, as far as the compensation standards are concerned, the time when the administrative agency decides to validate the administrative compensation after the decision takes effect can be deemed as the time point of compensation; the compensation amount for illegally demolishing the real estate of the Appellant can be based on the market evaluation price of similar commercial housing that can be obtained by the Appellant in accordance with property resettlement standards, so as to ensure the rights and interests of the person whose house is expropriated to afford similar houses.

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To sum up, the basic facts identified in the decision of the court of first instance are clear, and the determination of “the Appellee should pay the Appellant RMB 499,617.9 yuan as compensation” is correct and should be maintained. However, the court of first instance only awarded compensation according to the resettlement price of the demolished houses involved. The court of second instance also held that the “direct losses” stipulated in Subparagraph 8 of Article 36 of the State Compensation Law only referred to the resettlement price of the demolished houses involved. At the same time, it reserved the right of the Appellant to still be entitled to the indemnity for the demolition, reconstruction and resettlement of the rural houses in Zhangjiawan Village. It is the wrong application of law to inappropriately divide the Appellant’s right relief into two parts and should be corrected. In the end, the Supreme People’s Court made the following decisions: (1) to reverse the decision of administrative compensation (No. 36 [2016] Final, Adm. Division, the Higher People’s Court of Zhejiang Province) by the Higher People’s Court of Zhejiang Province; (2) to uphold the first item of the decision of administrative compensation (No. 4 [2014] Trial, Adm. Division, the Intermediate People’s Court of Huzhou City, Zhejiang Province) by the Intermediate People’s Court of Huzhou City, Zhejiang Province, i.e., “Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province pay Zhou X (A) RMB 499,617.9 yuan as compensation”; (3) to reverse the second item of the decision of administrative compensation (No. 4 [2014] Trial, Adm. Division, the Intermediate People’s Court of Huzhou City, Zhejiang Province) by the Intermediate People’s Court of Huzhou City, Zhejiang Province, i.e., “dismissing other claims of Zhou X (A)”; (4) to order Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province to make comprehensive compensation to Zhou X (A) in accordance with law within 90 days from the effective date of this decision.

Comment on Rule 1. Whether the Compensation Amount of the Decision of First Instance Can Comprehensively and Objectively Reflect the Overall Value of the Houses Involved in the Case The factors affecting the overall value of a house mainly include the value of the house itself (use values such as construction cost, storey height, orientation and others), the accessible public resources around the house (such as transportation, supporting facilities and surrounding environment), and the due benefits from the indemnity policy for resettlement when it is involved in public projects (such as expropriation and requisition). The court of first instance awarded a compensatory payment of RMB 499,617.9 yuan on the part of the Appellee to the Appellant based on the resettlement price after the houses involved were demolished plus the value of appendages. The resettlement price here referred to the cost of re-purchasing and building the houses with almost the same structure, style, quality and functions as

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the original ones, which was generally understood as the cost price of rebuilding the demolished houses. In this case, when it came to the evaluated price of the cost price, the court of first instance, based on the fact that the Appellee was at fault for illegally demolishing the houses by force, gave full consideration to the legitimate interests of the Appellant and calculated the resettlement price of the demolished houses in accordance with the standard that the building structure of the houses was first-grade brick and concrete and that the newness rate was 75%. Thus there is no impropriety in the evaluated compensation amount of RMB 499,617.9 yuan. However, the above-mentioned compensation was only limited to the resettlement cost of the houses, at most covering the general use value of the houses involved. It could not meet the requirement of fully reflecting the overall value of the houses involved. In accordance with Article 9 (2) of the State Compensation Law, “A claimant shall, first, file a claim for compensation with an agency under compensatory obligations and may, in the meantime, file the claim when applying for an administrative reconsideration and instituting an administrative procedure.” The Appellant in this case clearly put forward the claims for resettlement compensation in accordance with the standards of house expropriation on state-owned land during the trial of first instance, which abided by the latter of the two situations as stipulated in the Paragraph. Thus the resettlement compensation concerned should be handled coordinately. Moreover, based on the facts learned by the Supreme People’s Court during the case investigation stage, although the land involved was still collectively owned, the other 60 households except the Appellant had all replaced the old houses with commercial houses on state-owned land in other places. Since the administrative coercion acts of forcibly demolishing the Appellant’s houses by the Appellee were confirmed illegal by the effective decision of the people’s court, it was necessary to take into account, in the name of administrative compensation, the overall value of the Appellant’s houses including the indemnity rights and interests that he/she deserved in the demolition and resettlement, when verifying the compensation amount of the illegally demolished houses, especially after the other right holders of the houses in the project involved in the case had been uniformly indemnified and resettled by the Appellee. 2. How to Understand the Scope of “Direct Losses” Stipulated in Subparagraph 8 of Article 36 of the State Compensation Law Subparagraph 8 of Article 36 of the State Compensation Law stipulates that if other damage is done to the property rights as a result of infringement on property rights of a citizen, a legal person, or other organizations, compensation shall be paid for the direct losses. The decision of the court of second instance stated: “Administrative compensation and indemnity for demolition and resettlement are different ways of relief; and Subparagraph 8 of Article 36 of the State Compensation Law has already clearly stipulated that compensation shall be paid for the direct losses when the property rights are damaged…But Zhou X (A) still enjoys the right to access the indemnity for the demolition, reconstruction and resettlement of rural houses in Zhangjiawan Village.” It can be seen from the above that the court of second instance interpreted the “direct losses” stipulated in the State Compensation Law only as the

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losses resulted from resettlement of the demolished houses, excluding the indemnity rights and interests that the Appellant should enjoy in the demolition and resettlement of rural houses, which was obviously inappropriate. The abovementioned “direct losses” should be inclusive of both the losses from resettlement (i.e. the cost) after the demolition of houses and the indemnity rights and interests that the Appellant should enjoy in the demolition and resettlement of rural houses. The reasons are as follows: First, it is in line with the legislative spirit of the State Compensation Law to compensate the Appellant pursuant to the indemnity standards of demolition and resettlement. The original intention of establishing the state compensation system is to make up for the losses suffered by citizens due to the illegal use of the state administrative power or judicial power, so as to restore their state before being infringed upon. In order to give full play to the goals and functions of the State Compensation Law in safeguarding and relieving the legitimate rights and interests of the private party from being illegally infringed upon by the state public power, “direct losses”, as the standard of compensable losses in Article 36 of the Law, should be understood correctly, which should include not only the losses of vested property interests, but also those that are not vested but can surely be obtained. Based on the evidence in the case, the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province issued the Implementation Measures of Indemnity for Rural Housing Demolition and Resettlement in Huzhou Economic and Technological Development Zone (No. 38 [2005] Huzhou Development Committee) on May 17, 2005. On May 12, 2010, the Demolition and Resettlement Office of Huzhou Economic and Technological Development Zone published the Policies and Indemnity Standards of Rural Housing Demolition and Resettlement in Zhangjiawan Natural Village, Chenbanqiao, Fenghuang Street, Huzhou Economic Development Zone in Demolition and Resettlement Briefing. On May 10, 2010, the Villagers’ Committee of Chenbanqiao Village, Fenghuang Street signed the Agreement with the Demolition and Resettlement Agency of Huzhou Economic and Technological Development Zone, and the houses of the Appellant were located within the scope of demolition and resettlement. Therefore, it can be confirmed that without the intervention of illegal forced administrative demolition by the Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province, the Appellant could definitely have got corresponding indemnities through the indemnity procedures of demolition and resettlement, which means that as long as the losses caused by the illegal administrative demolition are within the indemnity standards of demolition and resettlement, they are all losses of interests that can surely be obtained, and should be included in the scope of “direct losses” stipulated in Subparagraph 8 of Article 36 of the State Compensation Law. Indemnities for demolition and resettlement also include property right exchange, transition fees, moving fees, etc. The exclusion of those matters from “direct losses” by the court of second instance is not right. Second, it is obviously unfair to exclude the indemnities for demolition and resettlement that can surely be obtained by the Appellant from the administrative

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compensation. If the Appellant cannot get all the indemnities through the administrative compensation procedure that otherwise could have been obtained through the demolition and resettlement indemnity procedure, objectively, it will become difficult for the Appellant to realize his/her interests protected by law due to the lack of judicial relief, and meanwhile, the Appellee, despite the illegal acts, will be exempted from taking the compensation liability that should have been more critical and have a greater impact. The statement that “Zhou X (A) still enjoys the right to access the indemnities in the demolition, reconstruction and resettlement of rural houses in Zhangjiawan Village” in the decision of second instance may, in practice, leave room and pretexts for the administrative agency to excuse its faults, blur the nature of its responsibilities, or even fail to fulfill its compensation obligations in time. If left unchecked and not corrected, it will obviously go against the legislative purpose of safeguarding the legitimate rights and interests of citizens, legal persons and other organizations in the Administrative Procedure Law and the legislative spirit of the State Compensation Law , and at the same time run counter to the fairness and justice highlighted by the judicial needs. The reaffirmation of the accurate understanding of “direct losses” in the State Compensation Law by the Supreme People’s Court helps to prevent the improper reduction of the state compensation responsibilities on the part of the agency under compensatory obligations in practice, clarify the scope of administrative compensation under similar circumstances, and play a positive guiding role in decreasing disputes, unifying the standards of adjudication and standardizing the compensation order, thus fully embodying the idea of rule of law with unified powers and responsibilities that “responsibilities come with power; the execution of power is under supervision; infringements must be compensated and violations must be investigated”. Third, when the conditions permit, the people’s court can solve the related indemnity problems of demolition and resettlement together through administrative compensation procedures, which conforms to the economical principle of litigation and helps with the substantive settlement of administrative disputes. Either the previous indemnities for demolition and settlement or the compensation after the forced demolition was confirmed to be illegal by the court, the relevant responsible subject is the Appellee—Administration Commission of Huzhou Economic and Technological Development Zone, Zhejiang Province, who cannot evade the indemnity or compensation obligations in administrative law before and after. For the houses involved, the two procedures deal with the problem of making up for the same loss. In this case, following the logic of the court of first instance, requiring the Appellant to seek relief separately through the indemnity procedure for demolition and settlement is not only unnecessary but also will cause waste to the judicial and administrative resources of the country. Therefore, for the sake of resolving disputes substantively, reducing litigation burden of the parties and saving national judicial and administrative resources, the disputes in this case should be resolved together through administrative compensation procedure. Pursuant to the principle of comprehensive compensation, the comprehensive, timely and one-time compensation and relief for the legitimate rights and interests of the Appellant can demonstrate the judicial requirements of economical litigation and the “two conveniences” principle

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of administrative procedure being convenient both for the parties to take actions and for the people’s courts to legally exercise judicial power independently, fairly and efficiently. 3. How to Determine the Compensation Standard of the Houses Involved In this case, the claim of the Appellant in the first instance was to ask the Appellee to pay compensation. Since the remaining 60 households on the land involved had been resettled in other places, the Appellee reported to the Supreme People’s Court at the filing stage of case reopening that the houses for resettlement were all commercial houses on state-owned land, and that the status of the land involved might be transformed into state-owned land in the future, so the Appellant had the right to choose compensation for property rights resettlement or obtain compensatory payment regarding the way of compensating for the real estate involved. First of all, in terms of compensation for property rights resettlement, in order to punish illegal demolition and effectively safeguard the legitimate rights and interests of the Appellant, this compensation to the Appellant should be no less than the relevant indemnities for property rights resettlement that he/she should have obtained. The Supreme People’s Court held that since 60 other households except the Appellant had been resettled, the compensation standard in this case could generally comply with the regulations like the Implementation Measures of Indemnity for Rural Housing Demolition and Resettlement in Huzhou Economic and Technological Development Zone (No. 38 [2005] Huzhou Development Committee), the Policies and Indemnity Standards of Rural Housing Demolition and Resettlement in Zhangjiawan Natural Village, Chenbanqiao, Fenghuang Street, Huzhou Economic Development Zone, which were uniformly implemented at that time, so as to reflect the coherence, consistency and fairness of policies before and after. Meanwhile, although the construction area of the houses confirmed by the Appellant after evaluation was 501.32 square meters, the actual available resettlement area in accordance with the above-mentioned demolition and resettlement policies was only 50 square meters. To avoid the kind of resettlement that “only counts heads without counting bricks”, the administrative agency, when it determines the specific compensation amount of this case in the next step and formulates similar indemnity policies for demolition and resettlement in the future, should further examine, investigate and weigh comprehensively in order to reflect the rationality and necessity of protecting citizens’ rights and interests in real estate property. What’s more, the Appellee, as the agency under compensatory obligations, should also give full compensation to the Appellant pursuant to laws and regulations, inclusive of compensation matters such as transition fees and moving expenses generated by the illegal forced demolition based on reasonable calculation. It is also necessary for the Appellee to go through the relevant legal procedures concerning the land involved in the case as soon as possible.

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Secondly, in terms of calculation of the compensation, pursuant to the provisions of Article 36 of the State Compensation Law and the requests of the Appellant and combined with the above-mentioned relevant calculation standards of compensation for property rights resettlement, the Appellee can consider as the time point of compensation the time when the administrative agency decides to validate the administrative compensation after the decision takes effect, and as the benchmark the market evaluation price of similar commercial housing that can be obtained by the Appellant in accordance with the above-mentioned property resettlement standards. In this way, the Appellee pays the Appellant enough compensation for illegally and forcibly demolishing the houses to ensure the rights and interests of the person whose house is expropriated to buy similar houses. As for the Appellant’s claim for compensation of RMB 27,071,280 yuan pursuant to the standards of house expropriation on state-owned land, it is difficult to be supported with insufficient basis of relevant laws and regulations because the land involved is still collective land at present and unified indemnity policy standards have already been implemented in the early stage in the resettlement of the other 60 households. Finally, as to whether there is a loss of movable property in the house, although the Appellant did not put forward relevant claims and evidence during the trial of first instance, he/she is still entitle to claim for compensation with relevant evidence to the Appellee after the decision is made pursuant to Article 38 (2) of the Administrative Procedure Law that states “In a case of administrative compensation or indemnity, the plaintiff shall provide evidence on the damage caused by the administrative acts. If the inability of the plaintiff to provide such evidence is caused by the defendant, the defendant shall have the burden of proof”. If the Appellee fails to provide evidence due to his/her own reasons, then he/she shall explain with relevant evidence whether a list of articles was made at the site of forced demolition and whether the articles in the house were properly sealed and kept.

Xiaobin Wang Doctor of Laws, senior judge, Administrative Division of the Supreme People’s Court of the People’s Republic of China.

Zhang X v. The People’s Government of Jianxi District, Luoyang City (Dispute over Government Information Disclosure): The “Transiency” and “Actual Accessibility” of Government Information Guangyu Li and Fangfei Luo

Rule 1. Whether the government information is within the scope of proactive disclosure and has been proactively disclosed, or within the scope of disclosure upon request and has not yet been disclosed, the response of the administrative agency aims to ensure that the applicant can obtain the information. The difference is that in the former scenario, the administrative agency is under no obligation to provide the specific applicant with the information, but only need to inform him/her of the ways and means to obtain it. 2. Not providing to the specific applicant the government information that has been proactively disclosed is only limited to cases where the information is “actually accessible”. The determination of whether the administrative agency has performed its statutory duties should not only be based on whether it has informed the applicant of the ways and means to obtain the information, but also on whether the applicant can actually obtain the information through those ways and means notified by the agency. For public information carriers such as bulletin boards and electronic information screens where the information is “transient”, a simple notification may not necessarily satisfy the applicant’s need to actually obtain the information he/she needs. If the applicant really needs access to such government

Collegiate Panel : Guangyu Li, Xuemei Liu and Wei Yan (Edited by Deqiang Han; translated by Jing Duan) G. Li (B) · F. Luo The Supreme People’s Court of the People’s Republic of China, Beijing, China e-mail: [email protected] © Law Press China 2021 China Institute of Applied Jurisprudence, 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/10.1007/978-981-15-9136-5_46

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information that has been proactively disclosed but cannot be consulted afterwards, the administrative agency shall provide it after collecting the necessary cost.

Case Information 1. Parties Appellant in the Reopening of the Case (Plaintiff in the First Instance, Appellant in the Second Instance): Zhang X Appellee in the Reopening of the Case (Defendant in the First Instance, Appellee in the Second Instance): The People’s Government of Jianxi District, Luoyang City 2. Procedural History First Instance: No. 266 [2015] Trial, Adm. Division, the Intermediate People’s Court of Luoyang City, Henan Province (dated Aug. 30 of 2016) Second Instance: No. 2561 [2016] Final, Adm. Division, the Higher People’s Court of Henan Province (dated Feb. 14 of 2017) Case Reopening: No. 93 [2017] Reopening, Adm. Division, the Supreme People’s Court (dated May 31 of 2018) 3. Cause of Action Dispute over government information disclosure

Essential Facts On October 23, 2015, Zhang X mailed two applications for information disclosure to the People’s Government of Jianxi District, Luoyang City, requiring for disclosure of details regarding the payment of various fees for land acquisition after approval of the compensation plan for land acquisition and those regarding the implementation of social security fund for land acquisition compensation in Xiaosuo Village, Jianxi district as stipulated in the document Henan Adm. Land No.997 [2014]. On November 8, 2015, the Information Disclosure Office of the People’s Government of Jianxi District made a written reply to Zhang X, stating that “As regards the issue of land acquisition costs, the relevant list of compensation-related costs has been publicly announced on the bulletin board of Xiaosuo Village. With regard to the social security fund for land compensation, the relevant expenses have been turned in to the Social Security Center of Jianxi District pursuant to the regulations”. The People’s Government of Jianxi District, Luoyang City sent the written reply to Zhang X on November 9, 2015 by EMS. Zhang X believed that the written reply of

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the People’s Government of Jianxi District, Luoyang City had not been made in line with his requirements, and therefore filed an administrative lawsuit on December 29, 2015, requesting the People’s Government of Jianxi District, Luoyang City to disclose the information in written form according to his requirements, and claiming that the information disclosure reply of the People’s Government of Jianxi District, Luoyang City on November 8, 2015 was illegal. On August 30, 2016, the court of first instance ruled (No. 266 [2015] Trial, Adm. Division, the Intermediate People’s Court of Luoyang City, Henan Province) and dismissed Zhang X’s lawsuit. On February 14, 2017, the court of second instance dismissed the appeal (No. 2561 [2016] Final, Adm. Division, the Higher People’s Court of Henan Province ) and upheld the decision of first instance. Zhang X refused to accept the decision and petitioned to the Supreme People’s Court for reopening of the case. The Supreme People’s Court issued an administrative ruling (No. 3315 [2017] Appeal, the Supreme People’s Court) on December 6, 2017 to reopen the case.

Issue Whether or not the administrative agency has the obligation to re-disclose upon request the government information that falls within the scope of proactive disclosure and is deemed by the agency to have been proactively disclosed.

Holding The Supreme People’s Court holds that the issue centered on whether or not the administrative agency has the obligation to re-disclose upon request the government information that falls within the scope of proactive disclosure and is deemed by the agency to have been proactively disclosed. Article 211 of the Regulations of the People’s Republic of China on the Disclosure of Government Information stipulates: “With regard to the government information upon request to be disclosed, the administrative agency shall respond according to the following circumstances: 1. As for the information that falls within the scope of proactive disclosure, the administrative agency shall inform the applicant of the ways and means to obtain it…” This 1 Regulations

on the Disclosure of Government Information was revised by No. 711 Decree of the State Council of the People’s Republic of China on April 3, 2019. The revised regulations came into force on May 15, 2019. When the decision was made after reopening the case, the regulations before the revision still applied. This article corresponds to article 36 of the revised Regulations: “With regard to the government information upon request to be disclosed, the administrative agency shall respond according to the following circumstances: 1. As for the information that has already been proactively disclosed, the administrative agency shall inform the applicant of the ways and means to obtain it…”.

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stipulation includes two situations: (1) If the government information requested for disclosure has already been proactively disclosed, the administrative agency shall inform the applicant of the ways of disclosure and means to obtain the information so that the applicant can access it. (2) If the government information requested for disclosure is within the scope of disclosure but has not been proactively disclosed, or if the applicant has more specific disclosure requirements for the information already disclosed, the administrative agency shall inform the applicant of the procedural formalities including time, place, and form to obtain information. According to this, whether the information is within the scope of proactive disclosure and has been proactively disclosed, or within the scope of disclosure upon request and has not been disclosed, the reply of the administrative agency aims to ensure that the applicant can obtain it. The difference is that for the former, the administrative agency is under no obligation to provide the specific applicant with the government information requested, but only needs to inform him/her of the ways and means to obtain the information. This is because once this kind of repeated requests with a large amount of workload is allowed, it will not only cause unnecessary repetition of labor and undermine the ability of the administrative agency to fulfill its obligations, but also increase public expenditures hugely. At the same time, the institutional value of proactive disclosure of government information will be greatly reduced. However, not providing to the specific applicant the government information that has been proactively disclosed is only limited to cases where the information is “actually accessible”. “Actual accessibility” is characteristic of the “public publications including government gazettes, newspapers, magazines and books” as stipulated in Subparagraph 2 of Article 2 of the Rules on Trying Administrative Cases of Government Information Disclosure. If the administrative agency refuses to provide such information and the applicant files a lawsuit because of this, the people’s court will not accept it. Besides, the Regulations of the People’s Republic of China on the Disclosure of Government Information also stipulates places and facilities where government information can be published and consulted such as government websites, public access rooms, information request stands, bulletin boards, electronic information screens, national archives and public libraries. In cases where one can obtain government information through these channels, the administrative agency shall inform the applicant of the specific ways and means to obtain it. The determination of whether the administrative agency has performed its statutory duties should not only be based on whether it has informed the applicant, but also on whether the applicant can really obtain the information through the ways and means notified by the agency. For public information carriers such as bulletin boards and electronic information screens where the information is “transient”, a simple notification may not necessarily satisfy the applicant’s need to actually obtain the information he/she needs. If the applicant really needs access to such government information that has been proactively disclosed but cannot be consulted afterwards, the administrative agency shall provide it after collecting the necessary cost. This case is just in point. The Appellant in the reopening of the case requested for the government information—details regarding the payment of various fees for land acquisition after approval of the compensation plan for land acquisition in Xiaosuo

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Village, Jianxi district. Although the Appellee provided evidence to prove that it had been publicly announced on the bulletin board of Xiaosuo Village, such publicity obviously had the characteristic of being “transient”. If the Appellant really needed it, the Appellee might as well provide another copy. As for the information requested by the Appellant of details regarding the implementation of social security fund for land acquisition compensation in Xiaosuo Village, Jianxi district, since the Appellee informed the Appellant that “the relevant expenses have been turned in to the Social Security Center of Jianxi District pursuant to the regulations”, the Appellant was able to achieve the goal of obtaining the information with another channel available to request for it. However, in accordance with the principle of “whoever makes publicizes” stipulated in the Regulations of the People’s Republic of China on the Disclosure of Government Information, it was not an extra-legal obligation for the Appellee to make the disclosure directly. To sum up, the Supreme People’s Court decided to reverse the decisions of first and second instance and the reply made to Zhang X by the People’s Government of Jianxi District, Luoyang City on November 8, 2015, and to order the People’s Government of Jianxi District, Luoyang City to provide Zhang X with the requested government information within 15 working days from the effective date of this decision.

Comment on Rule The issue of this case is that whether or not the administrative agency has the obligation to re-disclose upon request the government information that falls within the scope of proactive disclosure and is deemed by the agency to have been proactively disclosed. 1. Exemption from Repetitive Disclosure Obligations In accordance with the Regulations of the People’s Republic of China on the Disclosure of Government Information, there are two ways as regards government information disclosure: proactive disclosure and disclosure upon requests. Article 36 of the revised Regulations that took effect on May 15, 2019 stipulates: “With regard to the government information upon request to be disclosed, the administrative agency shall respond according to the following circumstances: (1) As for the information that has already been proactively disclosed, the administrative agency shall inform the applicant of the ways and means to obtain it…” Article 12 of the Rules on Trying Administrative Cases of Government Information Disclosure stipulates: “Under any of the following circumstances, if the defendant has fulfilled the legal obligation to inform or explain the reasons, the people’s court shall rule to dismiss the plaintiff’s claims…(2) When the requested government information has already been disclosed, and the defendant has already informed the applicant of the ways and means to obtain the information…” Based on the above regulations, if the government information has already been proactively disclosed, the administrative agency has no obligation to provide it to the specific applicant, but only needs to inform him/her of the ways

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and means to obtain the information. The reasons for these regulations are mainly due to the following three considerations: (1) One of the important purposes of setting up the system of proactive disclosure of government information is to exempt specific applicants from the burden of making special requests or applications through the proactive service on the part of administrative agencies. Since the law stipulates the channels to obtain government information, the public should not “look for another way”. (2) If the government information has been disclosed to the public through proactive disclosure channels, it will be deemed that the administrative agency has fulfilled its obligation to disclose government information. To request for “disclosure” again is tantamount to imposing additional obligations on the administrative agency. (3) Once this kind of repetitive requests is allowed, it will not only undermine the ability of administrative agencies to fulfill their obligations, but also increase public expenditures greatly.2 2. Conditions for Exempting from Repetitive Disclosure Obligations Although the administrative agency does not have the obligation to repeatedly provide the applicant with the government information that has been disclosed to the public, this does not mean that simply informing the applicant of the ways and means to obtain the information will be considered as fulfilling the legal duties of government information disclosure. As for government information within the scope of public disclosure, whether it has been proactively disclosed by the administrative agency or not, the reply of the agency shall aim to ensure that the applicant is able to obtain the government information. Therefore, the following three conditions shall be met to dismiss the plaintiff’s claims on the basis that the administrative agency has fulfilled its legal duties of disclosing government information when applying the provisions of Subparagraph 2 of Article 12 of the Rules on Trying Administrative Cases of Government Information Disclosure regarding “when the requested government information has already been disclosed, and the defendant has already informed the applicant of the ways and means to obtain the information…”: First, the government information requested for disclosure has already been proactively disclosed. The revised Regulations of the People’s Republic of China on the Disclosure of Government Information specifies ways in which the administrative agency proactively discloses government information. Article 23 stipulates: “The administrative agency shall establish and perfect the mechanism to disclose government information. It shall disclose government information that should be proactively disclosed through government gazettes, government websites or other online governmental media, press conferences, newspapers, radio, television and other channels.” Article 25 stipulates: “The people’s government at all levels shall set up places for government information consultation in national archives, public libraries and government service places and equip them with corresponding facilities to assist citizens, legal persons and other organizations in obtaining government information. Administrative agencies may set up places and facilities such as information center for public 2 参见李广宇: 《政府信息公开判例百选》 ,人民法院出版社2013年版,第118~119页。

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inspection, information stands, bulletin boards and electronic information screens as needed to disclose government information. Administrative agencies shall provide timely to national archives and public libraries government information that are proactively disclosed.” Some of the above-mentioned public information carriers such as government gazettes, government websites and newspapers have the characteristic of “actual accessibility”, while others such as radio, television, bulletin boards and electronic information screens have the characteristic of “transiency”. The fact that government information is disclosed to the public through various open channels with different characteristics will have certain influence on the legality of the administrative agency replying to individual requests. Second, the administrative agency has already informed the applicant of the ways and means to obtain the government information. Even if the administrative agency has already disclosed to the public the government information within the scope of proactive disclosure, it cannot ignore the applicant’s request for disclosure of government information and must still reply and inform him/her of the ways and means to obtain the information. This obligation is the requirement of the “decision-making principle” in the administrative procedure law, that is, the administrative agency should make a clear reply to all the requests of private parties regardless of the content of the reply.3 The administrative agency cannot be deemed as having performed its statutory duties in the following situations: even though the government information requested for disclosure has indeed been disclosed to the public, the administrative agency has not made any reply to the applicant’s request; or the administrative agency has made a reply, but it only notified the fact that the government information had been proactively disclosed without informing the applicant of the ways and means to obtain the information. Third, the applicant can actually obtain the government information through the ways and means notified by the administrative agency. As mentioned earlier, for government information that falls within the disclosure scope, the reply of the administrative agency shall be aimed to ensure that the applicant can obtain it. Thus the determination of whether the administrative agency has performed its statutory duties should not only be based on whether it has informed the applicant of the ways and means to obtain the information, but also on whether the applicant can actually obtain the information through those ways and means notified by the agency. In other words, for government information that falls within the disclosure scope, the ways and means notified by the administrative agency shall ensure that the applicant can actually obtain the information. This is in fact the requirement implied in the Subparagraph 1 of Article 36 of the revised Regulations of the People’s Republic of China on the Disclosure of Government Information and in the Subparagraph 2 of Article 12 of the Rules on Trying Administrative Cases of Government Information Disclosure. Especially when it comes to the public information carriers such as bulletin boards and electronic information screens where information is “transient”, a simple notification may not satisfy the applicant’s need to actually obtain the government information he/she requests for. In this case, the court of first instance 3 参见李广宇: 《政府信息公开判例百选》 ,人民法院出版社2013年版,第120页。

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and second instance held that “the government information requested by Zhang X fell within the scope of proactive disclosure. The People’s Government of Jianxi District, Luoyang City had already made an announcement on the bulletin board of Xiaosuo Village; and the People’s Government of Jianxi District, Luoyang City clearly notified Zhang X of the ways and means to inquire the information in the written reply. Therefore the People’s Government of Jianxi District, Luoyang City fulfilled its statutory duties”. It is obvious that they neglected the “transiency” of the information since the government involved in the case disclosed it by posting on the bulletin board. Even if the information requested for disclosure has already been disclosed to the public before and the administrative agency has also informed the ways and means to obtain it, the agency still cannot be deemed to have fulfilled its statutory duties when the information cannot be obtained through the ways and means notified by the agency. For the government information that has been proactively disclosed but cannot be consulted afterwards, the administrative agency can surely re-provide it after collecting the necessary cost. Based on the above reasons, the Supreme People’s Court made the decision, reversing the decisions of first and second instance and ordering the People’s Government of Jianxi District, Luoyang City to provide Zhang X with the government information involved in the case.

Guangyu Li Master of Laws, deputy director of Personnel Department and deputy director of Information Bureau of the Supreme People’s Court of the People’s Republic of China, former vice-president of Administrative Division of the Supreme People’s Court of the People’s Republic of China. Fangfei Luo Master of Laws, assistant judge, Administrative Division of the Supreme People’s Court of the People’s Republic of China.