Selected Cases from the Supreme People’s Court of the People’s Republic of China: Volume 4 (Library of Selected Cases from the Chinese Court) 981996363X, 9789819963638

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Library of Selected Cases from the Chinese Court

China Applied Jurisprudence Institute Editor

Selected Cases from the Supreme People’s Court of the People’s Republic of China Volume 4

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.

China Applied Jurisprudence Institute Editor

Selected Cases from the Supreme People’s Court of the People’s Republic of China Volume 4

Editor See next page

ISSN 2662-5261 ISSN 2662-527X (electronic) Library of Selected Cases from the Chinese Court ISBN 978-981-99-6363-8 ISBN 978-981-99-6364-5 (eBook) https://doi.org/10.1007/978-981-99-6364-5 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. Translation from the Chinese language edition: 《 “ 中华人民共和国最高人民法院案例选》(第四辑)” by et al., © Law Press China 2020. Published by Law Press China. All Rights Reserved. © Law Press China 2023 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, expressed 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 Paper in this product is recyclable.

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

Wenyan Ding China Applied Jurisprudence Institute Beijing, China Qiujing Ma Legal Translation and Publication Center Law Press·China Beijing, China

Translated by Daxuan Zheng School of Foreign Languages Southwest University of Political Science and Law Chongqing, China

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

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

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

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

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

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

Yi Zheng IP Division K and H Law Firm Chongqing, China

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 has exerted enormous impact on rule of law in China and 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 trial practice, serving economic and social development, serving legal education and legal scholarship, serving international legal exchanges among Chinese and foreign legal communities, and serving rule of law in China, the China Applied Jurisprudence Institute, under the auspices of the Supreme People’s Court, has decided to organize the compilation of Selected Cases from the Supreme People’s Court of the People’s Republic of China in both Chinese and English languages since 2018 for domestic and overseas distribution. The cases in the series are strictly selected by the trial departments of the Supreme People’s Court from their adjudicated cases. These cases are of significance in revealing or clarifying the application of legal rules, establishing new methods of adjudication, 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 case, legal thinking and reasoning, the decisional methodology, and the application of law, has enabled them to convey to the readers legal processes, legal methodology and ideology in an intuitive, clearest, and most accurate manner. This series is divided into three parts: (a) Cases by Justices, which have exerted profound influence throughout the country and the world; (b) Cases at the Adjudication Committee, which are focal, edge-cutting, and hard cases that have been deliberated at the Adjudication Committee of the Supreme People’s Court and have affected the judicial process and development in China so as to play the role of cases in unifying the application of law and functioning a role of early warning or predicting the legal issues; and (c) Typical Cases, which involve civil law, criminal law, commercial law, intellectual property law, maritime law, administrative law and

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Foreword

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

Editorial Board

Acknowledgments

1. The contents of this volume are intended for study and research only and shall not be used as evidence or proof. Any judgment opinions herein shall be subject to their original Chinese versions issued by the Supreme People’s Court of the People’s Republic of China. 2. In this translation, third-person singular male pronouns should be construed to include the corresponding female and neuter pronouns except where the context clearly requires otherwise.

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Panel of Senior Editors

Director of the Panel Wanming Yang Members of the Panel (In Order by Stroke Numbers of Chinese Characters) Housen Yu Yan Ma Zhenyu Wang Xiaodong Wang Jinya Wang Jian Ye Xiangbo Fu Zheng Liu Min Liu Zhumei Liu Su Qi Ao An Jianfeng Xu Zhihua Sun Guangyu Li Chengyu Li Xiaomin Li Ruiyi Li Li He Qiuling Xin Yili Zhang Benyu Chen Yifang Chen Guanghai Lin Wenxue Lin Zhiyong Luo xi

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Zhonglin He Jinshan Zhao Shihao Hu Lixin Hu Nonggen Duan Xiaochen Qian Xiaoli Gao Wenjun Huang Xiangyang Liao Wei Teng

Panel of Senior Editors

Panel of Editors

Editor-in-Chief Zhiyuan Chen Associate Editors Min Liu Xuechun Zhang Managing Editor Wenyan Ding Editors Ming Li Yi Yang (civil and commercial cases, performance cases) Wenyan Ding (intellectual property cases) Deqiang Han (administrative cases, state compensation cases) Assistant Editor Huishihan Wang

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

I. Administrative Enactments 1. The Land Administration Law of the People’s Republic of China (Rev. 2019) Referred to as Land Administration Law; adopted on June 25 of 1986 at the 16th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China; amended for the first time on December 29 of 1988 at the 5th Session of the Standing Committee of the Seventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Land Administration Law of the People’s Republic of China; revised on August 29 of 1998 at the 4th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China; amended for the second time on August 28 of 2004 at the 11th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Land Administration Law of the People’s Republic of China; amended for the third time on August 26 of 2019 at the 12th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Land Administration Law of the People’s Republic of China, and the Urban Real Estate Administration Law of the People’s Republic of China. 2. The Customs Law of the People’s Republic of China (Rev. 2017) Referred to as Customs Law; adopted on January 22 of 1987 at the 19th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China; amended for the first time on July 8 of 2000 at the 16th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Customs Law of the People’s Republic of China; amended for the second time on June 29 of 2013 at the 3rd Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on the Protection of Cultural Relics and xv

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Other Eleven Laws; amended for the third time on December 28 of 2013 at the 6th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Marine Environmental Protection Law of the People’s Republic of China and Other Six Laws; amended for the fourth time on November 7 of 2016 at the 24th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on the Foreign Trade Law of the People’s Republic of China and Other Eleven Laws; amended for the fifth time on November 4 of 2017 at the 30th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Accounting Law of the People’s Republic of China and Other Ten Laws. 3. The Law of the People’s Republic of China on the Protection of Rights and Interests of Women (Rev. 2018) Referred to as Law on the Protection of Rights and Interests of Women; adopted on April 3 of 1992 at the 5th Session of the Standing Committee of the Seventh National People’s Congress of the People’s Republic of China; amended for the first time on August 28 of 2005 at the 17th Session of the Standing Committee of the Tenth National People’s Congress in accordance with the Decision on Revising the Law of the People’s Republic of China on the Protection of the Rights and Interests of Women; amended for the second time on October 26 of 2018 at the 6th Session of the Standing Committee of the Thirteenth National People’s Congress in accordance with the Decision of the Standing Committee of the National People’s Congress on Revising the Law of the People’s Republic of China on the Protection of Wild Animals and Other Fourteen Laws. 4. The State Compensation Law of the People’s Republic of China (Rev. 2012) Referred to as State Compensation Law; adopted on May 12 of 1994 at the 7th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China; amended for the first time on April 29 of 2010 at the 14th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the State Compensation Law of the People’s Republic of China; amended for the second time on October 26 of 2012 at the 29th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the State Compensation Law of the People’s Republic of China. 5. The Administrative Licensing Law of the People’s Republic of China (Rev. 2019) Referred to as Administrative Licensing Law; adopted on August 27 of 2003 at the 4th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China; amended on April 23 of 2019 at the 10th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s

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Republic of China in accordance with the Decision on Revising the Construction Law of the People’s Republic of China and Other Seven Laws. 6. The Law of the People’s Republic of China on the Public Security Administration Penalties (Rev. 2012) Referred to as Law on the Public Security Administration Penalties; adopted on August 28 of 2005 at the 17th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China, and revised on October 26 of 2012 at the 29th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on the Public Security Administration Penalties. 7. The Food Safety Law of the People’s Republic of China (Rev. 2018) Referred to as Food Safety Law; adopted on February 28 of 2009 at the 7th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China, revised on April 24 of 2015 at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China; amended on December 29 of 2018 at the 7th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Product Quality Law of the People’s Republic of China and Other Four Laws. 8. The Administrative Coercion Law of the People’s Republic of China (2011) Referred to as Administrative Coercion Law; adopted at the 21st Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China and publicized on June 30 of 2011, and implemented as of January 1 of 2012. 9. The Organic Law on Villagers’ Committees of the People’s Republic of China (Rev. 2018) Referred to as Organic Law on Villagers’ Committees; adopted on November 4 of 1998 at the 5th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China; revised on October 28 of 2010 at the 17th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China; amended on December 29 of 2018 at the 7th Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Organic Law on Villagers’ Committees of the People’s Republic of China and the Organic Law on Residents’ Committees of the People’s Republic of China.

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

II. Economic Enactments 10. The Anti-Unfair Competition Law of the People’s Republic of China (Rev. 2019) Referred to as Anti-Unfair Competition Law; adopted on September 2 of 1993 at the 3rd Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China; revised on November 4 of 2017 at the 30th Session of the Standing Committee of the Twelfth National People’s Congress; amended on April 23 of 2019 at the 10th Session of the Standing Committee of the Thirteenth National People’s Congress in accordance with the Decision on Revising the Construction Law of the People’s Republic of China and Other Seven Laws. 11. The Law of the People’s Republic of China on Bid Invitation and Bidding (Rev. 2017) Referred to as Law on Bid Invitation and Bidding; adopted on August 30 of 1999 at the 11th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China; amended on December 28 of 2017 at the 31st Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Bid Invitation and Biddings and the Metrology Law the People’s Republic of China. 12. The Law of the People’s Republic of China on Land Contracting (Rev. 2009) Referred to as Land Contracting Law; adopted on August 29 of 2002 at the 29th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China; amended on August 27 of 2009 at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Several Laws. 13. The Law of the People’s Republic of China on Regulation of and Supervision over Banking Industry (Rev. 2006) Referred to as Law on Regulation of and Supervision over Banking Industry; adopted on December 27 of 2003 at the 6th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China; amended on October 31 of 2006 at the 24th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Regulation of and Supervision over Banking Industry.

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III. Civil and Commercial Enactments 14. The General Principles of Civil Law of the People’s Republic of China (Repealed) Referred to as General Principles of Civil Law; adopted on April 12 of 1986 at the 4th Session of the Sixth National People’s Congress of the People’s Republic of China; amended on August 27 of 2009 at the 10th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising Certain Laws of the People’s Republic of China; repealed as of January 1 of 2021 for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28 of 2020. 15. The Trademark Law of the People’s Republic of China (Rev. 2019) Referred to as Trademark Law; adopted on August 23 of 1982 at the 24th Session of the Standing Committee of the Fifth National People’s Congress of the People’s Republic of China; amended for the first time on February 22 of 1993 at the 30th Session of the Standing Committee of the Seventh National People’s Congress in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China; amended for the second time on October 27 of 2001 at the 24th Session of the Standing Committee of the Ninth National People’s Congress in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China; amended for the third time on August 30 of 2013 at the 4th Session of the Standing Committee of the Twelfth National People’s Congress in accordance with the Decision on Revising the Trademark Law of the People’s Republic of China; amended for the fourth time on April 23 of 2019 at the 10th Session of the Standing Committee of the Thirteenth National People’s Congress in accordance with the Decision on Revising the Construction Law of the People’s Republic of China and Other Seven Laws. 16. The Patent Law of the People’s Republic of China (Rev. 2020) Referred to as Patent Law; adopted on March 12 of 1984 at the 4th Session of the Standing Committee of the Sixth National People’s Congress of the People’s Republic of China; amended for the first time on September 4 of 1992 at the 27th Session of the Standing Committee of the Seventh National People’s Congress in accordance with the Decision on Revising the Patent Law of the People’s Republic of China; amended for the second time on August 25 of 2000 at the 17th Session of the Standing Committee of the Ninth National People’s Congress in accordance with the Decision on Revising the Patent Law of the People’s Republic of China; amended for the third time on December 27 of 2008 at the 6th Session of the Standing Committee of the Eleventh National People’s Congress in accordance with the Decision on Revising the Patent Law of the People’s Republic of China; revised on October 27 of 2020 at the 22nd Session of the Standing Committee of the Thirteenth National

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

People’s Congress in accordance with the Decision on Revising the Patent Law of the People’s Republic of China, and implemented as of June 1 of 2021. 17. The Maritime Law of the People’s Republic of China (1992) Referred to as Maritime Law; adopted on November 7 of 1992 at the 28th Session of the Standing Committee of the Seventh National People’s Congress of the People’s Republic of China; publicized on November 7 of 1992 by No. 64 Order of the President of the People’s Republic of China and implemented as of July 1 of 1993. 18. The Company Law of the People’s Republic of China (Rev. 2018) Referred to as Company Law; adopted at the 5th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on December 29 of 1993; amended for the first time on December 25 of 1999 at the 13th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Company Law of the People’s Republic of China; amended for the second time on August 28 of 2004 at the 11th Session of the Standing Committee of the Tenth National People’s Congress in accordance with the Decision on Revising the Company Law of the People’s Republic of China; revised at the 18th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China on October 27 of 2005; amended for the third time on December 28 of 2013 at the 6th Session of the Standing Committee of the Twelfth National People’s Congress in accordance with the Decision on Revising the Law of the People’s Republic of China on Protecting the Marine Environment and Other Six Laws; amended for the fourth time on October 26 of 2018 at the 6th Session of the Standing Committee of the Thirteenth National People’s Congress in accordance with the Decision on Revising the Company Law of the People’s Republic of China. 19. The Law of the People’s Republic of China on Negotiable Instruments (Rev. 2004) Referred to as Law on Negotiable Instruments; adopted on May 10 of 1995 at the 13th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China; amended on August 28 of 2004 at the 11th Session of the Standing Committee of the Tenth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Negotiable Instruments. 20. The Guarantee Law of the People’s Republic of China (Repealed) Referred to as Guarantee Law; adopted by at the 14th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China on June 30 of 1995; and publicized by No. 50 Order of the President of the People’s Republic of China on June 30 of 1995, and implemented as of October 1 of 1995; repealed as of January 1 of 2021 for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the

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

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Thirteenth National People’s Congress of the People’s Republic of China on May 28 of 2020. 21. The Insurance Law of the People’s Republic of China (Rev. 2015) Referred to as Insurance Law; adopted on June 30 of 1995 at the 14th Session of the Standing Committee of the Eighth National People’s Congress of the People’s Republic of China; amended for the first time on October 28 of 2002 at the 30th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Insurance Law of the People’s Republic of China; revised on February 28 of 2009 at the 7th Session of the Standing Committee of the Eleventh National People’s Congress; amended for the second time on August 31 of 2014 at the 10th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Insurance Law of the People’s Republic of China and Other Four Laws; amended for the third time on April 24 of 2015 at the 14th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Metrology Law of the People’s Republic of China and Other Four Laws. 22. The Contract Law of the People’s Republic of China (Repealed) Referred to as Contract Law; adopted on March 15 of 1999 at the 2nd Session of the Ninth National People’s Congress the People’s Republic of China, publicized by No. 15 Order of the President of the People’s Republic of China on March 15 of 1999, and implemented as of October 1 of 1999; repealed as of January 1 of 2021 as a result of the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28 of 2020. 23. The Property Law of the People’s Republic of China (Repealed) Referred to as Property Law; adopted at the 5th Session of the Tenth National People’s Congress on March 16 of 2007, publicized by No. 62 Order of the President of the People’s Republic of China on March 16 of 2007, and implemented as of October 1 of 2007; repealed as of January 1 of 2021 for the adoption on May 28 of 2020 of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China. 24. The Tort Law of the People’s Republic of China (Repealed) Referred to as Tort Law; adopted on December 26 of 2009 at the 12th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China, publicized by No. 21 Order of the President of the People’s Republic of China on December 26 of 2009 and implemented as of July 1 of 2010; repealed as of January 1 of 2021 as a result of the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the

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Thirteenth National People’s Congress of the People’s Republic of China on May 28 of 2020. 25. The General Rules of the Civil Law of the People’s Republic of China (Repealed) Referred to as General Rules of the Civil Law; adopted at the 5th Session of the Twelfth National People’s Congress of the People’s Republic of China on March 15 of 2017, publicized by No. 66 Order of the President of the People’s Republic of China on March 15 of 2017, and implemented on October 1of 2017; repealed as of January 1 of 2021 for the adoption of the Civil Code of the People’s Republic of China at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China on May 28 of 2020. 26. Civil Code of the People’s Republic of China Referred to as Civil Code; adopted on May 28, 2020 at the 3rd Session of the Standing Committee of the Thirteenth National People’s Congress of the People’s Republic of China and implemented as of January 1 of 2021, and simultaneously, the Marriage Law of the People’s Republic of China, the Succession Law of the People’s Republic of China, the General Principles of Civil Law of the People’s Republic of China, the Adoption Law of the People’s Republic of China, the Guaranty Law of the People’s Republic of China, the Contract Law of the People’s Republic of China, the Property Law of the People’s Republic of China, the Tort Liability Law of the People’s Republic of China, and the General Rules of Civil Law of the People’s Republic of China, are repealed. 27. The Marine Environment Protection Law of the People’s Republic of China (Rev. 2017) Referred to as Marine Environment Protection Law; adopted on August 23 of 1982 at the 24th Session of the Standing Committee of the Fifth National People’s Congress of the People’s Republic of China; revised on December 25 of 1999 at the 13th Session of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China; amended for the first time on December 28 of 2013 at the 6th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Law of the People’s Republic of China on Marine Environment Protection and Other Six Laws; amended for the second time on November 7 of 2016 at the 24th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Marine Environment Protection Law of the People’s Republic of China; and amended for the third time on November 4 of 2017 at the 30th Session of the Standing Committee of the Twelfth National People’s Congress of the People’s Republic of China in accordance with the Decision on Revising the Accounting Law of the People’s Republic of China and Other Ten Laws.

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IV. Procedural Enactments 28. The Administrative Procedure Law of the People’s Republic of China (Rev. 2017) Referred to as Administrative Procedure Law; adopted on April 4 of 1989 at the 2nd Session of the Seventh National People’s Congress of the People’s Republic of China; amended for the first time on November 1 of 2014 at the 11th Session of the Standing Committee of the Twelfth National People’s Congress in accordance with the Decision on Revising the Administrative Procedure Law of the People’s Republic of China; and amended for the second time on June 27 of 2017 at the 28th Session of the Standing Committee of the Twelfth National People’s Congress 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. 29. The Civil Procedure Law of the People’s Republic of China (Rev. 2017) Referred to as Civil Procedure Law; adopted on April 9 of 1991 at the 4th Session of the Seventh National People’s Congress of the People’s Republic of China; amended for the first time on October 28 of 2007 at the 30th Session of the Standing Committee of the Tenth National People’s Congress in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China; amended for the second time on August 31 of 2012 at the 28th Session of the Standing Committee of the Eleventh National People’s Congress in accordance with the Decision on Revising the Civil Procedure Law of the People’s Republic of China; amended for the third time on June 27 of 2017 at the 28th Session of the Standing Committee of the Twelfth National People’s Congress 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. 30. The Law of the People’s Republic of China on the Application of Laws to Foreign-Related Civil Relations (2011) Referred to as Law on the Application of Laws to Foreign-Related Civil Relations; adopted at the 17th Session of the Standing Committee of the Eleventh National People’s Congress of the People’s Republic of China on October 28 of 2010, publicized by No. 36 Order of the President of the People’s Republic of China and implemented as of April 1 of 2011.

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

V. Administrative Regulations 31. Regulations of the People’s Republic of China on the Registration of Households (1958) Referred to as Regulations on Household Registration; adopted on January 9 of 1958 at the 91st Session of the Standing Committee of the National People’s Congress, publicized by the Order of the President of the People’s Republic of China on January 9 of 1958 and implemented as of the date of its publication. 32. Regulations on Implementing the Copyright Law of the People’s Republic of China (Rev. 2013) Referred to as Regulations on Implementing Copyright Law; publicized on August 2 of 2002 by No. 359 Executive Order of the State Council of the People’s Republic of China; revised for the first time on January 8 of 2011 by the Decision of the State Council on Abolishing and Revising Some Administrative Regulations; and revised for the second time on January 30, 2013 by the Decision of the State Council on Revising Regulations on Implementing the Copyright Law of the People’s Republic of China. 33. Regulations of the People’s Republic of China on Implementing the Administrative Reconsideration Law (2007) Referred to as Regulations on Implementing the Administrative Reconsideration Law; adopted on May 23 of 2007 at the 177th Executive Meeting of the State Council, publicized on May 29 of 2007 by No. 499 Executive Order of the State Council of the People’s Republic of China, and implemented as of August 1 of 2007. 34. Regulations of the People’s Republic of China on Implementing the Patent Law (Rev. 2010) Referred to as Regulations on Implementing the Patent Law; publicized on June 15, 2001 by No. 306 Executive Order of the State Council of the People’s Republic of China; revised for the first time on December 28, 2002 by the Decision of the State Council on Revising Regulations on Implementing the Patent Law of the People’s Republic of China; and revised for the second time on January 9 of 2010 by the Decision of the State Council on Revising Regulations on Implementing the Patent Law of the People’s Republic of China.

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

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VI. Judicial Interpretations and Other Normative Documents Administrative Issues 35. Rules of the Supreme People’s Court on Certain Issues in Hearing the Administrative Agreement Cases (SPC JI No. 17 [2019]) Referred to as Rules on Certain Issues in Hearing the Administrative Agreement Cases, adopted on November 12 of 2019 at the 1781st Meeting of the Adjudication Committee of the Supreme People’s Court, publicized on November 27 of 2019 and implemented as of January 1 of 2020. 36. Rules of the Supreme People’s Court on Certain Issues in Hearing Administrative Cases about the Authorization and Determination of Trademark Rights (SPC JI No. 2 [2017]) Referred to as Rules on Certain Issues in Hearing Administrative Cases about Authorization and Determination of Trademark Rights; adopted on December 12, 2016 at the 1703rd Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on January 10, 2017 and implemented as of March 1, 2017. Civil and Commercial Issues 37. Rules of the Supreme People’s Court on Certain Issues in Hearing Cases Involving Disputes over Deposit Certificates (SPC JI No. 8 [1997]) Referred to as Rules on Certain Issues in Hearing Cases Involving Disputes over Deposit Certificates; adopted on November 25 of 1997 at the 946th Meeting of the Adjudication Committee of the Supreme People’s Court; and implemented as of December 13 of 1997. 38. Rules of the Supreme People’s Court on Certain Issues in Hearing Economic Cases Involving Suspected Economic Crimes (SPC JI No. 7 [1998]) Referred to as Rules on Certain Issues in Hearing Economic Cases Involving Suspected Economic Crimes; adopted on April 9 of 1998 at the 974th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on April 21 of 1998 and implemented as of April 29 of 1998. 39. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Contract Law of the People’s Republic of China (I) (SPC JI No. 19 [1999]) Referred to as Judicial Interpretation of Contract Law (I); adopted on December 1 of 1999 at the 1090th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on December 19 of 1999 and implemented as of December 29 of 1999.

xxvi

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

40. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Guarantee Law of the People’s Republic of China (SPC JI No. 44 [2000]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of the Guarantee Law; adopted on September 29 of 2000 at the 1133rd Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on December 8 of 2000 and implemented as of December 13 of 2000. 41. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (SPC JI No. 21 [2009]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes; adopted on December 21 of 2009 at the 1480th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on December 28 of 2009 and implemented as of January of 2010. 42. Rules of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Disputes (SPC JI No. 4 [2015]) Referred to as Rules on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Disputes; adopted on June 19 of 2001 at the 1180th Meeting of the Adjudication Committee of the Supreme People’s Court; revised for the first time on February 25 of 2013 at the 1570th Meeting of Adjudication Committee of the Supreme People’s Court in accordance with the Decision of the Supreme People’s Court to Revise Rules of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Disputes; revised for the second time on January 19 of 2015 at the 1641st Meeting of Adjudication Committee of the Supreme People’s Court in accordance with the Decision of the Supreme People’s Court to Revise Rules of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Disputes. 43. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II) (SPC JI No. 1 [2016]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II); publicized on March 21 of 2016 and implemented as of April 1 of 2016. 44. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in the Trial of Contract Disputes for the Building of Construction Projects (SPC JI No. 14 [2004]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in the Trial of Contract Disputes for the Building of Construction

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

xxvii

Projects; adopted on September 29 of 2004 at the 1327th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on October 25 of 2004 and implemented as of January 1 of 2005. 45. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Civil Cases Involving Unfair Competition (SPC JI No. 2 [2007]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Law in Hearing Civil Cases Involving Unfair Competition; adopted on December 30 of 2006 at the 1412nd Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on January 12 of 2007 and implemented as of February 1 of 2007. 46. Rules of the Supreme People’s Court on Certain Issues Regarding the Mediation Practices in Civil Cases in the People’s Courts (SPC JI No. 18 [2008]) Referred to as Rules on Certain Issues Regarding the Mediation Practices in Civil Cases in the People’s Courts; adopted on August 18 of 2004 at the 1321st Meeting of the Adjudication Committee of the Supreme People’s Court; amended on December 16 of 2008 in accordance with the Decision of the Supreme People’s Court on Adjusting the Judicial Interpretations and other Documents in Citing the Number of the Civil Procedure Law of the People’s Republic of China. 47. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Contract Law of the People’s Republic of China (II) (SPC JI No. 5 [2009]) Referred to as Judicial Interpretation of Contract Law (II); adopted on February 9 of 2009 at the 1462nd Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on April 24 of 2009 and implemented as of May 13 of 2009. 48. Rules of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Private Lending Cases (SPC JI No. 18 [2015]) Referred to as Rules on Certain Issues Regarding the Application of Laws in Hearing Private Lending Cases; adopted on June 23 of 2015 at the 1655th Meeting of the Adjudication Committee of the Supreme People’s Court; amended on August 18 of 2020 at 1809th Meeting of the Adjudication Committee of the Supreme People’s Court in accordance with the Decision of the Supreme People’s Court on Revising Rules of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Private Lending Cases. 49. Judicial Interpretation of the Supreme People’s Court Regarding the Application of Laws in Hearing Cases Involving Sales Contract Disputes (SPC JI No. 8 [2012]) Referred to as Judicial Interpretation Regarding the Application of Laws in Hearing Cases Involving Sales Contract Disputes; adopted on March 31 of 2012 at the 1545th

xxviii

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

Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on May 10 of 2012 and implemented as of July 1 of 2012. 50. Rules of the Supreme People’s Court on Certain Issues in Hearing Cases Involving Damages Resulting from Ship Oil Pollution (SPC JI No. 14 [2011]) Referred to as Rules on Certain Issues in Hearing Cases Involving Damages Resulting from Ship Oil Pollution; adopted on January 10 of 2011 at the 1509th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on May 4 of 2011 and implemented as of July 1 of 2011. 51. Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Environmental Tort Cases (SPC JI No. 12 [2015]) Referred to as Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Environmental Tort Cases; adopted on February 9 of 2015 at the 1644th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on June 1 of 2015 and implemented as of June 3 of 2015. 52. Rules of the Supreme People’s Court on Certain Issues in Hearing Disputes over Independent Letter of Guarantee (SPC JI No. 24 [2016]) Referred to as Rules on Certain Issues in Hearing Disputes over Independent Letter of Guarantee; adopted on July 11 of 2016 at the 1688th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on November 18 of 2016, and implemented as of December 1 of 2016. Procedural Issues 53. Judicial Interpretation of the Supreme People’s Court on Certain Issues in Applying the Law of the People’s Republic of China on Special Procedures in Maritime Litigation (SPC JI No. 3 [2003]) Referred to as Judicial Interpretation on Certain Issues in Applying the Law on Special Procedures in Maritime Litigation; adopted on December 3 of 2002 at the 1259th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on January 6 of 2003 and implemented as of February 1 of 2003. 54. Rules of the Supreme People’s Court on Sealing Up, Distraining and Freezing Property in the Enforcement of Civil Cases by the People’s Courts (SPC JI No. 15 [2004]) Referred to as Rules on Sealing Up, Distraining and Freezing Property in the Enforcement of Civil Cases by the People’s Courts; adopted on October 26 of 2004 at the 1330th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on November 4 of 2004, and implemented as of January 1 of 2005.

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

xxix

55. Judicial Interpretation of the Supreme People’s Court in Applying the Civil Procedure Law of the People’s Republic of China (SPC JI No. 5 [2015]) Referred to as Judicial Interpretation in Applying the Civil Procedure Law; adopted on December 18 of 2014 at the 1636th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on January 30 of 2015, and implemented as of February 4, 2015. 56. Rules of the Supreme People’s Court for the People’s Court to Handle Certain Issues Regarding Enforcement Objection and Reconsideration Cases (SPC JI No. 10 [2015]) Referred to as Rules for the People’s Court to Handle Certain Issues Regarding Enforcement Objection and Reconsideration Cases; adopted on December 29 of 2014 at the 1638th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on May 5 of 2015 and implemented as of May 5, 2015. 57. Rules of the Supreme People’s Court on Evidence for Administrative Proceedings (SPC JI No. 21 [2002]) Referred to as Rules on Evidence for Administrative Proceedings; adopted on June 4 of 2002 at the 1224th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on July 24 of 2002, and implemented as of October 1 of 2002. 58. Judicial Interpretation of the Supreme People’s Court in Applying the Administrative Procedure Law of the People’s Republic of China (SPC JI No. 1 [2018]) Referred to as Judicial Interpretation in Applying the Administrative Procedure Law; adopted on November 13 of 2017 at the 1726th Meeting of the Adjudication Committee of the Supreme People’s Court; publicized on February 6 of 2018, and implemented as of February 8, 2018. 59. Rules of the Supreme People’s Court on Evidence for Civil Actions (SPC JI No. 19 [2019]) Referred to as Rules on Evidence for Civil Actions; adopted on December 6 of 2001 at the 1201st Meeting of the Adjudication Committee of the Supreme People’s Court; revised on October 14 of 2019 at the 1777th Meeting of the Adjudication Committee of the Supreme People’s Court in accordance with the Decision of the Supreme People’s Court on Revising the Rules of Evidence for Civil Actions.

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

VII. Other Documents 60. Notice of the Supreme People’s Court, the Ministry of Land and Resources,1 and the Ministry of Construction2 on Certain Issues Regarding Standardizing the Enforcement by the People’s Courts and Assistance to the Enforcement by the Real Estate Management Departments Concerning Land and Resources in Accordance with the Law (SPC Doc. No. 5 [2004]) Referred to as Notice on Certain Issues Regarding Standardizing the Enforcement by the People’s Courts and Assistance to the Enforcement by the Real Estate Management Departments Concerning Land and Resources in Accordance with the Law; publicized on February 10 of 2004, and implemented as of March 1 of 2003. 61. Interpretation of Certain Issues in Implementing the Law of the People’s Republic of China on the Public Security Administration Penalties by the Public Security Authorities (II) (2007) Referred to as Interpretation of Certain Issues in Implementing the Law on the Public Security Administration Penalties (II); publicized January 26 of 2007 by the Ministry of Public Security of the People’s Republic of China. 62. Summary Minutes of the Supreme People’s Court Symposium in Hearing Cases Involving Assignment of Non-Performing Financial Claims (SPC Doc. No. 19 [2009]) Referred to as Symposium Minutes in Hearing Cases Involving Assignment of NonPerforming Financial Claims; publicized on March 30 of 2009 by the Supreme People’s Court. 63. Guideline Opinions of the Supreme People’s Court on Certain Issues in Hearing Cases Involving Civil and Commercial Contract Disputes under the Current Situation (SPC Doc. No. 40 [2009]) Referred to as Guideline Opinions on Certain Issues in Hearing Cases Involving Civil and Commercial Contract Disputes; publicized on July 7 of 2009 by the Supreme People’s Court.

1

Duties and responsibilities of the Ministry of Land and Resources has been transferred to be exercised by the Ministry of Natural Resources. 2 Duties and responsibilities of the Ministry of Construction has been transferred to be exercised by the Ministry of Housing & Urban-Rural Development according to the 2018 State Council Institutional Reform Plan.

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

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64. Guideline Opinions for Risk Supervision of Trusts Companies by General Office of China Banking Regulatory Commission3 (CBRC Doc. No. 99 [2014]) Referred to as Guideline Opinions for Risk Supervision of Trusts Companies; publicized on April 8 of 2014 by the China Banking Regulatory Commission (CBRC). 65. Opinions of the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security on Certain Issues Regarding the Application of Laws in Hearing Criminal Cases Involving Illegal Fund Raising (2014) Referred to as Opinions on Certain Issues Regarding the Application of Laws in Hearing Criminal Cases Involving Illegal Fund Raising; jointly publicized on March 25 of 2014 by the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security. 66. Opinions of the General Office of China Banking Regulatory Commission on Further Strengthening the Risk Supervision of Trusts Companies (CBRC Doc. No. 58 [2016]) Referred to as Opinions on Further Strengthening the Risk Supervision of Trusts Companies; publicized on March 18 of 2016 by China Banking Regulatory Commission.

3

According to the 2018 State Council Institutional Reform Plan, duties and responsibilities of the former China Banking Regulatory Commissions have been transferred to be exercised by China Banking and Insurance Regulatory Commission, and according to the 2023 State Council Institutional Reform Plan, duties and responsibilities of China Banking and Insurance Regulatory Commission has been transferred to be exercised by National Financial Regulatory Administration.

Contents

Cases at the Adjudication Committee Lianqi Development Co. Ltd. v. Shanghai Baoye Group Corp., Ltd. and Guangzhou Supervision Sakai Intellectual Intelligent Technology Co. Ltd. et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xiaomei Tang

3

Typical Cases Shanxi Coal International Energy Group Jincheng Co., Ltd. v. China CITIC Bank Co., Ltd. Xi’an Branch, Shaanxi Petroleum & Chemical Industrial Group Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xuefeng Ren and Yuyi Liao Xinjiang Longmei Nengyuan Co., Ltd. v. Zheng X . . . . . . . . . . . . . . . . . . . . Jing Zhao Ping An Bank Co., Ltd., Beijing Branch, and Beijing Gold Exchange Co., Ltd. et al. v. Hainan Jinfenghuang Hotspring Resort Co., Ltd., Beijing Xinyupeng Mechanical & Electrical Engineering Co., Ltd. et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xuemei Zhang China Nonferrous Metal Industry’s Foreign Engineering and Construction Co., Ltd. v. Ningbo Branch of Hengfeng Bank Co., Ltd. and Ningbo Zhongrenhong Electronics Co., Ltd. and Ningbo Gangdi Trade Co., Ltd. et al. (Defendants in the First Instance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chun Yang, Jiaqin Wei, and Tao Yang Xinjiang Huacheng Anju Real Estate Development Co., Ltd. v. China Railway Construction Bridge Engineering Bureau Group Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dian Luo and Ting Yang

13 23

31

43

51

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Contents

LC Securities Co., Ltd. and Eastern Gold Jade Co., Ltd. v. Yunnan Xinglong Industry Co., Ltd. and Zhao X et al. . . . . . . . . . . . . . . . . . . . . . . . . Aizhen Zhang Bank of Dalian Co., Ltd. v. Dalian Branch of China Railway Modern Logistics Technology Co., Ltd. and Jinzhou Zuoyuan Sugar Foods Co., Ltd. et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weiming Ji

57

65

Sichuan Zhongding Construction Engineering Co., Ltd. v. Zhu X and Natural Resources Bureau of Wulan County . . . . . . . . . . . . . . . . . . . . . Jing Zhao

75

Fujian Tinghu Real Estate Group Co., Ltd. v. Natural Resources Bureau of Xianyou County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Min Xia

81

Wang X v. Bazhou Sairui Machinery & Equipment Installation Co. Ltd, Cao X (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xiaofei Liu, Junhong Zou, and Ling Zhang

95

Peng X v. Chengdu Rural Commercial Bank Co., Ltd. Cuqiao Subbranch, Chen X, et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Wei Si and Zhe Liu Hubei YAS Commercial Chain Co., Ltd. v. Danyang Yongsheng Motor Transport Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Jingchuan Liu, Ge Wang, and Shuang Liang Jiang X, Chen X, et al. v. Lin X, Weng X(A), et al. . . . . . . . . . . . . . . . . . . . . 127 Chun Yang, Jiaqin Wei, and Ming Zhang Huang X v. Xiamen Shuangrun Investment Management Co., Ltd., Fenghe (China) Co., Ltd. (The Third Party in the First Instance), Hui’an County Rural Credit Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Min Xia Guilin Zhangtai Group Co., Ltd., Guangxi Lichengdong Investment Co., Ltd. et al. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Guohui Xiang and Xin Ye Zhou X v. Xiamen Baixiang Shouli E-business Co., Ltd. . . . . . . . . . . . . . . . 161 Chun Yang, Jiaqin Wei, and Fu Chen Yunnan Copper Company Co., Ltd. v. Kunming Wanbao Jiyuan Biotechnology Co., Ltd. Yunnan Zhongheng Innovation Investment Company Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 Lan Ma and Yingyue Mao

Contents

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Zhongkong Guorong New Energy Development Co., Ltd. v. Fuzhou Dade Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Genhui Xia Zhongrong Hengsheng Wood Industry Co., Ltd. (Beijing) v. Crosplus Home Furnishings (Shanghai) Co., Ltd. and Nanjing Mengyang Furniture Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Rong Li JDB (China) Drinks Co., Ltd. v. Guangzhou Wanglaoji Health Industry Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Xiaohong Qian and Jiayin Cao Shandong Bittel Intelligent Technology Co., Ltd. v. Jiangsu Zhongxun Digital Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Shu Tong LACOSTE v. Cartelo Crocodile Pte. Ltd. and Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China . . . . . . . . . . . . . . . . . . . . . 213 Guimei Lang and Zeyu Chen Xiamen Meiyou Co., Ltd. v. Beijing Kangzhilesi Network Technology Co., Ltd. and China National Intellectual Property Administration (NIPA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Zhihong Zhang Xiao X v. Shenzhen Seno Light (HK) Limited . . . . . . . . . . . . . . . . . . . . . . . . 235 Rong Wu and Ruijuan Zhou Md-care (Tianjin) Technology Co., Ltd. v. Sunshine New Technology (Tianjin) Co., Ltd. and Wang X, Zhang X et al. (Defendants in the First Instance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Yanfang Wang Ningbo Beworth Textile Machinery Co., Ltd. v. Ningbo Cixing Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 Zhuo Deng VMI Holland B.V. and Cooper (Kunshan) Tire Co., Ltd. v. Safe-Run Huachen Machinery (Suzhou) Co., Ltd. . . . . . . . . . . . . . . . . . . . . 263 Zhuobin Xu Alfa Laval Corporate AB v. China National Intellectual Property Administration and SWEP International AB (Third Party in the Original Trial) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Lei Fu

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Shimano, Inc. v. Guangdong Shunde Sensah Smart Sports Equipment Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 Lingling Zhang Shenzhen Jiedian Technology Co., Ltd. v. Shenzhen Laidian Technology Co., Ltd and Anker Innovations Co., Ltd. . . . . . . . . . . . . . . . . . 297 Yuanming Qin and Zhi Zeng Wartsila Finland Oy, Spliethoff’s Bevrachtingskantoor B.V. v. Rongcheng Xixiakou Shipbuilding Co., Ltd., Yingqin Engine (Shanghai) Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Xiaohan Yu Ministry of Transport Shanghai Salvage Bureau v. Provence Shipowners 2008–1 Ltd., CMA CGM S.A., et al. . . . . . . . . . . . . . . . . . . . . . . 315 Xiaohan Yu Bank of China Limited Henan Branch v. Union de Banques Arabes et Françaises (Hong Kong) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 Yan Shang Evergreen Marine (Singapore) Pte. Ltd. v. First Insurance Co., Ltd. & Evergreen Marine Pte. Ltd. (the Defendant in the First Instance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 Xiaohan Yu Shandong Xianglong Group Co., Ltd. v. NCS Co., Limited & Jinyuan Marine Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 Xiaohan Yu Ma X v. Guyuan People’s Government of Ningxia Hui Autonomous Region, and Guyuan Housing and Urban-Rural Development Bureau of Ningxia Hui Autonomous Region . . . . . . . . . . . . . . . . . . . . . . . . . . 349 Weihua Li and Wang Yi Hu X (A) v. People’s Government of Jinyun County, Zhejiang Province, People’s Government of Huzhen Town, Jinyun County . . . . . . . 357 Shaohua Li and Minjuan Tan Qi X v. People’s Government of Jiagedaqi District, Daxinganling Prefecture, Heilongjiang Province . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 Fengyun Liang and Mo Chen Ma X v. The People’s Government of Dongxiang Autonomous County, Gansu Province and Bureau of Land and Resources of the Dongxiang Autonomous County, Gansu Province . . . . . . . . . . . . . . . 377 Ping Liu

Contents

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Tian X v. Zhejiang Office of China Banking and Insurance Regulatory Commission and China Banking and Insurance Regulatory Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 Yan Wang and Zhen Du Wang X, Wuhan Tianjiu Industry & Trade Development Co., Ltd. v. Ministry of Commerce of the People’s Republic of China . . . . . . . . . . . . 393 Kexiong Yang and Yanjia Niu Li X and Zhang X v. The People’s Government of Huimin County, Shandong Province . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 Hong Yu Xiao X v. The People’s Government of Liaoyang City, Liaoning Province . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419 Yan Zhang

Cases at the Adjudication Committee

Lianqi Development Co. Ltd. v. Shanghai Baoye Group Corp., Ltd. and Guangzhou Supervision Sakai Intellectual Intelligent Technology Co. Ltd. et al. (Appeal Against Jurisdictional Objection in Dispute Over Infringement of Patent for Invention: Declaration of Non-infringement of Patent Rights and Jurisdiction for Declaratory Non-infringement Actions and Patent Infringement Actions Need to Take into Full Account the “Facilitation” Principles and the Leapfrog Appeal Mechanism) Xiaomei Tang

1 Rule 1. Legal action directed at declaring whether the same patent or related patents constitutes non-infringement of patent rights and patent infringement action fall into the scope of separate litigation. In judicial practices, the jurisdiction over the above two types of cases should follow the basic rules and characteristics of judicial activities by adhering to the principle of facilitating the parties to initiate the litigation and facilitating the independent, fair and efficient exercise of judicial power by the people’s courts in accordance with the law, not all of whose jurisdiction may be transferred for joint trial.

Collegial Bench for the Second Instance: Xiaojun Liu, Xiaomei Tang and Zongliang Ling Edited by Wenyan Ding; Translated by Daxuan Zheng and Yi Zheng X. Tang (B) Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_1

3

4

X. Tang

2. In judicial practice, conflicting decisions may result when the said two types of cases are heard separately by different people’s courts. However, potential problem or conflict can be resolved with recourse to the appellate mechanism as the appeals are uniformly heard by the Intellectual Property Court of the Supreme People’s Court.

2 Case Information 1. Parties Appellant (Defendant in the First Instance): Shanghai Baoye Group Corp., Ltd. (hereinafter referred to as Shanghai Baoye Group) Appellee (Plaintiff in the First Instance): Lianqi Development Co. Ltd. Defendant in the First Instance: Guangzhou Supervision Sakai Intellectual Intelligent Technology Co. Ltd. (hereinafter referred to as Supervision Sakai Intelligent Technology Company) Defendant in the First Instance: China Construction First Group Corporation Limited (hereinafter referred to as CSCEC) Defendant in the First Instance: Parsons Brinckerhoff Engineering Company Limited (hereinafter referred to as Parsons Brinckerhoff Engineering Company) Defendant in the First Instance: Jiangxi United Integrated Services Limited (hereinafter referred to as UIS) Defendant in the First Instance: China Electronics System Engineering No. 2 Construction Co., Ltd. (referred to as CESE 2) 2. Procedural History First Instance: No. 3447 and 3448 [2018] Trial, Civ. Division, the Intellectual Property Court of Guangzhou City (Guangdong 73) (dated Feb. 13 of 2019) Second Instance: No. 1 and 2 [2018] Final, Civ. Division (IP Tribunal), the Supreme People’s Court (dated Nov. 1 of 2019) 3. Cause of Action Appeal against jurisdictional objection in dispute over infringement of invention patent right

3 Essential Facts On November 14, 2018, Lianqi Development Company filed two patent infringement lawsuits with Guangzhou Intellectual Property Court: the first being a product patent infringement lawsuit, in which Lianqi Development Company claimed that the defendants be requested to cease infringing the patent granted to the company,

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numbered No. ZL200410048826.1, titled “Forming Device for Pre-drilled Openings in Concrete Floor Slabs”. In the said case, the Guangzhou Intellectual Property Court ruled to have the infringing “Qi’s cylinder products” seized or detained which have been put to use by the defendants in the construction projects in Guangzhou City, Guangdong Province. The second case was a lawsuit for infringement of a method patent, in which Lianqi Development Company requested that the defendants be ordered to stop infringing its patent, numbered No. ZL200810083903.5, titled “A Construction Method for Pre-drilled Holes in Concrete Floor Slabs”. The Guangzhou Intellectual Property Court ruled in the said case to have the evidence of the construction method of the “Qi’s cylinder products” used by the defendants preserved. The said court has also ascertained that Shanghai Huiya Aluminum Alloy Products Co., Ltd. (hereinafter referred to as Huiya Aluminum Alloy Products Company) filed a lawsuit with the Shanghai Intellectual Property Court on 24 July 2018, requesting the court to make a declaration that “Qi’s cylinder products” did not fall within the scope of protection of the above-mentioned product patents granted to Lianqi Development Company. The Shanghai Intellectual Property Court took the case and held a court trial. Baoye Group raised an objection against the jurisdiction, arguing that the two cases should be transferred to the Shanghai Intellectual Property Court for trial, on the ground that the Shanghai Intellectual Property Court had already taken the case involving a dispute of making declaration of non-infringement of the same patent for the said products. The Guangzhou Intellectual Property Court held that loci delictus (the place where the plaintiff suffered wrong) and the domicile of one of the defendants, that is, Supervision Sakai Intelligent Technology Company was located in Zengcheng District of Guangzhou City, which fell within its jurisdiction, and therefore it had jurisdiction over both cases. Baoye Group appealed to the Supreme People’s Court against the ruling, requesting that the ruling be revoked and the case be transferred to the Shanghai Intellectual Property Court for trial.

4 Issues 1. Jurisdiction of making declaration of non-infringement actions and patent infringement actions involving identical or related patents; 2. The consequence of conflicting judgments in the event of separate hearings in the cases where close connection is fully demonstrated.

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5 Holding The Supreme People’s Court held that Guangzhou Intellectual Property Court had jurisdiction over the two cases of patent infringement in accordance with the provisions of the Civil Procedure Law on territorial jurisdiction. The Supreme People’s Court also held that it was inappropriate to transfer the case to Shanghai Intellectual Property Court for trial for the purpose of facilitating the litigation of the parties concerned and the fair and efficient trial of the case by the people’s court. Accordingly, the appeal was dismissed and the original ruling was upheld.

6 Comment on Rule In determining the jurisdiction of the above-said cases, a people’s court has to answer the following three questions about the application of law: (1) How to make sure of the relationship between the patent non-infringement litigation and patent infringement litigation involving the same patent? (2) Should the two cases be transferred to Shanghai Intellectual Property Court and be heard jointly with the earlier noninfringement cases involving product patents? (3) How to resolve the conflict between non-infringement litigation and patent infringement litigation involving the same patent or an associated patent in different courts? 1. Relationship between the patent non-infringement litigation and patent infringement litigation involving the identical patent or related patents The Supreme People’s Court, in its No. 4 [2004] Miscellaneous, Civ. Division, SPC, titled “A Notice on the Designated Jurisdiction in Patent Dispute Cases to Honda Motor Co., Ltd., Shijiazhuang Shuanghuan Automobile Company Limited, Beijing Xuyang Hengxing Trade Co.” (hereinafter referred to as the Notice) declared that “the litigations concerning making declaration of non-infringement and patent infringement involving the identical facts are filed by both parties in accordance with the Civil Procedure Law to protect their rights and interests at different stages of the dispute process, which are independent litigation; any litigation for making declaration of non-infringement of patents filed by one party is not assimilated by the patent infringement litigation filed by the other party. The claims of the parties in the case at hand are divisible, regardless of the specific content of their claims, the facts and the grounds on which they are based”. Specifically, the two cases were both disputes over infringement of patents for inventions, one involving a patent for the invention of “Forming Device for Pre-drilled Openings in Concrete Floor Slabs” and the other involving a patent for the invention of “A Construction Method for Pre-drilled Holes in Concrete Floor Slabs”. The patents involved in the earlier dispute for confirmation of non-infringement of patent rights before the Shanghai Intellectual Property Court was the same as the above

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product patents. The two patents involved in the three cases are patents for the same technical field of “forming device” and “construction method” respectively, which are relatively closely related. According to relevant provisions in the Notice, the infringement cases involving method patents accepted by the Guangzhou Intellectual Property Court is different from the non-infringement cases handled by the Shanghai Intellectual Property Court, so they are clearly separable; while the infringement cases involving product patent is the same as the non-infringement cases handled by the Shanghai Intellectual Property Court, they are filed by both parties in accordance with the Civil Procedure Law to protect their rights and interests at different stages of the dispute. As the lawsuits were initiated at different stages of the dispute process, they were thus considered independent lawsuits. Therefore, the above three cases are independently initiated litigation, which in accordance with the law, should be respected and legally protected. 2. Whether the two cases should be transferred to Shanghai Intellectual Property Court to be jointly tried with the previous declaration of noninfringement case involving product patent For the jurisdiction of non-infringement lawsuits and patent infringement lawsuits involving the same facts in judicial practice, the Notice provides that “(i)n order to avoid repeated trials of cases involving the same facts by different people’s courts, the people’s courts shall transfer the jurisdiction for joint trials in accordance with the law” and establishes the principle of transferring the cases to be filed in the people’s courts who firstly handled the case for joint trials. However, in the present cases, if the product patent infringement case was transferred to be filed in Shanghai Intellectual Property Court for joint trial, as the method patent infringement case did not meet the requirements for transferring the jurisdiction as provided for in the Notice issued by the Supreme People’s Court, it could not be transferred to the same jurisdiction, and the related cases would also be heard by different courts. In particular, as Guangzhou Intellectual Property Court had already the evidence preserved of the infringing products and construction methods used in the project in exercising its jurisdiction, the transfer of jurisdiction was not only inconvenient for the parties to participate in the legal proceedings but also inconvenient for the people’s court to hear the case. Article 8 of the Civil Procedure Law provides that: “All parties to a civil litigation enjoy equal litigation rights. The people’s courts shall, when adjudicating civil cases, guarantee and facilitate the parties to exercise their litigation rights, and apply the law equally.” The exercise of judicial power by the people’s courts shall follow the basic rules and characteristics of judicial activities and adhere to the principle of facilitating the parties to initiate the litigation, and of facilitating the independent, impartial and efficient exercise of judicial power by the people’s courts in accordance with law. Therefore, to determine the jurisdiction of the above-mentioned three cases before Guangzhou Intellectual Property Court and Shanghai Intellectual Property Court, the convenience accorded to the parties and to the people’s courts, the specific circumstances of the cases and the enforcement of the judgment are to be taken into account so as to make a legitimate and reasonable treatment. Specific considerations should be given to:

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First, from the principle of facilitating the litigation of the parties, in terms of the parties to the three cases, in making declaration of non-infringement of patent rights by Shanghai Intellectual Property Court, the plaintiff is Huiya Aluminum Alloy Products Company, the defendant is Lianqi Development Company; in the two patent infringement lawsuits handled by Guangzhou Intellectual Property Court, the plaintiff is Lianqi Development Company, the defendants are Shanghai Baoye Group, Supervision Sakai Intelligent Technology Company, CSCEC, Parsons Brinckerhoff Engineering Company, UIS, CESE 2. If the product-related patent infringement cases were transferred to be handled by Shanghai Intellectual Property Court, the method patent infringement cases were still heard by Guangzhou Intellectual Property Court, the above six defendants and Lianqi Development Company will have to travel to Shanghai City and Guangzhou City respectively, which entails much more time and money for the parties. If the two patent infringement lawsuits were heard in the Guangzhou Intellectual Property Court, it would be more conducive to saving the litigation costs, or more in line with the principle of litigation economy, and more convenient for most parties to participate in the litigation. Second, from the principle of facilitating the people’s courts to exercise their jurisdiction in a fair and efficient manner, taking into account the fact that the two patent infringement cases accepted simultaneously by Guangzhou Intellectual Property Court deal with patent for product and patent for method in the same technical field, which were closely related, and the fact that the evidence of the infringing products and methods had been preserved by the people’s court, the disposition of the two cases by Guangzhou Intellectual Property Court can not only facilitate the parties to initiate the litigation, but also facilitate the people’s court to ascertain the facts of the cases, adjudicate the cases and enforce the judgments in accordance with the law so as to ensure a fair and efficient settlement of the said cases. Specific circumstances of the cases should be taken into account in making a decision of how jurisdiction can be exercised by the people’s court. Factually, though, the product patent infringement case before Guangzhou Intellectual Property Court and the declaration of non-infringement case beforehand by Shanghai Intellectual Property Court involving the same patent, the parties to the legal proceedings were different, unlike the specific circumstances provided in the Notice. Meanwhile, Guangzhou Intellectual Property Court also handled a method patent case with a high degree of relevance to the product patent, which is quite different from the circumstances of the case addressed in the Notice. Thus, actual circumstances of the three cases should be taken into account to make a relatively reasonable judgment. In accordance with the relevant provisions of the Civil Procedure Law and the judicial interpretation, and taking into account the actual situation of the two cases at hand, Guangzhou Intellectual Property Court can handle the above two patent infringement cases, which is in conformity with the regulations on the territorial jurisdiction provided for in the Civil Procedure Law, therefore, it is adjudicated inappropriate to transfer these two cases to Shanghai Intellectual Property Court for trial.

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3. How to resolve conflicting judgments when related cases are heard separately Whether related cases should be jointly heard and whether it is beneficial to avoid conflicting judgments are important factors in the court’s discretion. The possibility of conflicting decisions between Shanghai Intellectual Property Court and Guangzhou Intellectual Property Court exists in relation to the factual determination of infringement in the three connected cases. However, as their appeals are heard by the Intellectual Property Tribunal of the Supreme People’s Court, this potential inconsistency can be resolved through the appeal mechanism. The establishment of the Intellectual Property Tribunal of the Supreme People’s Court is an important step to improve the appellate mechanism for hearing intellectual property cases at the national level. The “leapfrog appeal system”, which means that the Supreme People’s Court will directly hear appeals of intellectual property cases involving such technicalities as patents from the specialized intellectual property courts, the higher people’s courts at the provincial level and the intermediate people’s courts, can on the one hand, facilitate the Intellectual Property Tribunal of the Supreme People’s Court to handle difficult and complex cases, one the other hand, the said mechanism can also prompt the Intellectual Property Tribunal of the Supreme People’s Court to deepen their research on such like cases and distill the rules of decision so as to provide precise guidance for the people’s courts at all levels to hear similar cases. In this sense, if conflicting judgments on the same facts arise between Shanghai Intellectual Property Court and Guangzhou Intellectual Property Court, the Intellectual Property Tribunal of the Supreme People’s Court can, through the appeal mechanism, make a relatively reasonable judgment of final resort, on the basis of ascertaining the facts of the said two cases, so as to supply a high-level guidance for other cases.

Typical Cases

Shanxi Coal International Energy Group Jincheng Co., Ltd. v. China CITIC Bank Co., Ltd. Xi’an Branch, Shaanxi Petroleum & Chemical Industrial Group Co., Ltd. (Dispute Over Contract: The Real Legal Relationship Between the Buyer, the Seller and the Bank Shall be Deemed a Legal Relationship Involving Loan and Guarantee Contract in the Confirmed Warehouse Transaction Without Real Trade Background) Xuefeng Ren and Yuyi Liao

1 Rule The transaction method agreed in the tripartite business cooperation agreement in this case is a typical confirmed warehouse transaction, which is a new mode of financial guarantee. A confirmed warehouse transaction is premised on the true purchase and sale relationship between the buyer and the seller. Where there is no true sale relationship between the parties, such transaction is a loan contract disguised as a confirmed warehouse transaction, leading to the invalidity of the confirmed warehouse transaction, and the disguised loan contract is the party’s true manifestation of intent, which shall be found valid unless there is other circumstance invalidating the contract. The finding of a confirmed warehouse transaction as a relationship of a loan contract does not affect the effect of the guarantee relationship between the seller and Collegial Bench for the Second Instance: Xuefeng Ren, Zhuo Yang and Yu Hu Edited by Ming Li; Translated by Lin Sun and Ting Sun X. Ren (B) · Y. Liao The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_2

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the bank, the guarantee contract remains effective, and the seller (guarantor) shall still bear the guarantee liability.

2 Case Information 1. Parties Appellant (Defendant in the First Instance): Shanxi Coal International Energy Group Jincheng Co., Ltd. (hereinafter referred to as Jincheng Company of SCIEG) Appellee (Plaintiff in the First Instance): China CITIC Bank Co., Ltd. Xi’an Branch (hereinafter referred to as Xi’an Branch of CITIC Bank) Appellee (Defendant in the First Instance): Shaanxi Petroleum & Chemical Industrial Group Co., Ltd. (hereinafter referred to as Shaanxi Petroleum & Chemical Industrial Group) 2. Procedural History First Instance: No. 11 [2017] Trial, Civ. Division, the Higher People’s Court of Shaanxi Province (dated Jul. 25 of 2018) Second Instance: No. 870 [2019] Final, Civ. Division, the Supreme People’s Court (dated Dec. 6 of 2019) 3. Cause of Action Dispute over contract

3 Essential Facts This case concerns the dispute over contract with the characteristics of confirmed warehouse transaction of the coal sales contract, the tripartite business cooperation agreement, the integrated credit contract, and the acceptance agreement of ebank acceptance draft in question, whereof the transaction mode among Shaanxi Petroleum & Chemical Industrial Group, Jincheng Company of SCIEG, and Xi’an Branch of CITIC Bank is consistent. Xi’an Branch of CITIC Bank issued as agreed the bank acceptance drafts in question with Jincheng Company of SCIEG as the beneficiary, who, after receiving the drafts, issued notices of recipient confirmation to Xi’an Branch of CITIC Bank. Xi’an Branch of CITIC Bank paid the full amount of the drafts in question upon the maturity thereof, while Shaanxi Petroleum & Chemical Industrial Group failed to repay the financing amount, and Xi’an Branch of CITIC Bank filed a lawsuit with the court of first instance against Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG, claiming that Shaanxi Petroleum & Chemical Industrial Group shall repay as agreed the principal of the outstanding financing amount plus the interest thereon, and that Jincheng Company

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of SCIEG shall bear the liability of refunding the difference and bear the liability of breach. The court of first instance held the tripartite business cooperation agreement in question valid and parties shall perform their respective obligations in accordance with the contract. The liability of refunding the difference as agreed in the tripartite business cooperation agreement in question was not a guarantee, thus the grounds raised by Jincheng Company of SCIEG to support its claim that the nature of the liability of refunding the difference is guarantee cannot be confirmed. Jincheng Company of SCIEG failed to perform its obligation of refunding the difference, hence caused a breach of contract, thus it shall bear corresponding liability of breach and compensate for all the losses suffered by Xi’an Branch of CITIC Bank as incurred by such breach. In respect of the principal of the outstanding amount of drafts in question and the interest thereon, both Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG are liable for the full repayment and shall bear jointly and severally the liability of repayment. The court of first instance held that, Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG shall, within 30 days upon the effective date of the judgment, pay Xi’an Branch of CITIC Bank the principal of the drafts totaling CNY 162,732,800 and the interest thereon (the interest amount totaling CNY 53,475,600 accrued up to November 30, 2016, plus the interest calculated from December 1, 2016 to the date of payment in fact at the rate of 0.05% per day). Dissatisfied with the first instance judgment, Jincheng Company of SCIEG filed an appeal, requesting to: (1) reverse the first instance judgment (No. 11 [2017] Trial, Civ. Division, the Higher People’s Court of Shaanxi Province), and dismiss the claim by Xi’an Branch of CITIC Bank demanding a refund of CNY 162,732,800 and compensations of the loss of interest thereon from Jincheng Company of SCIEG; (2) order Xi’an Branch of CITIC Bank and Shaanxi Petroleum & Chemical Industrial Group to bear all the litigation costs of this case. Upon investigation of second instance, the court found that there is no actual sale of goods between Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG. The fact-finding rendered by the court of first instance that Shaanxi Petroleum & Chemical Industrial Group has withdrawn goods that values CNY 325 million from Jincheng Company of SCIEG in March, April, July of 2014, respectively, lacks proof of evidence, and such fact shall not be affirmed. The court also found that Xi’an Branch of CITIC Bank issued the bank acceptance drafts in question, and Jincheng Company of SCIEG, after receiving such bank acceptance drafts in question, made transfers by endorsement. The bank acceptance drafts in question have been transferred for multiple times, and Xi’an Branch of CITIC Bank paid the amount of the drafts to the bearer after the maturity of the drafts.

4 Issue How to identify the nature of the tripartite transaction mode adopted by Shaanxi

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Petroleum & Chemical Industrial Group, Jincheng Company of SCIEG, and Xi’an Branch of CITIC Bank, and the validity of the tripartite business cooperation agreement.

5 Holding Upon review, the Supreme People’s Court holds that, the transaction mode manifested in the tripartite business cooperation agreement in question is confirmed warehouse transaction, nevertheless, there is untrue sale of goods between Jincheng Company of SCIEG and Shaanxi Petroleum & Chemical Industrial Group. The tripartite business cooperation agreement in question is essentially a loan and guarantee contract, and shall be found valid. The tripartite business cooperation agreement in question specifies two forms of liability, to wit, the refund of difference and the suretyship of difference, and the parties in this case chose the form of refund of difference. However, both the refund of difference and the suretyship of difference were in essence a suretyship liability borne by Jincheng Company of SCIEG, in the event that Shaanxi Petroleum & Chemical Industrial Group failed to repay the financing amount to Xi’an Branch of CITIC Bank, to repay the difference to Xi’an Branch of CITIC Bank. In accordance Articles 181 and 192 of the Guarantee Law of the People’s Republic of China (repealed in 2020) as well as the terms of the agreement, what Jincheng Company of SCIEG shall bear is joint and several suretyship liability. It is improperly found in the first instance that the liability to refund the difference as agreed in the tripartite business cooperation agreement in question is not a guarantee. Jincheng Company of SCIEG, Shaanxi Petroleum & Chemical Industrial Group, and Xi’an Branch of CITIC Bank entered into the tripartite business cooperation agreement in question on September 10, 2013, the duration of which was agreed to be two years. As the six bank acceptance drafts in question were issued within the duration agreed in the tripartite business cooperation agreement, Jincheng Company of SCIEG raised no objection to the fact of its receiving the six bank acceptance drafts in question, and Xi’an Branch of CITIC Bank submitted the notice of recipient confirmation, while Jincheng Company of SCIEG failed to produce evidence to prove that there is any other legal ground for its receiving the drafts. There is good reason for the court of first instance to dismiss the claim of Jincheng Company of SCIEG 1

This Article is now included as Article 688 of the Civil Code, which states: “(w)here the parties agree in a suretyship contract that the surety and the debtor shall be jointly and severally liable for the obligation, such a suretyship is a suretyship with joint and several liability. Where a debtor under a suretyship with joint and several liability fails to perform his obligation due or when a circumstance agreed by the parties occurs, the creditor may request the debtor to perform his obligation, or request the surety to undertake the suretyship liability within the scope of his suretyship.” Infra. 2 The provision has been revised in the Civil Code, as in Article 686: “Suretyship consists of general suretyship and suretyship with joint and several liability. Where there is no agreement in the suretyship contract on the form of the suretyship or the relevant agreement is unclear, the surety shall bear the liability as in the form of a general suretyship”. Infra.

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that the six e-bank acceptance drafts are not the financing under the tripartite business cooperation agreement. Based on its financing loan contract relationship with Shaanxi Petroleum & Chemical Industrial Group, Xi’an Branch of CITIC Bank, in accordance with the tripartite business cooperation agreement, the integrated credit contract and other agreements, and upon the application of Shaanxi Petroleum & Chemical Industrial Group, issued the bank acceptance drafts and made the payments at the maturity dates of those drafts. Considering that Shaanxi Petroleum & Chemical Industrial Group has merely paid partial amount, the decision of first instance that Shaanxi Petroleum & Chemical Industrial Group shall pay Xi’an Branch of CITIC Bank the principal of the outstanding amount of drafts and the interest thereon is clear in its findings of fact and correct in its application of law. In accordance with the terms in respect of the refunding of difference as agreed in the tripartite business cooperation agreement, the guarantee scope of Jincheng Company of SCIEG is the outstanding principal. However, in accordance with the terms in respect of liability of breach as agreed in such agreement, in the event that Jincheng Company of SCIEG failed to make payment as agreed to the account designated by Xi’an Branch of CITIC Bank within three working days upon receiving the notice of payment, such failure constitutes a breach of contract, and it shall bear the liability to compensate for the interest, default interest, compound interest, liquidated damages, and damages incurred from the date of its breach as well as the litigation costs, attorney fees, travelling expenses and other costs incurred in pursuing the realization of the creditor’s rights. Xi’an Branch of CITIC Bank failed to produce sufficient evidence to prove that Jincheng Company of SCIEG had received such notice nor to prove the exact time of receiving. Xi’an Branch of CITIC Bank filed a lawsuit, on November 17, 2017, and Jincheng Company of SCIEG was served the complaint of first instance of the case filed by Jincheng Company of SCIEG, therefore, this court holds that Jincheng Company of SCIEG shall bear the liability for the interest on the outstanding amount of Shaanxi Petroleum & Chemical Industrial Group as incurred from November 20, 2017. The starting point of calculating the interest that should be borne by Jincheng Company of SCIEG should be corrected. What Jincheng Company of SCIEG bears is joint and several suretyship liability, while it was decided in the first instance that Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG shall bear joint and several liability, without clearly distinguish the nature of liability borne respectively by Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG. Such decision is inappropriate and shall be corrected. The grounds of appeal raised by Jincheng Company of SCIEG can be established and should be supported. What Jincheng Company of SCIEG bears is joint and several suretyship liability, and in accordance with Article 313 of the Guarantee Law of the People’s Republic of China (repealed in 2020), it may, 3

This article is now included as Article 700 of the Civil Code: “After a surety has assumed the suretyship liability, unless otherwise agreed by the parties, the surety has the right to indemnification against the debtor within the scope of his suretyship liability, and may enjoy the right of a creditor against the debtor, provided that the creditor’s interests may not be harmed”. Infra.

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after bearing such liability, claim for recovery from Shaanxi Petroleum & Chemical Industrial Group. In conclusion, the decision of first instance in respect of the liability that shall be borne by Shaanxi Petroleum & Chemical Industrial Group is clear in its findings of facts and correct in its application of law, and shall be affirmed; while the decision in respect of the nature of the liability that shall be borne by Jincheng Company of SCIEG as well as the starting point of calculating the interest is inappropriate and shall be corrected. In accordance with Subparagraphs 1 and 2 of Paragraph 1 of Article 170, it is hereby adjudged as follows: (1) the first instance decision bearing No. 11 [2017] Trial, Civ. Division, the Higher People’s Court of Shaanxi Province be amended to read as follows: Shaanxi Petroleum & Chemical Industrial Group shall, within 30 days upon the effective date of this judgment, pay Xi’an Branch of CITIC Bank the principal of the drafts totaling CNY 162,732,800 and the interest thereon (the interest amount totaling CNY 53,475,600 accrued up to November 30, 2016, plus the interest calculated from December 1, 2016 to the date of payment at the rate of 0.05% per day); (2) Jincheng Company of SCIEG bear joint and several suretyship liability for the principal of drafts totaling CNY 162,732,800 and the interest thereon (the interest calculated from November 20, 2017 to the date of payment at the rate of 0.05% per day), which shall be paid to Xi’an Branch of CITIC Bank by Shaanxi Petroleum & Chemical Industrial Group; after bearing the suretyship liability, Jincheng Company of SCIEG may claim for recovery from Shaanxi Petroleum & Chemical Industrial Group; (3) all the remaining claims raised by Jincheng Company of SCIEG be dismissed; (4) all the remaining claims raised by Xi’an Branch of CITIC Bank be dismissed.

6 Comment on Rule This is a case concerning the dispute over contract with the terms stated in the tripartite business cooperation agreement, the transaction mode agreed by the parties is typical confirmed warehouse transaction.4 Based on the facts found by the court of second instance, there is no true sale of goods between Shaanxi Petroleum & Chemical Industrial Group and Jincheng Company of SCIEG. The issue of this case is to determine the legal relationship among the buyer, seller, and the bank, and what liability shall be borne by the seller to the bank in a confirmed warehouse transaction without real trade background. 1. A true sale relationship between the buyer and the seller shall be a premise for confirmed warehouse transaction 4

As a new mode of financial guarantee, confirmed warehouse transaction is a combination of a series of transactions, involving a variety of different legal relationships. On November 8, 2019, the Supreme People’s Court issued the Minutes of the National Courts’ Civil and Commercial Trial Work Conference, identifying the harmonized adjudicative approaches in respect of the relevant matters involved in cases relating confirmed warehouse transaction.

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Confirmed warehouse transaction, a new mode of financial guarantee, adopts the basic transaction mode that uses bank’s credit as the carrier and bank acceptance draft as the settlement instrument, with the bank controlling the title to goods, the seller (or storage/warehousing party) is entrusted with the custody of the goods and give as a guarantee on the difference between the bank acceptance draft and the deposit. Its basic transaction flow is as follows: a seller, a buyer, and a bank enter into a tripartite cooperation agreement, the buyer deposits a certain proportion of acceptance deposit in the bank, who in turn issues to the buyer a bank acceptance draft with the seller as the beneficiary, and the buyer delivers the bank acceptance draft to the seller in payment for the goods, the bank issues a delivery order to the seller based on a certain proportion of the deposit paid by the buyer, the seller delivers goods of the corresponding value to the buyer according to the delivery order, and the buyer uses the proceeds of the sale of the goods as deposit. Generally speaking, in a tripartite agreement, the primary obligation of the bank is to issue in time the acceptance draft and delivery it to the seller as agreed, while the primary obligation of the seller is to deliver the goods in accordance with the delivery order issued by the bank, and in the event that the buyer failed to sale or redeem the goods, to bear liability for the difference between the deposit and the acceptance draft. To protect its own rights and interests, the bank normally agrees that the seller shall put the goods in custody of its designated party and create a pledge thereon, thus involving custody agreement and circulating pledge. In practice, the parties might make other agreements in addition to the said basic transaction mode, which shall be found valid as long as they do not violate the mandatory provisions on the validity as provided in any law or administrative regulation. Where a party files an action regarding the dispute over a confirmed warehouse transaction, the people’s court shall use the contract for confirmed warehouse transaction as the substantial basis for the trial of the case, except for the circumstance that there is no true sale relationship between the buyer and the seller.5 In this case, the transaction mode agreed in the tripartite business cooperation agreement entered into by Shaanxi Petroleum & Chemical Industrial Group, Jincheng Company of SCIEG, and Xi’an Branch of CITIC Bank is in the form of confirmed warehouse transaction, however, the court of first instance erred in finding that Shaanxi Petroleum & Chemical Industrial Group had withdrawn the goods that values CNY 325 million from Jincheng Company of SCIEG in March, April, July of 2014, respectively, and based on the facts found in the second instance, there is no true sale relationship between Jincheng Company of SCIEG and Shaanxi Petroleum & Chemical Industrial Group. Since there is no real trade background, there is no true and valid legal relationship of confirmed warehouse transaction. 2. In a confirmed warehouse transaction without real trade background, the real legal relationship among the buyer, seller, and the bank shall be found to be a relationship of loan and guarantee contract 5

Article 68 (Confirmed Warehouse Transaction) of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference.

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The confirmed warehouse transaction is a portfolio of a series of transactions, including: (1) there is sales contract relationship between the buyer and the seller; (2) the following legal relationships exist simultaneously between the buyer and the bank: first, the relationship of authorized payment under the sales contract, in which the bank is the performance supporter of the buyer; second, the relationship of negotiable instruments between the buyer and the bank, in which the buyer is the drawer while the bank be the acceptor; third, the financial relationship between the buyer and the bank, which is essentially a loan relationship; fourth, the buyer provides guarantee for its debt by deposit, which is essentially a deposit pledge; fifth, where the seller, following the instruction of the bank, puts the goods in the custody of the party designated by the bank, there might be issues of lien, pledge and other guarantee in rem on the goods; (3) the following legal relationships exist simultaneously between the seller and the bank: first, the relationship of negotiable instruments between the seller and the bank, based on which the seller may request payment from the bank; second, the entrustment relationship between the seller and the bank, in other words, the bank entrusts the seller to deliver goods to its designated party for custody, so as to ensure its realization of the creditor’s rights on the funds of the buyer; third, the seller’s liability of making up the shortfall or repurchasing the goods in respect of the exposure sectors to the bank, which is essentially a surety.6 A confirmed warehouse transaction is premised on the true sale relationship between the buyer and the seller. Where there is no true sale relationship between the parties, such transaction is a loan contract disguised as a confirmed warehouse transaction, leading the invalidity of the confirmed warehouse transaction for it constitutes a false manifestation of intent, and the disguised loan contract is the party’s true manifestation of intent and shall be determined to be valid unless there is other circumstance invalidating the contract. The finding of a confirmed warehouse transaction as a relationship of a loan contract does not affect the effect of the guarantee relationship between the seller and the bank, and the seller shall still bear the guarantee liability.7 As there is no real trade background in the confirmed warehouse transaction in question, the true legal relationship among the parties to the tripartite business cooperation agreement in this case shall be the relationship of loan and guarantee contract, in other words, Xi’an Branch of CITIC Bank provides financing loan to Shaanxi Petroleum & Chemical Industrial Group, and Jincheng Company of SCIEG provides guarantee for the loan borrowed by Shaanxi Petroleum & Chemical Industrial Group from Xi’an Branch of CITIC Bank. Said loan and guarantee are both the parties’ true manifestation of intent and conform to the laws and regulations, thus, the confirmed warehouse transaction in question is essentially a loan and guarantee contract and shall be found valid. 3. In a confirmed warehouse transaction without real trade background, the seller shall bear guarantee liability to the bank 参见最高人民法院民事审判第二庭编著:《 理解与适 用》 , 人民法院出版社2019年版, 第395~396页. 7 Article 69 (Confirmed Warehouse Transaction Without Real Trade Background) of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference. 6

Shanxi Coal International Energy Group Jincheng Co., Ltd. v. China …

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Confirmed warehouse transaction is mixed contract rather than combination of contract, because even though the sales contract is invalid due for having no real trade background, it does not affect the suretyship between the seller and the bank nor the acceptance draft relationship between the buyer and the bank.8 Although the basic transaction relationship between the parties is found to be a loan relationship, in principle, it does not affect the validity of the bank’s lending to the buyer via the bank acceptance draft, neither shall it, in principle, affect the legal relationship of guarantee arisen from such borrowing.9 In Clauses 1.6, 1.7, and 6.2 of the tripartite business cooperation agreement in question,10 there are two forms of liability, to wit, the refund of difference and the suretyship of difference, and the parties in this case chose the form of refund of difference. Nevertheless, both the refund of difference and the suretyship of difference were in essence suretyship liability borne by Jincheng Company of SCIEG to, in the event that Shaanxi Petroleum & Chemical Industrial Group failed to repay the financing amount to Xi’an Branch of CITIC Bank, repay the difference to Xi’an Branch of CITIC Bank. Article 18 of the Guarantee Law (repealed in 2020) states: “Joint and several liability of suretyship refers to the arrangements laid down in the contract of suretyship that the surety and the debtor bear joint and several liability over the debts. Where a debtor bearing a joint and several liability of guarantee fails to perform the obligation within the specified duration of such performance as agreed in the main contract, the creditor may demand the performance of obligation from the debtor or, alternatively, request the surety to bear the guarantee liability within its guarantee 参见最高人民法院民事审判第二庭编著:《 理解与适 用》 , 人民法院出版社2019年版, 第397页. 9 参见最高人民法院民事审判第二庭编著:《 理解与适 用》 , 人民法院出版社2019年版, 第399页. 10 Clause 1.6 of the tripartite business cooperation agreement specifies that, the refund of difference refers to that, where Shaanxi Petroleum & Chemical Corporation fails to deposit in full amount within the agreed time or fails to repay Xi’an Branch of CITIC Bank the full amount of financing fund, and the accrued value stated in the delivery order issued by Xi’an Branch of CITIC Bank under this Agreement is less than the amount received by Jincheng Company of SCIEG, then, Jincheng Company of SCIEG shall refund the difference there between in accordance with the request of Xi’an Branch of CITIC Bank; Clause 1.7 specifies that, suretyship of difference refers to that, where Shaanxi Petroleum & Chemical Corporation fails to deposit in full amount within the agreed time or fails to repay Xi’an Branch of CITIC Bank the full amount of financing fund, and the accrued value stated in the delivery order issued by Xi’an Branch of CITIC Bank under this Agreement is less than the amount received by Jincheng Company of SCIEG, then, Jincheng Company of SCIEG shall refund the difference therebetween within the time requested by Xi’an Branch of CITIC Bank, and bear the joint and several liability for the amount that shall be refunded, the interest on the financing fund arising from the failure of Shaanxi Petroleum & Chemical Corporation to refund within the agreed time limit, and the overdue interest arising from the overdue of the financing fund of Shaanxi Petroleum & Chemical Corporation as well as other relevant costs. Clause 6.2 specifies that, where Shaanxi Petroleum & Chemical Corporation fails to deposit in full amount within the agreed time or fails to repay Xi’an Branch of CITIC Bank the full amount of financing fund, and the accrued value stated in the delivery order issued by Xi’an Branch of CITIC Bank under this individual financing or under this Agreement is less than the corresponding amount received by Jincheng Company of SCIEG under such individual financing or under this Agreement, Jincheng Company of SCIEG shall bear the liability to refund the difference therein. 8

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scope.” Article 19 of the Guarantee Law (repealed in 2020) states: “Where there is no agreement in the guarantee contract on the form of the guarantee or the relevant agreement is unclear, the surety shall bear the liability as in the form of a joint and several liability of guarantee.” Clause 6.5 of the tripartite business cooperation contract specifies that, Jincheng Company of SCIEG provides suretyship that, Xi’an Branch of CITIC Bank is not required to file a claim against Shaanxi Petroleum & Chemical Industrial Group before filing a claim against Jincheng Company of SCIEG, nor to take any legal action against Shaanxi Petroleum & Chemical Industrial Group first, nor to file a bankruptcy application against Shaanxi Petroleum & Chemical Industrial Group first. In accordance with said laws and regulations as well as the agreement, what Jincheng Company of SCIEG bears shall be joint and several suretyship liability. It is improperly found in the first instance that the liability to refund the difference as agreed in the tripartite business cooperation agreement in question is not a guarantee. The tripartite business cooperation agreement in question was stamped with the official seal of Jincheng Company of SCIEG, and was signed by the legal representative of the company. Clause 7.1 of such agreement expressly stipulates that “All the three parties are established by law and legally existing institutions, and the execution and performance of this Agreement have been validly approved and fully authorized by its highest authority, and the relevant documents and procedures required for the execution thereof are fully available and legally valid.” Therefore, the reasons for the appeal raised by Jincheng Company of SCIEG that its legal representative has no authority to enter into a contract or agreement of suretyship nature and thus the liability to refund the difference as specified in the tripartite business cooperation agreement, which is of suretyship nature, is invalid for Jincheng Company of SCIEG, cannot stand.

Xinjiang Longmei Nengyuan Co., Ltd. v. Zheng X (Dispute Over Equity Transfer Contract: Contract Shall not be Revoked due to Changed Circumstances When a Party Clearly Knows the Risks) Jing Zhao

1 Rule As mining in scenic areas is prohibited by administrative regulations, yet the parties still entered into an equity transfer contract, prospecting right therefrom could not be renewed in accordance with later issued policy, the risk incurred therefrom falls into the category of business risk. Hence rules for changed circumstances provided in Article 26 of the Judicial Interpretation of the Supreme People’s Court on Several Issues Regarding the Application of the Contract Law of the People’s Republic of China (II) (repealed in January 1, 2021) shall not be applied to revoke the contract. What the law regulates concern legal risks rather than business risks, and risks resulting from business or commerce are to be borne by the parties themselves.

Collegial Bench for the Second Instance: Jizhong Chen, Dongmin Wang and Guangyu Ding Edited by Ming Li; Translated by Lin Sun and Sisi Yi J. Zhao (B) The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_3

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2 Case Information 1. Parties Appellant (Defendant in the First Instance, Plaintiff in the Counterclaim): Xinjiang Longmei Nengyuan Co., Ltd. (hereinafter referred to as Longmei Nengyuan Company) Appellee (Plaintiff in the First Instance, Defendant in the Counterclaim): Zheng X 2. Procedural History First Instance: No. 55 [2018] Trial, Civ. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region (dated Nov. 15 of 2018) Second Instance: No. 827 [2019] Final, Civ. Division, the Supreme People’s Court (dated Oct. 23 of 2019) 3. Cause of Action Dispute over equity transfer contract

3 Essential Facts Zheng X transferred 51% equity of Xinjiang Hengruntai Trading Co., Ltd. (hereinafter referred to as Hengruntai Trading Company), the target company, to Longmei Nengyuan Company. Both parties concluded an equity transfer agreement, agreeing that the transfer amount would be paid by Longmei Nengyuan Company within 3 days after the performance of the registration change procedures; and agreeing that “in case that the purpose of this agreement cannot be achieved due to force majeure or reasons not attributable to any party,” any party could revoke the agreement. On April 12, 2010, the equity was transferred to the name of Longmei Nengyuan Company and the legal representative was changed. As of May 8, 2013 for the last payment, Longmei Nengyuan Company had paid a total of CNY 5.86 million in equity transfer. Since August 4, 2010, relevant documents of policies in mining area suggesting stricter regulation have been gradually issued. The reply correspondence to Zheng X’s letter made by Longmei Nengyuan Company on November 9, 2012, recorded: “Both parties have reached a consensus on the uncertainties of policy for the prospecting right to coal resource development, and our company is willing to work together with you to continue to promote the project development and construction, or fight for policy compensation.” Till the time when the legal action commenced, the said prospecting right has not been renewed. Then, Zheng X filed the lawsuit, requesting Longmei Nengyuan Company to pay the equity transfer amount of CNY 6.7416 million, as well as the overdue payment of liquidated damages of CNY 3.7769 million. Longmei Nengyuan Company then filed a counterclaim, requesting to revoke both the equity transfer agreement and the

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supplementary agreement of equity transfer, and to return the equity transfer payment as well as other expenses totaling more than CNY 6.681 million. The first instance ruled that Longmei Nengyuan Company paid Zheng X equity transfer amount CNY 6.7416 million, coupled with overdue payment of liquidated damages of CNY 3.7769 million. Longmei Nengyuan Company appealed to the Supreme People’s Court against the judgment of the first instance.

4 Issue Whether rules on changed circumstances shall be applied in this case to revoke the contract.

5 Holding The Supreme People’s Court holds that the mining area is located in Urumqi Nanshan Scenic Spot where, in accordance with Article 26 of Regulations on Scenic and Historic Areas, mining shall be prohibited, and that Longmei Nengyuan Company, as a mineral enterprise, shall have foreseen polices for mining area, but Longmei Nengyuan Company is still willing to take the risk to accept the equity, so the unsuccessfully renewed prospecting right is a business risk of Hengruntai Trading Company, the contract consequently shall not be revoked by rules on changed circumstances in accordance with Article 26 of Judicial Interpretation of the Supreme People’s Court on Several Issues Regarding the Application of the Contract Law of the People’s Republic of China (II). Accordingly, the equity transfer agreement shall not be revoked, and the Supreme People’s Court dismisses the appeal and sustains the decision of first instance.

6 Comment on Rule In the civil dispute cases involving the exploitation of mineral resources, after the mining area is shut down due to the issuance of environmental protection documents, the parties often assert the termination of the contract in accordance with Article 26 of Judicial Interpretation of Contract Law (II). Together with the facts of this case, the following analysis may serve as reference for the like cases. 1. Principle of changed circumstances and its elements

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Principle of changed circumstances means that, if changed circumstance which is not caused by reasons attributable to both parties occurs after the formation of a contract, and continuous performance of the contract is obviously unfair to the other party or cannot realize the purposes of the contract, the contract is allowed to be modified or revoked. Article 26 of Judicial Interpretation of Contract Law (II) provides a legal remedy to adjust the original balance of interests of the contract when an unfair state exists due to unforeseen objective circumstances. The application of this article must meet the following four elements: first, there must be a significant change in objective circumstances, so that the continuation of the contract is manifestly unfair to one of the parties, or can not fulfill the purpose of the contract; second, such a significant change must occur after the conclusion of the contract and before the performance of the contract; third, such a significant change falls into the category of an abnormal change in the circumstances underlying the formation of the contract, the risk incurred is an unexpected risk, which is not attributable to the parties, which cannot be foreseen at the time of contracting and is not caused by the parties themselves, and is not a commercial risk; and fourth, although the parties cannot foresee the risk at the time of contracting, it is not unavoidable or insurmountable and does not constitute force majeure. 2. Distinctions among changed circumstances, business risks and force majeure Rules for changed circumstances exclude major changes triggered by business risks and force majeure, so when rules for changed circumstances are applied, business risks shall be distuiguished from force majeure due to their different legal consequences. If changed circumstances are confused with normal business risk, the avoidance of business risks will be connived, the safety of transactions undermined, normal commercial order disrupted, and the market economy damaged. If changed circumstances are confused with force majeure, the party that is exempted from liability due to force majeure may bear responsibility that shall not be borne by it. (1) Changed circumstances and business risks Business risks refer to all the objective economic phenomena in the business activities that trigger chance and opportunity to cause loss to the business subject due to any uncertain factors. Distinction between business risks and changed circumstances lies in whether the change is abnormal and foreseeable. The occurrence of changed circumstances can objectively cause a fundamental change to the basis and purpose of the contract, and continuous performance of the contract will violate the principles of good faith and fairness, so the law is required to intervene and adjust the situation. While the occurrence of business risks does not fundamentally change the basis of the contract, only cause difficulties in performance under certain conditions, increase in performance costs or reduction in anticipated profits, and continuous performance does not violate the basic principles of civil law, so legal intervention is not required. Business risks are inherent to business activities, and are often understood by the parties, so the resulting changes are not abnormal and unforeseeable. However, the occurrence of changed circumstances cannot be foreseen at the formation or in light of that circumstance. Foreseeable or not is not an objective existence, in order to

Xinjiang Longmei Nengyuan Co., Ltd. v. Zheng X

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accurately identify it, it should be considered in specific cases. Owing to this difference, changed circumstances and business risks have different legal consequences. Changed circumstances are unforeseeable, so they cannot be attributed to the parties, and the parties can negotiate to modify the contract or request the court to revoke the contract; while the business risks are foreseeable, the parties are often willing to take risks by themselves. (2) Changed circumstances and force majeure Force majeure refers to objective circumstances that are unforeseeable, unavoidable and insurmountable. Although force majeure and changed circumstances both are unforeseeable, they are presented in different ways: force majeure always refers to natural catastrophes or abnormal social activities such as war, strike, riot, state expropriation, state condemnation, etc. While changed circumstances refer to unforeseeable circumstance at the formation of contract, such as government policy or economic factors. If force majeure has constituted a failure to perform, the obligor does not have to bear civil liability; while changed circumstances don’t mean the impossibility of performance, but to continue to perform the contract is obviously unfair to the other party or cannot realize the purposes of the contract, contrary to the principle of fairness and the principle of good faith, so the law is required to intervene. Force majeure is a ground for exemption, and a failure to perform caused by force majeure shall be exempted from liability for breach of contract. After the occurrence of changed circumstances, the parties may request the termination of the contract to prevent the continuation of performance. Changed circumstances and force majeure are easy to distinguish, and Article 180 of General Principles of the Civil Law of the People’s Republic of China (repealed in January 1, 2021)1 and Articles 942 and 1173 of Contract Law of the People’s Republic of China (repealed in January 1, 2021) 1

This article is now included as Article 180 of the Civil Code. This article is now included as Article 563 of the Civil Code: “The parties to a contract may rescind the contract under any of the following circumstances: (1) it becomes impossible to realize the purpose of contract for force majeure; (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, and after such performance is demanded, still fails to perform within a reasonable period; (4) the other party delays performance of its obligations, or breaches the contract in some other manner, making it impossible to achieve the purpose of the contract; or (5) other circumstance as provided by the law. A contract without a term, requiring the successive performance of the obligation, may be revoked by a party any time, provided that the other party is notified within a reasonable time”. 3 This article is now included as Article 180 and Article 590 of the Civil Code. Article 180 stipulates that “Where the non-performance of civil obligations is caused by force majeure, no civil liability shall arise therefrom, except as otherwise provided for by any law. Force majeure means any objective circumstance that is unforeseeable, inevitable, and insurmountable”. Article 590 stipulates that “Where a party is unable to perform the contract due to force majeure, the party shall be exempt from liability in part or in whole based on the impact of the force majeure, except as otherwise provided by law. In such a case, the party shall, in a timely manner, notify the other party, so as to mitigate the loss possibly caused to the other party, and provide proof within a reasonable time limit. If the force majeure occurs after a party delays performance, the party shall not be exempt from liability for breach”. 2

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have specifically provided for legal consequences due to force majeure as well as relevant rules to revoke contract, which will not be repeated here. 3. Determination of the changed circumstances in this case First, the issuance of environmental protection documents is not an abnormal change for Longmei Nengyuan Co. Ltd., and thus it is foreseeable and not an unexpected risk but a business risk. The involved mining area is located in Urumqi Nanshan Scenic Spot, and Longmei Nengyuan Company, as a mineral enterprise, shall have known the location of the involved mining area when completing the equity transfer agreement, and Regulations on Scenic and Historic Areas has taken effect. Even if the local environmental protection policy is lenient as claimed by Longmei Nengyuan Company, it still can and shall objectively anticipate the impact of the environmental protection policy on the equity transfer since there are clear provisions in the administrative regulations. In this case, Longmei Nengyuan Company took a chance on the policies at that time, later the prospecting right cannot be renewed by gradually tightened policies issued later, so this resulting risk does not constitute an unexpected risk to Longmei Nengyuan Company. Knowing that administrative regulations prohibit mining in scenic areas, Longmei Nengyuan Company still enters into an equity transfer contract to become a shareholder of Hengruntai Trading Company to enjoy the benefit by prospecting right, so the resulting risk is a business risk. Also, changes in policies does not cause failure to the basis and purpose of contract. Longmei Nengyuan Company signing equity transfer agreement with Zheng X is on the grounds that Zheng X has the equity of Hengruntai Trading Company which has the involved prospecting rights. The change of local policy may cause the involved prospecting rights unsuccessfully renewed, but the prospecting rights still in possession at the time of the trial, and Longmei Nengyuan Company does not lose the basis to enter into the equity transfer agreement, and still holds 51% equity interest of Hengruntai Trading Company, enjoying shareholders’ rights and interests. On April 12, 2010, the involved equity had changed to register under the name of Longmei Nengyuan Company, which means the purpose of the equity transfer had been realized, and the prospecting right does not lose. As a result, the failure to renew the prospecting right due to policies is the business risk encountered by Hengruntai Trading Company in the process of operation, which does not lead to the failure of the contract purpose of the equity transfer agreement, so Longmei Nengyuan Company shall not claim prospecting rights and mining rights as the purpose of equity transfer agreement. Finally, Longmei Nengyuan Company practically continues to perform the contract after the policy adjustment. According to the reply letter Longmei Nengyuan Company to Zheng X’s letter provided on November 9, 2012, both parties have reached a consensus on the uncertainties of policy for the coal resource development, and are still willing to continue to promote the project development and construction or strive for policy compensation. As of July 9, 2010, Longmei Nengyuan Company knew the policy adjustment, but in its reply letter dated November 9, 2012, it clearly indicated to continue the project, and on May 8, 2013, it paid the equity transfer price to continue to perform the contract by actual acts.

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To sum up, Article 26 of Judical Interpretation of Contract Law (II) on rules for changed circumstances shall not be applied to this case, and the ground of changed circumstances Longmei Nengyuan Company claimed for revoking the contract is not established.

Ping An Bank Co., Ltd., Beijing Branch, and Beijing Gold Exchange Co., Ltd. et al. v. Hainan Jinfenghuang Hotspring Resort Co., Ltd., Beijing Xinyupeng Mechanical & Electrical Engineering Co., Ltd. et al. (Dispute Over Loan Contract: The Effect of Issuing a Blank Guarantee Contract Stamped with the Official Seal, and a Guarantor May be Exempted within the Scope of the Pledge Waived by Its Pledgee) Xuemei Zhang

1 Rule Where a party issues a blank guarantee contract stamped with its official seal to its creditor, such party is assumed to authorize the creditor to fill in relevant content, and such party is bound by the content stated in the guarantee contract, unless there is sufficient evidence to the contrary to refute the finding. As the parties agreed to pledge the principal of the deposit and the interest thereon as guarantee, the secured party transferred the interest of the deposit to the settlement account without exercising its priority of claim as the subject matter of the pledge by deposit, which indicates that the secured party waived its priority of claim for that part of interest. In accordance with Article 218 of the Property Law of the People’s Collegial Bench for the Second Instance: Chongli Liu, Xuemei Zhang and Yuying Wang Edited by Ming Li; Translated by Lin Sun and Ting Sun X. Zhang (B) President of the Second Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_4

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Republic of China,1 a guarantee provider may accordingly be exempted from the guarantee liability within the scope of the priority of claim for the interest on deposit waived by the guarantee interest holder.

2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): Ping An Bank Co., Ltd., Beijing Branch (hereinafter referred to as Beijing Branch of Ping An Bank) Appellant (Defendant in the First Instance): China Youth Travel Service Industrial Development Co., Ltd. (hereinafter referred to as China YTS Industrial Development Company) Appellant (Defendant in the First Instance): Beijing Gold Exchange Co., Ltd. (hereinafter referred to as the Gold Exchange Company) Appellee (Defendant in the First Instance): Suzhou Jingsiyuan Co., Ltd. (hereinafter referred to as Jingsiyuan Company) Appellee (Defendant in the First Instance): Zhongjin Commercial Factoring Co., Ltd. (hereinafter referred to as Zhongjin Commercial Factoring Company) Appellee (Defendant in the First Instance): Hainan Jinfenghuang Hotspring Resort Co., Ltd. (hereinafter referred to as Jinfenghuang Hotspring Resort Company) Appellee (Defendant in the First Instance): Beijing Xinyupeng Mechanical & Electrical Engineering Co., Ltd. (hereinafter referred to as Xinyupeng M & E Engineering Company) Appellee (Defendant in the First Instance): Khorgos Guodu Commercial Technology Co., Ltd. (hereinafter referred to as Guodu Commercial Technology Company) Appellee (Defendant in the First Instance): Yongqing Tongda Advanced Construction Materials Technology Development Co., Ltd. (hereinafter referred to as Tongda Company) 2. Procedural History First Instance: No. 67 [2018] Trial, Civ. Division, the Higher People’s Court of Beijing Municipality (date Dec. 29 of 2018) Second Instance: No. 935 [2019] Final, Civ. Division, the Supreme People’s Court (dated Jun.28 of 2019) 3. Cause of Action Dispute over financial loan contract 1 This article is now included as Article 435 of the Civil Code, which states: “A pledgee may waive the right of pledge. Where a debtor establishes the right of pledge by its own properties, and the pledgee waives the right of pledge, other guarantor will be exempted from the guarantee liability within the scope for which the pledgee has lost the right to seek priority of claim, unless any of other guarantors promises to provide the guarantee nonetheless.” Infra.

Ping An Bank Co., Ltd., Beijing Branch, and Beijing Gold Exchange …

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3 Essential Facts On July 24, 2017, Beijing Branch of Ping An Bank entered into a credit contract with the Gold Exchange Company, stipulating that Beijing Branch of Ping An Bank grants the Gold Exchange Company a comprehensive credit line of CNY 4 billion for the period from July 24, 2017 to July 23, 2018. China YTS Industrial Development Company, Jingsiyuan Company, and Zhongjin Commercial Factoring Company, entered into a contract with Beijing Branch of Ping An Bank for maximum amount, thereof with stipulation stating that they were willing to provide a joint and several maximum-amount suretyship as a surety for Beijing Branch of Ping An Bank, so as to ensure the performance of the contract between Beijing Branch of Ping An Bank and the Gold Exchange Company. Xinyupeng M&E Engineering Company and Tongda Company entered into a contract with Beijing Branch of Ping An Bank for guarantee by suretyship at maximum pledge amount, thereof with stipulation stating that they were willing to provide a guarantee by charge at maximum amount for Beijing Branch of Ping An Bank with its legally owned property, so as to ensure the performance of the contract between Beijing Branch of Ping An Bank and the Gold Exchange Company. China YTS Industrial Development Company, Guodu Commercial Technology Company, and Zhongjin Commercial Factoring Company, entered into a contract with Beijing Branch of Ping An Bank for guarantee by suretyship at maximum pledge amount, thereof with stipulation stating that they were willing to provide a guarantee by pledge at maximum amount for Beijing Branch of Ping An Bank with its legally owned property, so as to ensure the performance of the contract between Beijing Branch of Ping An Bank and the Gold Exchange Company. On January 22, 2018, Beijing Branch of Ping An Bank entered into a draft acceptance contract numbered No. 0001 Acceptance (20180122), Pingyinwuliuji (平银 物流集承字) with the Gold Exchange Company, agreeing that the Gold Exchange Company applies for draft acceptance to Beijing Branch of Ping An Bank. Beijing Branch of Ping An Bank underwrote the commercial draft issued by the Gold Exchange Company in the total amount of CNY 240 million. On the same day, Beijing Branch of Ping An Bank entered into a contract for guarantee by pledge numbered No. 0003 Pledge (20180122), Pingyinwuliuji, agreeing that the Gold Exchange Company provides pledge for Beijing Branch of Ping An Bank with its legally owned property. Then, Beijing Branch of Ping An Bank entered into draft acceptance contracts and contracts for guarantee by pledge on February 28, 2018, March 1, 2018, March 2, 2018, March 5, 2018 and March 6, 2018, respectively, each draft acceptance contract agreed that Ping An Bank Beijing Branch would accept the commercial bills of exchange with a total amount of CNY 34,000,000 issued by the Gold Exchange Company; and each guarantee contract by pledge agreed that the Gold Exchange Company would provide pledge to Ping An Bank Beijing Branch with its legally owned properties. On March 7, 2018, Beijing Branch of Ping An Bank entered into an acceptance contract numbered No. 0001 Acceptance (20180307), Pingyinwuliuji with the Gold

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Exchange Company, agreeing that the Gold Exchange Company applies for draft acceptance to Beijing Branch of Ping An Bank. Beijing Branch of Ping An Bank underwrote the commercial draft issued by the Gold Exchange Company in the total amount of CNY 598 million. On July 23, 2018, Beijing Branch of Ping An Bank underwrote five acceptance drafts issued on January 23, 2018, with a payment amount of CNY 240 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 120 million of principal and CNY 180,000 of interest thereon from the certificates of deposit pledged by the Gold Exchange Company. On August 28, 2018, Beijing Branch of Ping An Bank underwrote seven acceptance drafts issued on February 28, 2018, with a payment amount of CNY 340 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 170 million of principal and CNY 255,000 of interest thereon from the certificates of deposit pledged by the Gold Exchange Company. On September 1, 2018, Beijing Branch of Ping An Bank underwrote seven acceptance drafts issued on March 1, 2018, with a payment amount of CNY 340 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 170 million of principal and CNY 257,833.33 of interest thereon from the certificates of deposit pledged by the Gold Exchange Company. On September 2, 2018, Beijing Branch of Ping An Bank underwrote seven acceptance drafts issued on March 2, 2018, with a payment amount of CNY 340 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 170 million of principal and CNY 256,416.67 of interest thereon from the certificates of deposit pledged by the Gold Exchange Company. On September 5, 2018, Beijing Branch of Ping An Bank underwrote seven acceptance drafts issued on March 5, 2018, with a payment amount of CNY 340 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 170 million of principal and CNY 255,000 of interest thereon from the certificates of deposit pledged by the Gold Exchange Company. On September 6, 2018, Beijing Branch of Ping An Bank underwrote seven acceptance drafts issued on March 6, 2018, with a payment amount of CNY 340 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 170 million of principal and CNY 255,000 of interest thereon from the certificates of deposit pledged by the Gold Exchange Company. On September 7, 2018, Beijing Branch of Ping An Bank underwrote two acceptance drafts issued on March 7, 2018, with a payment amount of CNY 59.8 million. On the same day, Beijing Branch of Ping An Bank transferred CNY 29.9 million from the deposit paid by the Gold Exchange Company for the said drafts, the CNY 29.9 million of which had accrued interest of CNY 19,435 since June 21, 2018, which was transferred in the bank account 1101×××××××××× of the Gold Exchange Company. The CNY 19,435 has been deducted upon the claim of Beijing Branch of Ping An Bank. The Gold Exchange Company still owes CNY 998,421,315 to Beijing Branch of Ping An Bank.

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On April 25, 2018, Beijing Branch of Ping An Bank checked the enterprise credit information of China YTS Industrial Development Company via the Credit Reference Center, the People’s Bank of China, and the enterprise credit report of China YTS Industrial Development Company shows that, on March 28, 2018, China YTS Industrial Development Company made 11 advancements for bank acceptance drafts amounting to CNY 296.1 million. On April 17, 2018, Beijing Branch of Ping An Bank issued a notice of maturity in advance of debt to the Gold Exchange Company, declaring that, due to the cause accelerating maturity as agreed by the parities, the credit contract and the draft acceptance contract are matured in advance; and request the Gold Exchange Company to repay the said debts matured in advance within five days upon receiving the notice; in the event that it failed to repay on such date, Beijing Branch of Ping An Bank will calculate and collect penalty interest and compound interest. On April 17, 2018, Beijing Branch of Ping An Bank sent China YTS Industrial Development Company two notices requiring the fulfillment of guarantee liability, notifying China YTS Industrial Development Company to fulfill its guarantee obligation and to, within five days upon receiving the notices, repay the debts on behalf of the debtor, including the principal of the financing fund, the interest thereon, the penalty interest, and the compound interest, etc. Besides, Beijing Branch of Ping An Bank sent Xinyupeng M&E Engineering Company and Guodu Commercial Technology Company, respectively, notices requiring the fulfillment of guarantee liability, the content of which is basically the same as that sent to China YTS Industrial Development Company, both notifying Xinyupeng M & E Engineering Company and Guodu Commercial Technology Company to repay the debts on behalf of the debtor, including the principal of the financing fund, the interest thereon, the penalty interest, and the compound interest, etc. On July 20, 2017, China YTS Industrial Development Company adopted a resolution at its shareholders’ meeting, assenting to provide suretyship for the Gold Exchange Company to apply for credit granting to Beijing Branch of Ping An Bank. On November 13, 2017, China YTS Industrial Development Company adopted a resolution at its shareholders’ meeting, assenting to provide guarantee by pledge for the Gold Exchange Company to apply for credit granting to Beijing Branch of Ping An Bank, the collateral of which is the 20% equity of Xinyupeng M & E Engineering Company held by China YTS Industrial Development Company. Beijing Branch of Ping An Bank also submitted the shareholders’ resolution of Jingsiyuan Company, in which, Zhongjin Commercial Factoring Company, which is the shareholder of Jingsiyuan Company, assented to provide guarantee for suretyship for the Gold Exchange Company to apply for credit granting to Beijing Branch of Ping An Bank, with a credit amount of CNY 4 billion. Beijing Branch of Ping An Bank also submitted the contract for guarantee by suretyship at the maximum amount entered with Jinfenghuang Hotspring Resort Company, with the stated concluding date be May 11, 2018, it is agreed in the contract that Jinfenghuang Hotspring Resort Company is willing to provide a joint and several maximum-amount suretyship as a surety for Beijing Branch of Ping An

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Bank, so as to ensure the performance of the contract between Beijing Branch of Ping An Bank and the Gold Exchange Company. The secured scope of this contract is the principal of all the debts (including any contingent liability) that shall be borne by the Gold Exchange Company under the credit contract, the interest thereon, compound interest and penalty interest, and the expenses for realizing the creditor’s rights. The maximum amount of the principal of the debts is CNY 4 billion. Beijing Branch of Ping An Bank also submitted the contract for guarantee by charge at maximum amount entered with Jinfenghuang Hotspring Resort Company, with the stated concluding date be May 11, 2018, it is agreed in the contract that: Jinfenghuang Hotspring Resort Company is willing to provide a joint and several maximum-amount suretyship as a surety for Beijing Branch of Ping An Bank, so as to ensure the performance of the contract between Beijing Branch of Ping An Bank and the Gold Exchange Company. The secured scope by charge of this contract is the principal of all the debts (including any contingent liability) that shall be borne by the Gold Exchange Company under the credit contract, the interest thereon, compound interest and penalty interest, as well as the expenses for realizing the creditor’s rights. The maximum amount of the principal of the debts is CNY 4 billion yuan, with other stipulations in the contract. Jinfenghuang Hotspring Resort Company also submitted an e-mail, which was sent by Zhu X of the financing department of China YTS Industrial Development Company to Wang X of Jinfenghuang Hotspring Resort Company on May 11, 2018 at 17:10:53. The e-mail shows that: as Beijing Branch of Ping An Bank is preparing for renewing the credit granting of the debts of CNY 2 billion and the bank requires additional methods of guarantee, that is to say, Jinfenghuang Hotspring Resort Company should make guarantee by charge, and should cooperate to stamp the attached document attached. Additionally, Jinfenghuang Hotspring Resort Company also submitted a telephone record between its staff Wang X and the staff Jiang X of Beijing Branch of Ping An Bank on July 8, 2018, in which, Wang X said that on May 11, China YTS Industrial Development Company, for renewing the credit granting, requested Jinfenghuang Hotspring Resort Company to handle the guarantee process. On May 12, Wang X sent 15 blank contracts to Beijing Branch of Ping An Bank. On May 22, Jiang X and Zhu X, another staff of Beijing Branch of Ping An Bank, arrived Jinfenghuang Hotspring Resort Company for confirmation. Wang X even asked Jiang X and Zhu X whether the renewal formalities were completed. On the phone, Jiang X did not deny the statement of Wang X, and recognized that the guarantee of Jinfenghuang Hotspring Resort Company covers a loan of CNY 2 billion. Jinfenghuang Hotspring Resort Company also submitted a telephone record between its legal representative Diao X and the general manager Ma X of China YTS Industrial Development Company in the afternoon of July 8, 2018, in which, Diao X stated that, on May 11, Ma X sent Diao X a message, saying that China YTS Industrial Development Company required Jinfenghuang Hotspring Resort Company to provide guarantee for the renewal of credit granting of Beijing Branch of Ping An Bank. After Jinfenghuang Hotspring Resort Company sent the blank contracts, Beijing Branch of Ping An Bank sent its staff to Jinfenghuang Hotspring Resort

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Company on May 23. Diao X stated that Ma X did not tell him about the litigation. On the phone, Ma X recognized the statement of Diao X. The Higher People’s Court of Beijing Municipality ruled that: (1) the Gold Exchange Company shall, within 10 days upon the effective date of the judgment, pay Beijing Branch of Ping An Bank the principal of CNY 998,421,315, plus the penalty interest thereon (in which, the penalty interest of CNY 119,820,000 is calculated from July 23, 2018; the penalty interest of CNY 169,745,000 is calculated from August 28, 2018; the penalty interest of CNY 169,742,166.67 is calculated from September 1, 2018; the penalty interest of CNY 169,743,583.33 is calculated from September 2, 2018; the penalty interest of CNY 169,745,000 is calculated from September 5, 2018; the penalty interest of CNY 169,745,000 is calculated from September 6, 2018; the penalty interest of CNY 29,880,565 is calculated from September 7, 2018. All the said penalty interest is calculated from the respective date to the date of payment of the principal, and at the rate of 0.5‰.); (2) China YTS Industrial Development Company, Jingsiyuan Company, Zhongjin Commercial Factoring Company bears a joint and several liability on the debts of the Gold Exchange Company as ascertained in Item 1 of the judgment; (3) in respect of the debts owed by the Gold Exchange Company as ascertained in Item 1 of the judgment, Xinyupeng M & E Engineering Company, within the value scope of the collateral under the contract for guarantee by charge at maximum amount signed with Beijing Branch of Ping An Bank, bears the liability of compensation jointly and severally for Beijing Branch of Ping An Bank; (4) in respect of the debts owed by the Gold Exchange Company as ascertained in Item 1 of the judgment, Beijing Branch of Ping An Bank has the right of priority to be paid from the proceeds of discount of the equity of Xinyupeng M & E Engineering Company, the amount of contribution of which paid by China YTS Industrial Development Company is CNY 6 million, or from the proceeds amount of auction or sale; (5) in respect of the debts owed by the Gold Exchange Company as ascertained in Item 1 of the judgment, Beijing Branch of Ping An Bank has the right of priority to be paid from the proceeds of discount of the equity of Xinyupeng M&E Engineering Company, the amount of contribution of which paid by Guodu Commercial Technology Company is CNY 24 million, or from the proceeds amount of auction or sale; (6) in respect of the debts owed by the Gold Exchange Company as ascertained in Item 1 of the judgment, Tongda Company, within the value scope of the collateral under the contract for guarantee by charge at maximum amount signed with Beijing Branch of Ping An Bank, bears the liability of compensation jointly and severally for Beijing Branch of Ping An Bank; (7) China YTS Industrial Development Company, Jingsiyuan Company, Zhongjin Commercial Factoring Company, after fulfilling their joint and several liabilities, may recover from the Gold Exchange Company; (8) all the remaining claims raised by Beijing Branch of Ping An Bank shall be dismissed. Dissatisfied with the decision of first instance, Beijing Branch of Ping An Bank, the Gold Exchange Company, and China YTS Industrial Development Company filed an appeal with the Supreme People’s Court. The facts found in the first instance were affirmed in the second instance. It is also found in the second instance that:

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Clause 2.1 of the contract numbered No. 0001 Acceptance (20180307), Pingyinwuliuji specifies that: the principal of the deposit and interest thereon are pledged as a guarantee on applying to Party A for acceptance of draft. Beijing Branch of Ping An Bank recognizes that, the Gold Exchange Company, while issuing the bank acceptance drafts which shall be matured on September 7, 2018, had CNY 29,990,000 of its deposit preserved on March 7, 2018, with the preservation date be the date of commencement of interest calculation. Beijing Branch of Ping An Bank has already transferred interest accrued before June 21, 2018 into the settlement account of the Gold Exchange Company, and it did not deduct such interest from the creditor’s rights involved in this case as the pledge, and it recognizes that, if such interest be the thing pledged to realize the creditor’s rights, the amount of such interest shall be deducted from the principal of the creditor’s rights. There are two shareholders of Jinfenghuang Hotspring Resort Company, to wit, China Youth Travel Service Materials (Shanghai) Co., Ltd. [hereinafter referred to as YTS Materials (Shanghai) Company] and Beijing Houyihuitong Business Travel Service Co., Ltd., while the ownership percentage of China YTS Materials (Shanghai) Company is 75%, and the company is 100% owned by China YTS Industrial Development Company.

4 Issues 1. The effect of issuing a blank contract stamped with an official seal; 2. The guarantee liability of a guarantor where the pledgee partially waived its pledge.

5 Holding The Supreme People’s Court holds that: (1) Items 1, 3, 4, 5, and 6 of the judgment numbered No. 67 [2018] Trial, Civ. Division, the Higher People’s Court of Beijing Municipality shall be affirmed; (2) Items 2, 7, and 8 of the judgment numbered No. 67 [2018] Trial, Civ. Division, the Higher People’s Court of Beijing Municipality shall be reversed; (3) China YTS Industrial Development Company shall, within 10 days upon the effective date of this judgment, pay Beijing Branch of Ping An Bank the principal of CNY 998,395,900, as well as the penalty interest thereon (in which, the penalty interest of CNY 119,820,000 is calculated from July 23, 2018; the penalty interest of CNY 169,745,000 is calculated from August 28, 2018; the penalty interest of CNY 169,742,166.67 is calculated from September 1, 2018; the penalty interest of CNY 169,743,583.33 is calculated from September 2, 2018; the penalty interest of CNY 169,745,000 is calculated from September 5, 2018; the penalty interest of CNY 169,745,000 is calculated from September 6, 2018; the penalty interest of CNY 29,880,150 is calculated from September 7, 2018. All the said penalty interest

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is calculated from the respective date to the date of payment of the principal, and at the rate of 0.5‰.); (4) China YTS Industrial Development Company, Jingsiyuan Company, Zhongjin Commercial Factoring Company, and Jinfenghuang Hotspring Resort Company bear a joint and several liability on the debts of the Gold Exchange Company as ascertained in Item 1 of this judgment; (5) China YTS Industrial Development Company, Jingsiyuan Company, Zhongjin Commercial Factoring Company, and Jinfenghuang Hotspring Resort Company, after fulfilling their joint and several liabilities, may claim for recovery from the Gold Exchange Company; (9) all the other remaining claims raised by Beijing Branch of Ping An Bank shall be dismissed.

6 Comment on Rule 1. Whether a legal and valid relationship of guarantee contract is established between Jinfenghuang Hotspring Resort Company and Beijing Branch of Ping An Bank Jinfenghuang Hotspring Resort Company denies that it has established a legal and valid legal relationship of guarantee contract with Beijing Branch of Ping An Bank based on the following three reasons: First, the content of the contract for guarantee by suretyship at the maximum amount was filled out by Beijing Branch of Ping An Bank per se, while the purpose of securing the principal creditor’s right as written in the contract is different from that of the guarantee assumed by Jinfenghuang Hotspring Resort Company. While the Supreme People’s Court holds that, the content of the contract for guarantee by suretyship at the maximum amount as produced by Beijing Branch of Ping An Bank, which was signed between the branch and Jinfenghuang Hotspring Resort Company, is a contract with blank text mailed by Jinfenghuang Hotspring Resort Company to Beijing Branch of Ping An Bank after being stamped with the official seal of the company, in which, the content regarding the guarantee of the principal creditor’s right was filed by Beijing Branch of Ping An Bank. As Jinfenghuang Hotspring Resort Company delivered the blank guarantee contract stamped with its official seal to the creditor for filing, such behavior indicates that it authorized the creditor to file the guarantee-related content, therefore, the content stated in the guarantee contract is binding on Jinfenghuang Hotspring Resort Company. Jinfenghuang Hotspring Resort Company failed to produce evidence to the contrary sufficient to refute such facts. Second, Jinfenghuang Hotspring Resort Company contends that, what it provided is the guarantee for the renewal of the credit granting between Beijing Branch of Ping An Bank and the Gold Exchange Company, rather than that for the principal creditor’s right in question, and China YTS Industrial Development Company and Beijing Branch of Ping An Bank constitute a fraud against it. The Supreme People’s Court holds that, the evidence produced by Jinfenghuang Hotspring Resort Company is not sufficient to establish the said facts, in particular: first, the e-mail

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submitted is only an internal communication e-mail between the staff of China YTS Industrial Development Company and the staff of Jinfenghuang Hotspring Resort Company, under the circumstance that Beijing Branch of Ping An Bank does not recognize the claimed fact of “renewal of credit granting”, the content stated in such e-mail cannot prove that the purpose of Beijing Branch of Ping An Bank’s informing Jinfenghuang Hotspring Resort Company is to provide guarantee for the “renewal of credit granting”, neither can it prove that Beijing Branch of Ping An Bank knows or should have known the fact that the purpose for the staff of China YTS Industrial Development Company’s informing Jinfenghuang Hotspring Resort Company is to provide guarantee for the “renewal of credit granting”. Second, the telephone record between the staff of Jinfenghuang Hotspring Resort Company and the staff of Beijing Branch of Ping An Bank shows that, the time of telephone is after Jinfenghuang Hotspring Resort Company mailed the contract for guarantee by suretyship at maximum amount to Beijing Branch of Ping An Bank for filing, rather than during the process of communication between Beijing Branch of Ping An Bank and Jinfenghuang Hotspring Resort Company regarding the provision of guarantee, neither did the staff of Beijing Branch of Ping An Bank directly acknowledge the statement of the staff of Jinfenghuang Hotspring Resort Company regarding the “renewal of credit granting”. Lastly, in the process of the staff of Beijing Branch of Ping An Bank going to Jinfenghuang Hotspring Resort Company to verify the seal and take photos at site, there is no evidence to prove that Jinfenghuang Hotspring Resort Company has ever raised any objection. Third, Jinfenghuang Hotspring Resort Company denies that the content of the resolution of the shareholders’ meeting of the company was to provide guarantee for the principal creditor’s right involved in this case. In accordance with Article 16 of the Company Law (2018), where a company intends to invest in any other enterprise or provide guarantee for others, the company shall make a resolution via the board of directors, shareholders meeting or general meeting of shareholders according to its bylaws. During the trial of the second instance of this case, Jinfenghuang Hotspring Resort Company acknowledged that it had made a resolution through its shareholders meeting, however, it merely disagreed with the content of the resolution of the shareholders meeting. Besides, it acknowledged that its shareholders had already signed on the blank guarantee contract. Due to the fact that it acknowledges the existence of the resolution of the shareholders meeting yet failed to produce evidence sufficient to prove that the content stated in such resolution is to provide guarantee for the “renewal of credit granting”, hence, considering the fact that it e-mailed a blank guarantee contract stamped with the official seal to Beijing Branch of Ping An Bank, it can be presumed that Jinfenghuang Hotspring Resort Company made a resolution in respect of the guarantee in question, which complies with Article 16 of the Company Law which provides that a company that intends to provide guarantee for others shall make a resolution through relevant authorities of the company, therefore, it can be found to be the true manifestation of intention of the company and shall be found valid.

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2. Where a pledgee partially waived its right of pledge, the guarantor may be exempted within the scope of the right waived Article 218 of the Property Law (repealed in 2021) states that, “A pledgee may waive the right of pledge. Where a debtor establishes the right of pledge by its own properties, and the pledgee waives the right of pledge, other guarantors will be exempted from the guarantee liability within the scope for which the pledgee has lost the right to seek priority of claim, unless any of other guarantee providers promises to provide the guarantee nonetheless.” In this case, Clause 2.1 of the draft acceptance contract specifies that the principal of the deposit and interest thereon are pledged as a guarantee on applying to Beijing Branch of Ping An Bank for acceptance of draft, however, Beijing Branch of Ping An Bank transferred the interest of the deposit to the settlement account of the debtor without exercising its priority of claim as the subject matter of the pledge by deposit, which indicates that it waived its priority of claim for that part of interest. Based on such facts, China YTS Industrial Development Company filed an appeal, contending that it should not bear the guarantee liability for the CNY 25,415 of the principal of such debt, and correspondingly, since such amount is the offset against the principal of the seventh loan, hence, the penalty interest for the seventh loan on which China YTS Industrial Development Company shall bear guarantee liability should be reduced correspondingly, that is to say, the basis for calculating the penalty interest for the seventh loan on which it shall bear guarantee liability should be CNY 2,988,150, and the calculation should be from September 7, 2018 to the date of payment of the principal, with the payable rate of 0.5‰ per day. The court of second instance upholds the claims in the appeal made by China YTS Industrial Development Company.

China Nonferrous Metal Industry’s Foreign Engineering and Construction Co., Ltd. v. Ningbo Branch of Hengfeng Bank Co., Ltd. and Ningbo Zhongrenhong Electronics Co., Ltd. and Ningbo Gangdi Trade Co., Ltd. et al. (Defendants in the First Instance) (Dispute Over the Issuing of Letter of Credit and the Right of Recourse: A Debtor of a Negotiable Instrument Cannot Oppose the Pledgee of the Negotiable Instrument with His Own Defense Against the Pledgor) Chun Yang, Jiaqin Wei, and Tao Yang

1 Rule As stoppage of right to protest is to protect the legitimate and bona fide holder of a negotiable instrument, the pledgee has paid a reasonable consideration and has legally and bona fide acquired the right in the negotiable instrument, the debtor cannot oppose the pledgee with reasons of his own protest.

Collegial Bench for Reopening Review: Chun Yang, Qinglin Jia and Ying Zhang Edited by Ming Li; Translated by Lin Sun and Sisi Yi C. Yang (B) · J. Wei The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China T. Yang Postgraduate School, Zhejiang University, Hangzhou, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_5

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2 Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): China Nonferrous Metal Industry’s Foreign Engineering and Construction Co., Ltd. (hereinafter referred to as Nonferrous Metal Construction Company or NFC) Respondent in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Hengfeng Bank Co., Ltd. Ningbo Branch (hereinafter referred to as Hengfeng Bank Ningbo Branch) Defendant in the First Instance: Ningbo Zhongrenhong Electronics Co., Ltd. (hereinafter referred to as Zhongrenhong Electronics Company) Defendant in the First Instance: Ningbo Gangdi Trade Co., Ltd. (hereinafter referred to as Gangdi Trade Company) Defendant in the First Instance: Yang X Defendant in the First Instance: Wang X Defendant in the First Instance: Ningbo Guohai Electronics Co., Ltd. (hereinafter referred to as Guohai Electronics Company) Defendant in the First Instance: Sinotrans Ningbo Resources Co., Ltd. (hereinafter referred to as Sinotrans Ningbo Resources Company) Defendant in the First Instance: Zhejiang Ledi Electronics Technology Co., Ltd. (hereinafter referred to as Ledi Electronics Technology Company) 2. Procedural History First Instance: No. 499 [2017] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province (dated Jan. 24 of 2018) Second Instance: No. 223 [2018] Final, Civ. Division, the Higher People’s Court of Zhejiang Province (dated May 4 of 2018) Petition for Case Reopening: No. 6472 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated Mar. 13 of 2020) 3. Cause of Action Dispute over the issuing of letter of credit and the right of recourse

3 Essential Facts Zhongrenhong Electronics Company and Nonferrous Metal Construction Company entered into three purchase contracts in advance by commercial paper, agreeing that Zhongrenhong Electronics Company sold electrolytic aluminum to NFC. On the day of sigining, NFC successively issued three trade acceptances with total value at CNY 100 million, and negotiated them by endorsement to Zhongrenhong Electronics

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Company. However, Zhongrenhong Electronics Company failed to fulfill its delivery obligation under the above three in-advance purchase contracts. On the other hand, Hengfeng Bank Ningbo Branch and Zhongrenhong Electronics Company had concluded four trade financing principal agreements, agreeing the total amount of trade financing that the company could apply was CNY 111.9175 million, with the financing service of the first principal agreement on domestic letters of credit, and the second and the third were on buyer factoring guarantee. At the same time, Hengfeng Bank Ningbo Branch and Zhongrenhong Electronics Company also signed a maximum amount pledge contract, agreeing that Zhongrenhong Electronics Company shall guarantee the principal claims arising from the above-mentioned trade financing principal agreements with these three trade acceptances issued and accepted by NFC. Zhongrenhong Electronics Company endorsesd the corresponding trade acceptances in pledge and delivered them to Hengfeng Bank Ningbo Branch, the endorsee, and Zhongrenhong Electronics Company stamped the “endorser” column with a special financial seal and noted the word “pledge”. In the process of implementing the trade financing principal agreements, Hengfeng Bank Ningbo Branch issued a domestic Letter of Credit in the amount of CNY 39.96 milion to Zhongrenhong Electronics Company and provided guarantee for buyer credit risk for the transaction between Zhongrenhong Electronics Company and Gangdi Trade Company, with the total guarantee amount of CNY 71.96115 million. Meanwhile, Gangdi Trade Company submitted an application to Hengfeng Bank Ningbo Branch for TAS-DFC service, by which the said right to factoring proceeds was transferred to Fortune Securities Co., Ltd. (hereinafter referred to as Fortune Securities Company), and then Gangdi Trade Company raised CNY 70.47022736 million. Zhongrenhong Electronics Company did not fully deposit the funds under the above Letter of Credit nor could it settle the accounts payable, resulting that Hengfeng Bank Ningbo Branch made an advance of CNY 39.96 million and a payment of CNY 71.95755 million to Fortune Securities Company. Based on the mentioned facts, Hengfeng Bank Ningbo Branch filed a lawsuit with the court of first instance, requesting that: (1) Zhongrenhong Electronics Company shall immediately repay the advances of CNY 99.80600675 mililon to Hengfeng Bank Ningbo Branch and pay the overdue interest from the actual date of paying the advanced money to the actual date of payment; (2) NFC shall immediately take up draft of CNY 100 million to Hengfeng Bank Ningbo Branch and to pay the interest calculated at the benchmark interest rate of similar loans of the People’s Bank of China for the same period from the due date to the date of payment. The court of first instance found that: a draft in pledge bore the nature of guaranteeing, and Hengfeng Bank Ningbo Branch based on its pledge enjoyed the right of priority to be repaid. Such a right was no longer the title of draft owned by Zhongrenhong Electronics Company, nor subject to defects of the draft. Hengfeng Bank Ningbo Branch’s enforcement of title of draft was to realize the pledge. Moreover, NFC did not prove Hengfeng Bank Ningbo Branch was in bad faith when creating the pledge. Instead, Hengfeng Bank Ningbo Branch took the draft for value and in good faith, as a third party, his rights shall be protected. Therefore, the defense of NFC

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against Zhongrenhong Electronics Company shall not be claimed against Hengfeng Bank Ningbo Branch. As a result, the court of first instance held that Hengfeng Bank Ningbo Branch was entitled to request NFC to pay the amount under the trade acceptances involved, if Zhongrenhong Electronics Company failed to perform its payment obligation. NFC was not satisfied with the judgment of first instance and appealed to the court of second instance, requesting to dismiss Hengfeng Bank Ningbo Branch’s claims to NFC. The court of second instance held that, the abstractness of negotiable instrument, the independence of act on negotiable instrument, and the severance of right to defense all intended to protect the holder in due course and in good faith. In this case, Hengfeng Bank Ningbo Branch, as the pledgee, had obtained the negotiable instruments involved legally and in good faith. Although the title of negotiable instruments owned by the pledgee, such as repledge and negotiation by re-endorsement, shall be restricted, such restriction shall not be enlarged infinitely, the right of claim and the right of recourse to guarantee the realization of the pledge shall be protected. Accordingly, Hengfeng Bank Ningbo Branch’s right of claim and the right of recourse shall be free of the defense of NFC. Accordingly, the court of second instance dismissed the appeal and uphold the decision of first instance. NFC was not satisfied with the decision of second instance and applied to the Supreme People’s Court for reopening.

4 Issue Whether NFC as a negotiable instrument debtor could make the protest against the pledgee Hengfeng Bank Ningbo Branch, on the ground that Zhongrenhong Electronics Company failed to perform its deliver obligation.

5 Holding Upon review, in accordance with Article 13(1) of the Negotiable Instruments Law of the People’s Republic of China (hereinafter referred to as the Negotiable Instruments Law) provides: “Negotiable instrument debtors shall not protest against the holder by using the ground of protesting against the drawer or the prior holder, except when the holder has obtained the negotiable instruments with the clear knowledge of the ground for protest.” And Article 11(2) hereof provides: “The prior holder refers to a debtor who puts his signature or seal to the negotiable instruments before they are acquired by the present signer or holder.” The Supreme People’s Court held that, Zhongrenhong Electronics Company endorsesd the negotiable instruments with a pledge and delivered them to Hengfeng Bank Ningbo Branch, which meets

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the requirement of being the prior holder of Hengfeng Bank Ningbo Branch. The severance of right to protest in negotiable instruments is intended to protect holder in due course and in good faith, and Hengfeng Bang Ningbo Branch, as the pledgee paid the value, had already obtained the negotiable instruments legally and in good faith. As a result, it is not improper that the court of second instance did not support NFC’s claim that the right to protest was not severed. Accordingly, the Supreme People’s Court dismissed the application of NFC for reopening.

6 Comment on Rule 1. The nature of the pledge on a negotiable instrument Creating a pledge on the negotiable instrument involves legal relations both in pledge and in negotiable instrument, it is not only regulated by ordinary civil laws such as guarantee law, but also restricted by the rules of the law of negotiable instruments, which makes it complicated to understand the legal issues of the pledge created on the negotiable instruments. This results to complexity to address issues concerning pledge on the negotiable instrument, among which, the most controversial is whether negotiable instrument debtors shall make the defense against the pledgee based on the ground of protesting the pledgor. To resolve this issue, the first thing is clarifying the nature of pledge on the negotiable instrument. In guarantee law, the pledgee of negotiable instrument who obtained the pledge by endorsing and delivering the negotiable instruments with a pledge, is the holder of pledge but not the owner of the negotiable instrument, since the endorsement over negotiable instruments is not to negotiate the title, but to guarantee certain claims of the endorsee against the endorser. Accordingly, although the negotiable instrument was endorsed to the endorsee’s possession, the endorser was the owner of the instrument, and the endorsee who held the instrument did not obtain the title, and could only exercise his right in a manner consistent with the Guarantee Law, that is, Article 219(2) of the Property Law of the People’s Republic of China,1 which provides that “(t)he pledgee may, by agreement with the pledger, appraise and accept the pledged property as satisfaction of his claim, or have priority to be paid from the proceeds obtained from auction or sale of the pledged property.” Nevertheless, in the Negotiable Instruments Law, Article 35(2) provides that “A draft may be pledged. In pledging a draft, the word ‘pledge’ shall be in written form on the endorsement. When the endorsee has realized the pledge according to law, the endorsee may exercise the rights to the draft.” As a result, the pledgee was entitled to the negotiable instruments. Theoretically and practically, there are different opinions on how to understand different provisions of these two legal norms on the nature of the pledge of the negotiable instruments and whether the pledgee of the instrument was entitled to negotiable instruments. 1

This article is now included as Article 436 of the Civil Code.

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Some argue that the pledgee of the instrument was not entitled to negotiable instruments, for the title of negotiable instruments was different from the pledge to the negotiable instruments held by the pledgee, the former was governed by the Negotiable Instruments Law, while the latter, the Guarantee Law. The purpose of the owner of a negotiable instrument to pledge a negotiable instrument is to set the pledge on the right rather than to transfer the right, which is different from the endorsement to transfer, so after pledging the negotiable instrument, the pledgee does not obtain the right out of the negotiable instrument and cannot exercise these rights directly. As a result, the pledgee, unlike the owner, can only exercise the pledge to negotiable instruments in accordance with general rules for pledgees to fulfill the right when the debtor fails to perform obligations. Besides, the amounts claimed on the pledge cannot exceed that of the guaranteed principal claims, and when exercising the pledge, the pledgee only enjoy the right to priority claim, rather than various rights to the negotiable instrument,2 such as the right of claim and the right of recourse that the owner was entitled to. Furthermore, the pledgee of negotiable instruments can only exercise his rights through the pledgor or litigation procedure,3 which is considered as to exercise the right on behalf of the endorser.4 To those who claim that the pledgee of negotiable instruments is not entitled to negotiable instruments, creating a pledge on negotiable instruments is in nature creating a pledge on general creditor’s claim, and the right held by the pledgee is in nature a right of pledge. Owing to the pledgee’s lack of independent entitlement to negotiable instruments, his exercise of rights depends on and on behalf of the pledgor who, for this reason, does not constitute the “holder” in the sense of negotiable instruments law. Consequently, when the pledgor who has a direct creditordebtor relationship with the debtor of the instrument fails to perform the agreed obligation, the debtor may claim against the pledgor, and may also claim against the pledgee who exercises the right to negotiable instruments on behalf of the pledgor. The pledgee shall not claim to cut off the right of protest in accordance with Article 13(1) of the Negotiable Instruments Law. For instance, in Suburban Credit Cooperative of Tengzhou City and China Construction Bank Xuecheng District Subbranch, Zaozhuang City (Disputes over Negotiable Instruments),5 the Higher People’s Court of Shandong Province held, the coal washery plant obtained a bank draft without paying the value, China Construction Bank Xuecheng District Subbranch, as the drawer, could protest against the coal washery plant, and the pledge of negotiable instruments obtained by Suburban Credit Cooperative by signing the pledge contract and delivering the right documents, shall inherit the defects of negotiable instruments of the pledgor, the coal washery plant, so China Construction Bank Xuecheng District Subbranch could protest against the suburban credit cooperatives. 2. The pledgee’s entitlement of negotiable instruments 参见王利明:《物权法研究》(第3版·上下卷), 中国人民大学出版社2013年版, 第1355页. 参见曹士兵:《中国担保诸问题的解决与展望——基于担保法及其司法解释》 , 中国法制出 版社2001年版, 第313页. 4 参见王小能:《票据法教程》 , 北京大学出版社1994年版, 第226页. 5 参见 《最高人民法院公报》 2004年第11期. 2 3

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Although the view that the pledgee of a negotiable instrument was not entitled to the negotiable instrument is in line with the general provisions of guarantee law on pledge, it ignores the particularity of the negotiable instrument and does not accord with the basic logic of negotiation of the negotiable instrument in commercial activities, which is not conducive to protecting the reliance interests of the pledgee of the negotiable instrument, so it is not adopted by most scholars. In the prevailing view, the pledgee can assert against the protest enjoyed by the pledgee against the pledgor and cited by the debtor, unless the pledgee of the negotiable instrument obtains the instruments with clear knowledge of the defense to the instrument.6 There are two reasons for this conclusion. For one thing, the pledgee obtains negotiable instruments based on the basic legal relationship of creating a pledge on negotiable instruments, and is the holder in due course, who exercises rights to negotiable instruments in his own name and for his own interests. The pledgor and pledgee are two independent subjects whose legal personality and interests are separated in negotiable instrument law, so the negotiable instrument debtor shall not protest against the pledgee based on the defense against the pledgor.7 For the other thing, compared to general claims, the title of negotiable instruments bears particularity. Negotiable instrument is a common instrument of payment in commercial activities, and its negotiation depends on the exterior act of the dealer, aiming to guarantee the safety of the transaction, while endorsement in pledge aims to “guarantee the pledged debts with the safety and credit of the title of negotiable instruments. If the defense against the endorser can be used against the endorsee, which results in a failure in exercise of the pledge, the safety of negotiable instruments as right securities and the credit as negotiable securities will be damaged, which will also be inconsistent with the independence principle of the act of negotiable instruments, then negotiable instrument as the subject matter of the pledge will lose its particularity. This is also the leading view in judicial practice”.8 The Supreme People’s Court held that, the view that the pledgee is entitled to negotiable instruments and is entitled to assert against the defense against the pledgor and enjoyed by the debtor, is admissible.9 参见孙永全:《票据权利质押与票据质押区辨》 , 载 《人民法院报》 2017年5月17日; 刘保玉主 编:《担保纠纷裁判依据新释新解》 , 人民法院出版社2014年版, 第267页. 7 参见刘心稳:《票据法》(第3版), 中国政法大学出版社2015年版, 第154-155页. 8 See Jiangsu Jinpiaotong Investment Management Co., Ltd. v. Zhejiang Unifull Industrial Fibre Co., Ltd. et al. (Dispute over Right of Recourse of Negotiable Instruments), No. 7 [2020] Final, Civ. Division, Shanghai Financial Court; Ping An Bank Co., Ltd. Ningbo Branch v. China Nonferrous Metal Industry’s Foreign Engineering and Construction Co., Ltd. et al. (Dispute over Financial Loan Contract), No. 2695 [2018] Final, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province; Bank of China Haimen Subbranch v. Tianjin Good Hand Railway Holding Co., Ltd (Dispute over Right of Claim of Negotiable Instruments), No. 64 [2013] Final, Civ. Division, The Higher People’s Court of Guangdong Province. 9 In comparative law, this view is also a dominant theory. For example, Paragraph 2 of Article 19 “Endorsement in Pledge” of the German Negotiable Instruments Law provides that the debtor of the draft shall not defend to the holder on the ground that he has a direct relationship with the endorser, except when the holder knows that the transaction is not conducive to the debtor at the time of obtaining the draft. It is also stipulated in Paragraph 2 of Article 19 “Creating a Pledge” of the 6

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First, owing to the relation between the guarantee law and the negotiable instruments law that the former is general civil law and the latter is special commercial law, when the two laws have different applicable provisions, those of the negotiable instrument law prevail, that is, the nature of the title of the negotiable instrument pledge shall be determined in accordance with the negotiable instruments law. Second, this point of view is supported by direct legal basis. Article 35(2) of Negotiable Instruments Law provides that when a pledgee of negotiable instruments has realized the right of pledge according to law, he may exercise the right to draft. At the same time, Article 4(4) hereof provides: “The term ‘rights to the negotiable instrument’ used in this Law refers to the rights of the holder to claim payment according to the amount specified in the negotiable instruments, including the right of claim and the right of recourse.” Therefore, the pledgee of negotiable instruments, like the holder of the negotiable instrument who obtained the negotiable instruments by negotiation, enjoys the same rights, that is, the right of claim and the right of recourse. Third, Article 13(1) of Negotiable Instruments Law provides: “Negotiable instrument debtors shall not protest against the holder by using the ground of protesting against the drawer or the prior holder, except when the holder has obtained the negotiable instruments with the clear knowledge of the ground for protest.” From this provision, the severance of right to protest emphasizes the factual possession of the negotiable instruments, that is, actual holding of the instrument, focusing on protecting the title of the holder, and the actual holder is the pledgee of negotiable instruments who, for this reason, may claim the severance of right to protest. And finally, the severance of right to protest intends to protect holder in due course and in good faith, the pledgee, as the holder of the pledge, has already paid the value and obtained the title of negotiable instruments legally and in good faith. If negotiable instrument debtor is allowed to protest against the pledgee on the ground of that protest against the pledgor, the pledgee in good faith will take unpredictable risks, which will damage the safety of negotiable instruments as right securities, the credit as negotiable securities and the safety of transaction, harmful to the healthy and stable market economy. In addition, it should be noted that the pledge of negotiable instruments, as a special pledge of rights, does not completely exclude the application of the guarantee law, and the pledgee’s exercise of the pledge also needs to meet the provisions of Article 35(2) of the Negotiable Instruments Law on conditions for realizing the pledge in accordance with the law, and if the debtor fails to perform the due debt or the security interest agreed by the parties, the pledge shall be exercised within the scope of the guarantee.

Negotiable Instruments Law of Japan that negotiable instrument debtor shall not protest against the holder on the basis of personal relationship against the endorser, except where the holder acquires the instrument knowing that it is harmful to the negotiable instrument debtor.

Xinjiang Huacheng Anju Real Estate Development Co., Ltd. v. China Railway Construction Bridge Engineering Bureau Group Co., Ltd. (Dispute Over Contract for Building of Construction Project: The Application of Good Faith Principle in Determining the Validity of a Contract) Dian Luo and Ting Yang

1 Rule The purpose to establish a system of declaring invalid contract is to prevent the loss to the interests of the country, the society and the third party because of the performance of invalid contracts, and to maintain the rule of law and public morality in society. The claim that the parties maliciously request to confirm the invalidity of the contract on the grounds of their own illegal acts is not to be judicially supported.

2 Case Information 1. Parties Collegial Bench for the Second Instance: Dian Luo, Dongmin Wang and Jizhong Chen Edited by Ming Li; Translated by Lin Sun and Sisi Yi D. Luo (B) Vice President of the Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China T. Yang The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_6

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Appellant (Defendant in the First Instance): Xinjiang Huacheng Anju Real Estate Development Co., Ltd. (hereinafter referred to as Huacheng Anju Real Estate Development Company) Appellee (Plaintiff in the First Instance): China Railway Construction Bridge Engineering Bureau Group Co., Ltd. (hereinafter referred to as Railway Construction Bridge Engineering Bureau) 2. Procedural History First Instance: No. 26 [2017] Trial, Civ. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region (dated Oct. 24 of 2018) Second Instance: No. 347 [2019] Final, Civ. Division, the Supreme People’s Court (dated Apr. 30 of 2019) 3. Cause of Action Dispute over contract for building of construction project

3 Essential Facts On July 11, 2011, Railway Construction Bridge Engineering Bureau and Huacheng Anju Real Estate Development Company signed a building construction cooperation framework agreement of the Blue-collar Apartment project (hereinafter referred to as the building construction framework agreement) in the cooperative zone; on May 9, 2012, the two parties signed a contract for building of construction project of Blue-collar Apartment project (hereinafter referred to as the contract for building of construction project) in the cooperative zone, agreeing that Railway Construction Bridge Engineering Bureau would be responsible for the construction of the Blue-collar Apartment project developed by Huacheng Anju Real Estate Development Company, with a total contract price of CNY 418.33235272 million, and the scope of the project, construction period, quality and payment for the project. After the formation of the contract, in May 2012, Railway Construction Bridge Engineering Bureau entered the construction site to start their work as stipulated. Later, as Huacheng Anju Real Estate Development Company failed to pay for the project price in time and in full, Railway Construction Bridge Engineering Bureau Group stopped the construction and filed a lawsuit in the first instance, requesting: (1) to rescind the contract for building of construction project; (2) Huacheng Anju Real Estate Development Company to pay for the project price and interest to Railway Construction Bridge Engineering Bureau, and to return the performance bond and overdue interest; (3) to confirm Railway Construction Bridge Engineering Bureau Group enjoy the priority of claim to the discounted price of the project or the price after auction. The court of first instance decided: (1) to rescind the involved contract for building of construction project; (2) Huacheng Anju Real Estate Development Company pay for the project price and interest, and to return the performance bond and overdue

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interest; (3) Railway Construction Bridge Engineering Bureau enjoys priority of claim within the scope of the project amount in respect of the discounted price or auctioned price, etc. Huacheng Anju Real Estate Development Company appealed to the Supreme People’s Court regarding the judgment of first instance, claiming that the bid and the contract for building of construction project in the involved project are void, because the involved contract for building of construction project violates Articles 43, 53, and 55 of the Bidding Law of the People’s Republic of China (hereinafter referred to as the Bidding Law) as well as Article 1 of the Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in the Trial of Contract Disputes for the Building of Construction Projects (hereinafter referred to as Judicial Interpretation of Contract for Building of Construction Projects).

4 Issue Whether the contract for building of construction project is valid.

5 Holding In this case, on May 8, 2012, China Railway 13th Bureau Group Co., Ltd. (hereinafter referred to as China Railway 13th Bureau) won the bid for Blue-collar Apartment Project in the cooperative zone, and on May 9, 2012, it signed the involved contract for building of construction project with Huacheng Anju Real Estate Development Company. The contract was the true manifestation of intent of both parties, and the content did not violate the mandatory provisions of relevant laws and regulations, so the contract was lawful and valid, and the parties shall strictly perform the obligations as agreed in the contract. Huacheng Anju Real Estate Development Company claimed in the appeal that it had negotiated with Railway Construction Bridge Engineering Bureau on the substantial contents of the contract before bidding, and they tended to evade the application of laws such as the Bidding Law and relevant administrative regulations by bidding on the surface with the bidder determined actually (fraudulent biding), so the bid and the contract shall be void. The Supreme People’s Court holds if the winning bid had been affected by negotiations between tenderee and any tenderer on the substantial contents of contract, the bid shall be invalid, which will make the contract void, in accordance with Article 521 of the Contract Law, Article 1 of the Judicial Interpretation of Contract for Building of Construction Projects, and Articles 43, 55 and 65 of the Bidding Law. Any interested party who believes that a 1

This article has no corresponding terms in the Civil Code, and the provisions of Article 52 of the Contract Law are covered by Articles 146, 150, 153 and 154 of the General Provisions of the Civil Code.

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bidding had been conducted in violation of law, shall be entitled to raise objections or file a complaint with the relevant administrative departments of supervision, and any entity or person who is held in direct responsibility shall bear disciplinary sanctions. Parties in this case had negotiated and reached an agreement on cooperation, and had concluded building construction cooperation framework agreement before bidding. However, this agreement did not agree on contents such as bid plan, commencement date, but leave a lot of uncertainties in the contract terms. For example, in respect of construction, the parties agreed that “the specific planning target and construction content shall be subject to the final approval documents of relevant government departments”; as to the budget estimate, the parties agreed that “the total estimated budget for the construction of the project is next to CNY 300 million, and the specific estimated value will be agreed upon after the planning documents and design plan are determined”. After signing the building cooperation framework agreement, two parties performed the bidding procedures in accordance with the provisions of the Bidding Law. Besides, there was no evidence to prove that there existed circumstances that might affect the validity of the contract due to illegal acts in the bidding process of the project involved. Although Huacheng Anju Real Estate Development Company claimed that its own violation of the Bidding Law invalidated the bid, but it did not prove whether the violation affected the bid. Moreover, there was no such situation in this case that the interested party raised objections or filed a complaint with the relevant administrative departments due to the bidding’s violation of law, resulting in the relevant personnel being held accountable. To sum up, it was not improper that the court of first instance found the contract for building of construction project involved valid, so the court of second instance upheld it.

6 Comment on Rule In accordance with Article 52 of the Contract Law, Article 1 of the Judicial Interpretation of Contract for Building of Construction Projects, and Articles 43, 55 and 65 of the Bidding Law, the Supreme People’s Court found that the bid had not been affected by negotiations between the tenderee and the tenderer on the substantial contents of the contract, which will not result in invalid bid and the contract, so this court overruled the appeal request of Huacheng Anju Real Estate Development Company claiming the contract for building of construction project involved was void. However, what is worth noting in this case is that the fact that Huacheng Anju Real Estate Development Company claimed the invalidity of contract on the ground that its own illegal acts violate the good faith principle and good faith litigation. 1. Bidding activities shall be subject to good faith principle The principle of good faith is not only the basic principle of civil and commercial activities, but also the basic principle that civil litigation shall abide by. In construction projects, bidding procedures are established to protect national interests, public interests and the legitimate rights and interests of the parties concerned to improve

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economic efficiency and ensure project quality. In the bidding process, compared to the contractor, the project owner controls the situation to a certain extent. In this case, Huacheng Anju Real Estate Development Company, as a tenderee, clearly knows that its negotiation with Railway Construction Bridge Engineering Bureau on the substantial contents of the contract before bidding may lead to the invalidity of the contract on the ground of violating the relevant provisions of the Bidding Law, but still actively pursues or allows the legal consequences to occur. Both Huacheng Anju Real Estate Development Company and Railway Construction Bridge Engineering Bureau violate the good faith principle in the bidding of the involved project. 2. Contract performance shall be subject to the good faith principle During the construction process of the involved project and the procedure in the first instance, Huacheng Anju Real Estate Development Company never raised objection to the effect of contract, and only argued in the first instance that there was no contractual rescission or statutory rescission in this case, and disagrees with the request of the Railway Construction Bridge Engineering Bureau to rescind the contract. In the second instance, Huacheng Anju Real Estate Development Company’s claim that the contract for building of construction project was invalid was based on the belief that a valid contract for building of construction project would bring it disadvantages or benefits less than that brought by an invalid contract, it aims to avoid the obligation to pay and to exempt or reduce the civil liability found by the first instance. The court of second instance holds that contractual agreements shall be strictly observed and the concept of good faith shall be strengthened. Huacheng Anju Real Estate Development Company, as the tenderee and party A of the involved construction project, takes the lead in signing the involved contract for building of construction project, but when the counterparty to the contract, Railway Construction Bridge Engineering Bureau had performed the contract as agreed, it did not pay for the project price as promised. After being ruled by the court of first instance to bear corresponding responsibilities, Huacheng Anju Real Estate Development Company, on the grounds of its own bidding behavior violating the law, claims in the second instance that the contract is void. This behavior violates basic principle of good faith and damages the stability of civil legal relations, so it is a malicious defense to pursue its own interests to the maximum at the expense of good faith and others’ interests. 3. The aim of establishing a system to declare the contract void The purpose to establish a system of declaring invalid contract is to prevent the loss to the interests of the country, the society and the third party because of the performance of invalid contracts, and to maintain the rule of law and public morality in society. However, in the case at hand, Huacheng Anju Real Estate Development Company, as a wrongdoer, maliciously requested the people’s court to confirm the invalidity of the contract. If the appeal were to be maintained by the court, it would have meant that the contract which reflects the true intention of both parties is not binding, to the extent that the said party may even obtain illegitimate interests, which will violate the purpose of establishing a system to declare contract null and void, and will also indulge the wrongdoer in illegal activities, making the system of declaring contract

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null and void a means for the wrongdoer to pursue illegitimate or even illegal interests or benefits.

LC Securities Co., Ltd. and Eastern Gold Jade Co., Ltd. v. Yunnan Xinglong Industry Co., Ltd. and Zhao X et al. (Dispute Over a Suretyship Contract: The Scope of the Guarantor’s Liability Should be Limited to the Scope of the Principal Obligation) Aizhen Zhang

1 Rule As provided in Article 21 of the Guarantee Law of the People’s Republic of China (repealed in 2021; hereinafter referred to as Guarantee Law),1 the scope of suretyship liability assumed by the surety shall be firstly subject to the agreement under the suretyship contract. Based on the principle of autonomy of will, the suretyship liability agreed by the parties to the suretyship contract is often greater than the principal obligation. It is common that the parties agree in the suretyship contract that the surety shall not only assume joint and several liability for the principal obligation, but also pay the creditor liquidated damages if the surety fails to assume its suretyship liability as agreed therein. Circumstances in which the security liability is greater than the principal obligation also include the cases that the interest rate agreed under the security liability is higher than the interest rate under the principal obligation, and that the performance period of the security liability is the same as the performance 1 This article is now included as Article 691 of Civil Code of the People’s Republic of China (hereinafter referred to as Civil Code): “The scope of suretyship covers the principal claim and the interest thereof, the liquidated damages, compensatory damages, and the expenses for realizing the claim, unless otherwise agreed by the parties.” Infra.

Collegial Bench for the Second Instance: Aizhen Zhang, Jun He and Chenghui Wang Edited by Ming Li; Translated by Daxuan Zheng and Jialiu Xiao A. Zhang (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_7

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period of the principal obligation. Since the security contract is secondary to the principal contract, the agreements beyond the scope of the principal obligation shall, based on the principle of secondariness, be found void to reduce the security liability to the scope of the principal obligation.

2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): LC Securities Co., Ltd. (hereinafter referred to as LC Securities Company) Appellant (Defendant in the First Instance): Eastern Gold Jade Co., Ltd. (hereinafter referred to as Eastern Gold Jade Company) Appellee (Defendant in the First Instance): Yunnan Xinglong Industry Co., Ltd. (hereinafter referred to as Xinglong Industry Company) Appellee (Defendant in the First Instance): Zhao X Appellee (Defendant in the First Instance): Wang X 2. Procedural History First Instance: No. 38 [2018] Trial, Civ. Division, the Higher People’s Court of Zhejiang Province (dated Apr. 18 of 2019) Second Instance: No. 1353 [2019] Final, Civ. Division, the Supreme People’s Court (dated Oct. 10 of 2019) 3. Cause of Action Dispute over a suretyship contract

3 Essential Facts On December 26, 2016, Eastern Gold Jade Company as the transferor and Kunlun Trust Co., Ltd. (hereinafter referred to as Kunlun Trust Company) as the transferee entered into the Contract for Eastern Gold Jade Company’s Transfer and Repurchase of Right to Return on Specific Equity to and from the Assembled Funds Trust Plan Managed by Kunlun Trust Company for LC Securities Company (hereinafter referred to as Repurchase Contract), agreeing that Eastern Gold Jade Company transfers to Kunlun Trust Company the right to return on 100% of its equity in Shenzhen Eastern Gold Jade Jewelry Industry Co. Ltd. for a price of CNY 300 million (may be paid in installments). Article 5.1 of the Repurchase Contract stipulates that “the Transferor, as the party who transfers the right to return on specific equity, undertakes to repurchase all of the right to return on specific equity within the time limit and at the cost agreed herein”. Article 5.5.2 of the Repurchase Contract stipulates that “the

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Transferor shall, within five (5) days prior to the end of a 2-year period after the expiration (including the early expiration declared by the trustee of the trust plan) of each trust unit or on the date of early repurchase, pay the basic repurchase price in full in installments”. On December 26, 2016, Xinglong Industry Company, Zhao X and Wang X, respectively as sureties, entered into the Suretyship Contract for Eastern Gold Jade Company’s Obligation to the Assembled Funds Trust Plan Managed by Kunlun Trust Company for LC Securities Company (contract number: Kunlun Trust Suretyship No. 16198–01 of 2016; hereinafter referred to as Suretyship Contract No. 1) and Suretyship Contract for Eastern Gold Jade Company’s Obligation to the Assembled Funds Trust Plan Managed by Kunlun Trust Company for LC Securities Company (contract number: Kunlun Trust Suretyship No. 16198–02 of 2016; hereinafter referred to as “Suretyship Contract No. 2”), agreeing that the principal obligation for which the sureties provide security is Eastern Gold Jade Company’s obligation under the Repurchase Contract of paying Kunlun Trust Company the price for repurchasing the right to return on specific equity; the scope of the suretyship liability is all debts owed by Eastern Gold Jade Company to the creditor under the principal contract, including but not limited to the basic repurchase price of all the right to return on specific equity and the exercise fees, capital occupation fees, liquidated damages, compensation, handling fees, insurance premium and other expenses incurred for the conclusion or performance hereof as well as expenses incurred by the creditor for realizing its claim and suretyship rights; the suretyship hereunder is suretyship with joint and several liability and the term of suretyship commences on the effective date of this contract and ends two years after expiration of the performance period of obligations under the principal contract. Article 10.2 of the Suretyship Contracts also stipulates that “(t)he Creditor shall be entitled to take one or more of the following measures in case of default on the part of the Surety … (3) require the Surety to pay liquidated damages in an amount equivalent to 10% of the principal claim…” The Suretyship Contracts also contain agreement on matters such as service. After conclusion of the aforesaid contracts, Kunlun Trust Company, as stipulated in the Repurchase Contract, paid Eastern Gold Jade Company a total of CNY 300 million for transfer of the right to return on specific equity. LC Securities Company as the principal and Kunlun Trust Company as the trustee entered into the Kunlun Trust—LC Securities & Eastern Gold Jade Assembled Funds Trust Contract (hereinafter referred to as Trust Contract). On July 24, 2018, Kunlun Trust Company sent LC Securities Company a notice of distribution of trust property in its original form. Kunlun Trust Company, as agreed in the Trust Contract, decided to terminate the trust plan early on July 24, 2018 and distribute the trust property to LC Securities Company in the form of claims, i.e. Kunlun Trust Company hands the claims corresponding to 299 million trust shares (such trust shares correspond to the transfer price of the right to return on specific equity in an amount of CNY 299 million) under the Repurchase Contract and all rights under the Suretyship Contracts corresponding to the subject claims over to LC Securities Company, and LC Securities Company, on and from July 24, 2018, receives all Kunlun Trust Company’s contractual rights corresponding to the subject claims under the Repurchase Contract, Suretyship Contract No. 1, and Suretyship Contract No. 2. On July 24, 2018, Kunlun

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Trust Company sent Eastern Gold Jade Company a notice of transfer of claims and Xinglong Industry Company, Zhao X, and Wang X a notice of alternation of rights, informing them of the transfer of claims and alternation of rights. Eastern Gold Jade Company, Xinglong Industry Company, Zhao X, and Wang X failed to fulfill the obligation of repurchase and pay the repurchase price at the request of Kunlun Trust Company, therefore LC Securities Company filed a lawsuit with the claims hereunder: (1) Eastern Gold Jade Company pays the basic repurchase price of the right to return on specific equity in an amount of CNY 299 million; (2) Eastern Gold Jade Company pays CNY 12,848,694.44 of periodic exercise fee for the period from December 20, 2017 (inclusive) to June 20, 2018 (exclusive) and CNY 2,188,513.89 of periodic exercise fee for the period from June 20, 2018 (inclusive) to July 20, 2018 (inclusive); (3) Eastern Gold Jade Company pays lump-sum liquidated damages in an amount of CNY 31,395,000; (4) Eastern Gold Jade Company pays liquidated damages for delay in payment of the basic repurchase price; (5) Xinglong Industry Company pays liquidated damages in an provisionally calculated amount of CNY 34,711,215.15 [10% of the sum of Claim (1), Claim (2), Claim (3), Claim (4), and Claim (8)]; (6) Zhao X and Wang X pays liquidated damages in a provisionally calculated amount of CNY 34,711,215.15 [10% of the sum of Claim (1), Claim (2), Claim (3), Claim (4), and Claim (8)]; (7) Xinglong Industry Company, Zhao X, and Wang X assume joint and several liability for Eastern Gold Jade Company’s payment obligations under Claim (1), Claim (2), Claim (3), Claim (4), and Claim (8); (8) Eastern Gold Jade Company, Xinglong Industry Company, Zhao X, and Wang X jointly indemnify LC Securities Company against the following payments made by LC Securities Company: CNY 291,574.21 of premium of property preservation liability insurance, CNY 1.1 million of attorney’s fee, and CNY 2,040 of notarization fee, and jointly bear the legal cost and property preservation fee pertaining to this case. The court of first instance rendered the decision hereunder: (1) Eastern Gold Jade Company shall, within 10 days from the effective date of this decision, pay LC Securities Company the basic repurchase price of the right to return on specific equity in an amount of CNY 299 million; (2) Eastern Gold Jade Company shall, within 10 days from the effective date of this decision, pay LC Securities Company CNY 12,848,694.44 of periodic exercise fee for the period from December 20, 2017 (inclusive) to June 20, 2018 (exclusive) and CNY 2,188,513.89 of periodic exercise fee for the period from June 20, 2018 (inclusive) to July 20, 2018 (inclusive), totally CNY 15,037,208.33; (3) Eastern Gold Jade Company shall, within 10 days from the effective date of this decision, pay LC Securities Company lump-sum liquidated damage in an amount of CNY 31,395,000; (4) Eastern Gold Jade Company shall, within 10 days from the effective date of this decision, pay LC Securities Company liquidated damages for late payment in an amount of CNY 1,679,943.18 (provisionally calculated until July 31, 2018, and to be subsequently calculated until the date of actual payment on the basis of CNY 314,037,208.33 and at an annual rate of 15.75%); (5) Eastern Gold Jade Company shall, within 10 days from the effective date of this decision, compensate LC Securities Company for the loss of attorney’s fee in an amount of CNY 1.1 million, insurance premium in an amount

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of CNY 291,574.21 and notarization fee in an amount of CNY 2,040, totally CNY 1,393,614.21; (6) Xinglong Industry Company, Zhao X, and Wang X shall be jointly and severally liable for the said payment obligations of Eastern Gold Jade Company; (7) the other claims of LC Securities Company are rejected. In respect of the case acceptance fee in the amount of CNY 2,124,473 and the property preservation fee in the amount of CNY 5,000, LC Securities Company shall bear CNY 347,112 thereof and Eastern Gold Jade Company shall bear CNY 1,782,361 thereof and Xinglong Industry Company, Zhao X, and Wang X shall assume joint and several liability for the part borne by Eastern Gold Jade Company. LC Securities Company appealed to the Supreme People’s Court from the decision of first instance with the claims hereunder: (1) The court modifies the decision of first instance, ordering Xinglong Industry Company to pay liquidated damages in a provisionally calculated amount of CNY 35,063,523.87 [10% of the sum of the repurchasing price of the right to return on specific equity in an amount of CNY 299 million, the periodic exercise fee in an amount of CNY 15,037,208.33 for the period from December 20, 2017 (inclusive) to July 20, 2018 (inclusive), lump-sum liquidated damages in an amount of CNY 31,395,000, liquidated damages for late payment in an amount of CNY 1,679,943.18, and costs for realizing claims in an amount of CNY 3,523,087.21]. (2) The court modifies the decision of first instance, ordering Zhao X and Wang X to pay liquidated damages in an provisionally calculated amount of CNY 35,063,523.87 [10% of the sum of the repurchasing price of the right to return on specific equity in an amount of CNY 299 million, the periodic exercise fee in an amount of CNY 15,037,208.33 for the period from December 20, 2017 (inclusive) to July 20, 2018 (inclusive), the lump-sum liquidated damages in an amount of CNY 31,395,000, liquidated damages for late payment in an amount of CNY 1,679,943.18, and expenses for realizing claims in an amount of CNY 3,523,087.21]. (3) The court modifies the decision of first instance, ordering Eastern Gold Jade Company to bear the case acceptance fee and property preservation fee of first instance in an amount of CNY 347,112; and Xinglong Industry Company, Zhao X, and Wang X to be jointly and severally liable for the said amount. (4) The court orders Eastern Gold Jade Company, Xinglong Industry Company, Zhao X, and Wang X to jointly bear the case acceptance fee, traveling expenses, announcement fee, and postage fee of second instance.

4 Issue Whether Xinglong Industry Company, Zhao X, and Wang X shall pay LC Securities Company liquidated damages as stipulated in the Suretyship Contracts in addition to the principal obligation pertaining to this case, i.e. whether a security provider may bear security liability to an extent greater than the principal obligation.

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5 Holding Upon Review, the Supreme People’s Court rendered the decision hereunder: first, Article 21 of the Guarantee Law provides that “(T)he scope of suretyship covers the principal claim and the interest thereof, the liquidated damages, compensatory damages, and the expenses for realizing the claim, unless otherwise agreed in the suretyship contract. Where the parties fail to agree on the scope of suretyship or relevant agreement is unclear, the surety shall be liable for each and every part of the obligation.” In accordance with this provision, the scope of suretyship liability assumed by the surety shall, following the principle of autonomy of will, firstly be subject to the agreement under the suretyship contract. However, the suretyship contract is secondary to the principal contract and the suretyship liability is secondary to the principal obligation, therefore the scope of suretyship liability may not be larger than the scope of the principal obligation based on the unchangeable secondariness of suretyship. Where the scope of suretyship liability agreed by the parties is greater than the principal obligation, the scope of suretyship liability shall be reduced to the scope of the principal obligation. Second, Article 5 of the Contract Law of the People’s Republic of China (repealed in 2021; hereinafter referred to as Contract Law) provides that “(T)he parties to a contract shall follow the principle of fairness in determining their rights and obligations.”2 If the liquidated damages clause agreed upon by LC Securities Company, Xinglong Industry Company, Zhao X, and Wang X were sustained by the court, LC Securities Company would obtain from the sureties considerable additional benefits that cannot be obtained from the principal debtor. Article 31 of the Guarantee Law provides that “After assuming the suretyship liability, the surety shall be entitled to indemnification against the debtor.” The liquidated damages specifically agreed upon by the creditor and the sureties in the suretyship contracts are only on the sureties and not a part of the principal obligation, therefore the sureties, after assuming the liability under the suretyship contracts, will not be entitled to indemnification against the principal debtor and this will cause serious imbalance between the interests of the parties. Therefore, the decision of first instance which, based on the principle of secondariness of security and in consideration of the fact that Xinglong Industry Company, Zhao X, and Wang X have assumed joint and several liability for the lump-sum liquidated damages and liquidated damages for late payment to be paid by Eastern Gold Jade Company, rejected LC Securities Company’s claim that Xinglong Industry Company, Zhao X, and Wang X pay liquidated damages in an amount of CNY 34,711,215.15 is not improper with respect to application of law. In view of the above, the appeal by LC Securities Company does not stand and thus shall be dismissed; the decision of first instance is correct in application of law and therefore shall be affirmed. Accordingly, this court dismiss the appeal and affirm the decision of first instance. 2

This article is now included as Article 6 of Civil Code: “When conducting a civil activity, a person of the civil law shall, in compliance with the principle of fairness, reasonably establish the rights and obligations of each party.” Infra.

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6 Comment on Rule 1. The jurisprudence basis for finding the “agreement on suretyship liability beyond the principal obligation” void Article 21 of the Guarantee Law provides that “The scope of suretyship covers the principal claim and the interest thereof, the liquidated damages, compensatory damages, and the expenses for realizing the claim, unless otherwise agreed in the suretyship contract. Where the parties fail to agree on the scope of suretyship or relevant agreement is unclear, the surety shall be liable for each and every part of the obligation.” In accordance with this provision, the scope of suretyship liability assumed by the surety shall firstly be subject to the agreement under the suretyship contract. In trial practice, the parties concerned, based on the principle of autonomy of will, often agree on suretyship liability greater than the principal obligation. Pursuant to the provision of Article 5 of the Guarantee Law that “(A) security contract is a contract secondary to the principal contract and shall be void if the principal contract is void”,3 security features secondariness and the security contract is secondary to the principal contract. Although agreement on the scope of suretyship liability under the suretyship contract follows the principle of autonomy of will, the suretyship contract is secondary to the principal contract and suretyship liability is secondary to the principal obligation, therefore the scope of suretyship liability may not be larger than the scope of the principal obligation based on the principle of secondariness. Where the scope of suretyship liability agreed upon by the parties is greater than the principal obligation, the agreements greater than the principal obligation shall, for violation of secondariness—an essential attribute of security, be found void to reduce the suretyship liability to the scope of the principal obligation. Article 5 of the Contract Law provides that “(T)he parties to a contract shall follow the principle of fairness in determining their rights and obligations.” If the liquidated damages clause agreed upon by the creditor—LC Securities Company and the sureties—Xinglong Industry Company, Zhao X, and Wang X were sustained by the court, LC Securities Company would obtain from the sureties excessive benefits that cannot be obtained from the principal debtor. Security is created with the view of ensuring realization of the principal claim, therefore allowing the creditor to obtain a benefit greater than the principal claim by virtue of the security contract is contrary to the purpose of creating security. Article 31 of the Guarantee Law provides that “(A)fter assuming the suretyship liability, the surety shall be entitled to indemnification against the debtor.” The liquidated damages specifically agreed upon 3

This article is now included as Article 388 of the Civil Code: “To create a security interest, a security contract shall be entered into in accordance with the provisions of this Code and other laws. Security contracts include mortgage contracts, pledge contracts, and other contracts with a function of security. A security contract is a contract secondary to the principal contract under which the principal claims and obligations arise. Where the principal contract is void, the security contract is also void, unless otherwise provided by law. Where a security contract is determined to be void, if the debtor, the security provider, and the creditor are at fault, they shall each bear civil liability in proportion to their fault”.

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by the creditor and the sureties in the suretyship contracts are only on the sureties and not a part of the principal obligation, therefore the sureties, after assuming the suretyship liability, will not be entitled to indemnification against the principal debtor. This results in seriously imbalanced contractual rights and obligations of the parties and constitutes de facto circumvention of mandatory provisions of the law on interest ceiling. Paragraph 2 of Article 1534 of the General Rules of the Civil Law of the People’s Republic of China provides that “(A) civil juristic act that offends the public order and good morals is void.” LC Securities Company’s act of obtaining from the sureties benefits beyond the principal obligation constitutes an act of excessive security and offends the public order and good morals and therefore shall be void.5 2. Whether a people’s court may, by virtue of its functions and powers, find the part of security liability that is greater than the principal obligation void Although the “agreement on suretyship liability beyond the principal obligation” is void for violating the secondariness of security and offending the public order and good morals, the agreement is after all the sureties’ true manifestation of intent and only affects the personal interests of the sureties. In the absence of a plea by the surety, it is improper for a people’s court to take the initiative to review and find the part of security liability that exceeds the principal obligation void, unless the surety claims so.

4

This article is now included as Article 153 of Civil Code. Infra. A comparative investigation indicates that countries or regions of civil law have made it explicit that the scope of suretyship liability shall be limited to the scope of the principal obligation. For instance, Article 2013 of French Civil Code provides that “The scope of suretyship may not exceed the debtor’s obligation or contain conditions heavier than that of the debtor’s obligation.” Suretyship in excess of the debtor’s obligation or suretyship with conditions heavier than that of the debtor’s obligation is valid provided that it is reduced to the limit of the principal obligation. Article 448 of Japanese Civil Code provides that “The burden on the surety shall, if it is heavier than the principal obligation in terms of the subject matter or form, be reduced to the limit of the principal obligation.” The comparison shows that in countries or regions of civil law, the scope of suretyship liability is limited to the principal obligation and the part in excess of the principal obligation is not deemed void but reduced to the limit of the principal obligation. Although there is no provision in this regard in the Guarantee Law and relevant judicial interpretations, the above-mentioned provisions, given the secondariness of suretyship, are reasonable and should be absorbed by our legislative and judicial practice. 5

Bank of Dalian Co., Ltd. v. Dalian Branch of China Railway Modern Logistics Technology Co., Ltd. and Jinzhou Zuoyuan Sugar Foods Co., Ltd. et al. (Dispute Over Loan Contracts: Change of Possession Cannot Create a Chattel Pledge) Weiming Ji

1 Rule The pledge is created upon the delivery of the pledged property by the pledgor. The delivery of chattel (movable property) required for the establishment of the pledge shall be limited to the pledgee’s actual domination and control of the pledged property. If the parties deliver the chattel (movable property) in possession, the pledge cannot be created if it does not meet the delivery standard required for the creation of the pledge. If the parties agree that the trustee to perform the supervisory obligations of the pledges, the supervisory agreement is deemed the commission contract. The regulator shall follow the principle of fault liability. If it has performed its duty and obligations as agreed without fault, it shall not bear the liability for the damage and loss of the supervised object.

Collegial Bench for the Second Instance: Chunyu Song, Xiaohan Yu and Weiming Ji Edited by Ming Li; Translated by Daxuan Zheng and Jialiu Xiao W. Ji (B) The Second Circuit Court of the Supreme People’s Court of the People’s Republic of China, Shenyang, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_8

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2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): Bank of Dalian Co., Ltd. (hereinafter referred to as Bank of Dalian) Appellee (Defendant in the First Instance): Dalian Branch of China Railway Modern Logistics Technology Co., Ltd. (hereinafter referred to as Dalian Branch of China Railway Logistics Technology Company) Appellee (Defendant in the First Instance): Jinzhou Zuoyuan Sugar Foods Co., Ltd. (hereinafter referred to as Jinzhou Zuoyuan Sugar Company) Appellee (Defendant in the First Instance): Zuoyuan Group Co., Ltd. (hereinafter referred to as Zuoyuan Group) Appellee (Defendant in the First Instance): Dalian Xinyuanhua Food Processing Co., Ltd. (hereinafter referred to as Xinyuanhua Food Company) Appellee (Defendant in the First Instance): Wang X Appellee (Defendant in the First Instance): Liu X Appellee (Defendant in the First Instance): Song X 2. Procedural History First Instance: No. 42 [2017] Trial, Civ. Division, the Higher People’s Court of Liaoning Province (dated Jul. 23 of 2018) Second Instance: No. 331 [2019] Final, Civ. Division, the Supreme People’s Court (dated Sep. 23 of 2019) 3. Cause of Action Dispute over loan contracts

3 Essential Facts On July 10, 2014, Bank of Dalian and Jinzhou Zuoyuan Sugar Company entered into a comprehensive credit agreement, a contract for import bill advance, and a maximum pledge contract, agreeing that Jinzhou Zuoyuan Sugar Company, by using the sugar stored in its warehouses as the pledged property, raises a loan from Bank of Dalian. Zuoyuan Group, Xinyuanhua Food Company, Wang X, Liu X, and Song X as sureties respectively entered into a suretyship contract with Bank of Dalian for the loan raised by Jinzhou Zuoyuan Sugar Company. On July 16, 2014, Bank of Dalian, Dalian Zuoyuan Sugar Company (the parent company that owns 100% of Jinzhou Zuoyuan Sugar Company), and Dalian Branch of China Railway Logistics Technology Company entered into an agreement of custody for chattel (later the three parties and Jinzhou Zuoyuan Sugar Company entered into a supplemental agreement to the agreement of custody for chattel), agreeing that Bank of Dalian entrusts Dalian Branch of China Railway Logistics Technology Company

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with custody for the pledged property provided by Jinzhou Zuoyuan Sugar Company; and that Dalian Branch of China Railway Logistics Technology Company assumes liability of compensation by replenishment in case of any actual loss such as shortage of or damage to the property in custody due to Dalian Branch of China Railway Logistics Technology Company’s fault. The pledged property was stored in the warehouses of Jinzhou Zuoyuan Sugar Company. After the conclusion of the agreement of custody for chattel, Dalian Branch of China Railway Logistics Technology Company, following the instruction of Bank of Dalian, entered into a warehouse lease agreement with Jinzhou Zuoyuan Sugar Company at a rent of CNY 1. The property in custody were factually still in the warehouses of Jinzhou Zuoyuan Sugar Company and the possession thereof was not transferred. Dalian Branch of China Railway Logistics Technology Company dispatched its staffs to provide custody for the pledged property at the warehouses of Jinzhou Zuoyuan Sugar Company. During the custody, Jinzhou Zuoyuan Sugar Company successively refused to cooperate with the custody, transferred the pledged property, forbade inventory count by the stewards, and attempted to drive away the stewards. Dalian Branch of China Railway Logistics Technology Company, by taking measures such as immediately notifying Bank of Dalian through several telephone calls and written correspondence, instructing the stewards to carry out 24-h monitoring, sending a cease-and-desist letter to Jinzhou Zuoyuan Sugar Company, alerting the competent public security authority twice, timely and fully fulfilled its contractual obligations. Jinzhou Zuoyuan Sugar Company was obliged to repay the loan in an amount of CNY99,980,126.55 and USD 15.25 million and the interest thereon. Bank of Dalian, being unable to get the repayment from Jinzhou Zuoyuan Sugar Company, filed a lawsuit with a people’s court, requesting repayment of the principal and interest of the loan and the sureties’ assumption of their suretyship liability; exercise of the pledge and Dalian Branch of China Railway Logistics Technology Company’s assumption of liability of compensation by replenishment. The court of first instance rendered the decision hereunder: (1) Jinzhou Zuoyuan Sugar Company, within 10 days from the effective date of this decision, repays Bank of Dalian the principal of the advance made by Bank of Dalian under an acceptance draft in an amount of CNY 99,980,126.55 and the interest incurred until the date of actual repayment (including the interest incurred before January 20, 2017 in an amount of CNY 27,494,524.85 and the interest incurred from January 21, 2017 to the date of actual payment at the contractual rate of five out of ten thousand per day); (2) Jinzhou Zuoyuan Sugar Company, within 10 days from the effective date of this decision, repays Bank of Dalian the principal of the bill advance made by Bank of Dalian in an amount of USD 15.25 million and the interest thereon (including the interest incurred from January 7 to July 6, 2015 at the contractual rate of 4.6574% per annum; and the interest incurred from July 7, 2015 to the date of actual payment at a rate of 150% of 4.6574% per annum); (3) Jinzhou Zuoyuan Sugar Company, within 10 days from the effective date of this decision, pays Bank of Dalian attorney fee in an amount of CNY 300,000; (4) Zuoyuan Group and Xinyuanhua Food Company respectively assume joint and several suretyship liability for items (1) and (2) of this

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decision within the scope of the contractual maximum suretyship in an amount of CNY 100 million; (5) Wang X, Liu X, and Song X respectively assume joint and several suretyship liability for items (1) and (2) of this decision within the scope of the contractual maximum suretyship in an amount of CNY 200 million; (6) Zuoyuan Group, Xinyuanhua Food Company, Wang X, Liu X, and Song X assume joint and several suretyship liability for the repayment obligation under item (3) of this decision; (7) Zuoyuan Group, Xinyuanhua Food Company, Wang X, Liu X, and Song X, after assuming suretyship liability, may claim compensation from Jinzhou Zuoyuan Sugar Company; (8) the other claims of Bank of Dalian are rejected. The case acceptance fee in an amount of CNY 1,275,746.23 and the property preservation fee in an amount of CNY 5,000 shall be jointly borne by Jinzhou Zuoyuan Sugar Company, Zuoyuan Group, Xinyuanhua Food Company, Wang X, Liu X, and Song X. Bank of Dalian appealed the decision of first instance, requesting the court to modify item (8) of the decision of first instance and order that Bank of Dalian be awarded the priority to compensation in respect of the pledged property provided by Jinzhou Zuoyuan Sugar Company, namely priority to the disposal price of the pledged property within the scope of the contractual security liability; Dalian Branch of China Railway Logistics Technology Company, within the scope of the loss of the pledged property, be liable to Bank of Dalian for compensation by replenishment and that costs of the lawsuits in the first and second instance be borne by Jinzhou Zuoyuan Sugar Company, Xinyuanhua Food Company, Zuoyuan Group, Wang X, Liu X, Song X and Dalian Branch of China Railway Logistics Technology Company. Jinzhou Zuoyuan Sugar Company and Xinyuanhua Food Company, in response to the appeal of Bank of Dalian, answered that the fact-finding and application of law by the decision of first instance were clear and correct and therefore the appeal of Bank of Dalian should be dismissed.

4 Issue Under the condition that the pledged property was still under the control of the pledgor, Jinzhou Zuoyuan Sugar Company, and the possession thereof was not transferred, Dalian Branch of China Railway Logistics Technology Company, following the instruction of Bank of Dalian, entered into a nominal warehouse lease agreement with the pledgor at the rent of CNY 1 to provide custody for the pledged property. Whether such delivery of the pledged property meets the criterion of delivery required for creation of a pledge and whether the pledge alleged by Bank of Dalian has been legally created.

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5 Holding Upon review, the Supreme People’s Court rendered the decision hereunder: 1. On whether the pledge has been legally created Bank of Dalian contends in its appeal that the pledged property in question were tens of thousands of tons of sugar products that do not meet the condition for actual delivery and that the delivery was made by directive, i.e. by entrusting Dalian Branch of China Railway Logistics Technology Company with custody for the pledged property in question. Specifically speaking, the delivery was completed since Dalian Branch of China Railway Logistics Technology Company, after being advised of Bank of Dalian and Jinzhou Zuoyuan Sugar Company’s intention of creating a pledge, leased the warehouses where the pledged property was located (warehouses owned by Jinzhou Zuoyuan Sugar Company) and made an inventory of the pledged property. Bank of Dalian gained indirect control and possession of the pledged property and such directive delivery made it possible for Dalian Branch of China Railway Logistics Technology Company to achieve actual custody for and control of the pledged property, therefore the pledged property was delivered and the pledge has been legally created. Article 212 of the Property Law of the People’s Republic of China (repealed in 2021; hereinafter referred to as Property Law) provides that “(A) pledge is created upon delivery of the pledged property by the pledgor.”1 Delivery of the pledged property is required for creation of a pledge. In creation of a pledge, the pledged property is actually delivered by the pledgor or by a third party instead of the pledgor or the possession thereof is legally taken by the pledgee in advance. In either case, the pledged property is in essence assigned through a statutory action of performance for effective control by the pledgee, therefore the premise of judging whether the pledge in question has been created by law is to examine whether the pledged property in question has been delivered by law and in the effective control of the pledgee. The pledged property in question were stored in the warehouses of the pledgor, Jinzhou Zuoyuan Sugar Company, and Bank of Dalian, by entering into the tripartite agreement of custody for chattel, appointed Dalian Branch of China Railway Logistics Technology Company to lease the warehouses of Jinzhou Zuoyuan Sugar Company at a symbolic rent of only CNY 1 to provide custody for the pledged property. Bank of Dalian contends that the directive delivery was achieved through the above-mentioned actions, in particular through the delivery of relevant materials such as agreements, lists, reports, and ledgers. However, given the fact that the pledgor Jinzhou Zuoyuan Sugar Company did not transfer the pledged property for creation of pledge, forbade the custodian to enter the warehouses and even expelled the custodian, the delivery was only symbolic and the pledged property in question were still under the actual control and at the disposal of Jinzhou Zuoyuan Sugar Company. It was a substantive action of possession reformulation and did not result in effective direct or indirect control by Bank of Dalian. As a result of the action of possession 1

This article is now included as Article 429 of the Civil Code.

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reformulation, the pledgor Jinzhou Zuoyuan Sugar Company continued its possession and control of the pledged property, which conflicts with the pledgee’s request of retaining possession of the pledged property. In this case, under the circumstance that the pledged property was still in the actual possession and control of the pledgor, Bank of Dalian as the pledgee failed to actively fulfill its obligations to create the pledge and failed to achieve substantive control and possession of the pledged property in question, therefore the pledge in question was not legally created since the delivery of the pledged property in question does not meet the formal requirements of law on delivery of chattel and creation of pledge. 2. On whether Dalian Branch of China Railway Logistics Technology Company shall be liable for compensation by replenishment Bank of Dalian contends in its appeal that Dalian Branch of China Railway Logistics Technology Company should assume liability of compensation by replenishment for two reasons: (1) Dalian Branch of China Railway Logistics Technology Company’s failure to fulfill its obligations of custody constitutes a breach of contract and liability for breach of contract is not based on the premise of fault; (2) if the factor of fault shall be considered, Dalian Branch of China Railway Logistics Technology Company was at fault when performing the agreement of custody for chattel since it fails to prevent transfer of the pledged property by taking reinforcement measures such as deploying additional staffs and reinstalling warehouse keys. With respect to reason (1): Article 396 of the Contract Law of the People’s Republic of China (repealed in 2021; hereinafter referred to as Contract Law) provides that “(A)n entrustment contract is a contract under which a principal and an agent agree that the agent shall handle the matters for the principal.”2 In this case, the agreement of custody for chattel, which primarily involves Bank of Dalian’s general entrustment that Dalian Branch of China Railway Logistics Technology Company handles the custody for the pledged property in question, is an entrustment contract. Article 406 of the Contract Law provides that “(U)nder a non-gratuitous entrustment contract, where losses are caused to the principal due to the agent’s fault, the principal may request compensation.”3 Meanwhile, Subparagraph 4 of Article 12 of the agreement of custody for chattel stipulates that “(I)n the custody mode of dynamic pledge, if, due to Party C’s fault, any discrepancy between the minimum quantity/ value of the goods in the custody of Party C and the minimum quantity/value set forth in the notice of custody or the latest notice of minimum requirement for the property in custody arises, Party C shall be liable for compensation by replenishing the part wrongfully withdrawn due to Party C’s breach of this agreement or covering the shortage of the minimum quantity/value of the property in custody.” Therefore, 2

This article is now included as Article 919 of the Civil Code. This article is now included as Article 929 of the Civil Code: “Under a non-gratuitous entrustment contract, where losses are caused to the principal due to the agent’s fault, the principal may request compensation. Under a gratuitous entrustment contract, where losses are caused to the principal by the agent’s intentional act or by his gross negligence, the principal may request for compensation. Where an agent acts ultra vires thus causing losses to the principal, the agent shall make compensation.” Infra.

3

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subject to the said legal provision and the agreement of custody for chattel, Dalian Branch of China Railway Logistics Technology Company shall assume liability for fault (if any) in providing custody for the goods in question. With respect to reason (2): In this case, Dalian Branch of China Railway Logistics Technology Company, after becoming aware of the situations during custody that the goods in custody were ex-warehoused by force and that Jinzhou Zuoyuan Sugar Company refused to cooperate with the custody, forbade inventory count by the stewards, and attempted to drive away the stewards, notified Bank of Dalian in a timely manner by telephone and by successively issuing the letter for notification of risks and letter for notification of obstruction of custody; sent Jinzhou Zuoyuan Sugar Company several letters that demand Jinzhou Zuoyuan Sugar Company to cease its dangerous behaviors or eliminate its obstruction of custody, and twice took emergency measures such as reporting Jinzhou Zuoyuan Sugar Company’s ex-warehouse of goods by force to the competent public security authority. The above-mentioned actions indicate that Dalian Branch of China Railway Logistics Technology Company, without actual control and possession of the pledged property and warehouses storing the pledged property, has done its best to actively perform its custody obligations. Although Bank of Dalian contends that in addition to the aforesaid actions of custody Dalian Branch of China Railway Logistics Technology Company should take other measures such as dispatching additional staffs, preventing transfer of the pledged property by more effective means and reinstalling the warehouse keys, the pledged property in question were always in the actual control and possession of Jinzhou Zuoyuan Sugar Company and Dalian Branch of China Railway Logistics Technology Company has exhausted its custody capacity and measures by law by fulfilling its obligations such as notifying Bank of Dalian by letter and reporting the incident to the police. In addition, the measures suggested by Bank of Dalian are not custody matters or custody obligations under the agreement of custody for chattel between Bank of Dalian and Dalian Branch of China Railway Logistics Technology Company. According to the above reasoning regarding reasons (1) and (2), Bank of Dalian’s allegation that Dalian Branch of China Railway Logistics Technology Company was at fault when fulfilling its custody obligations is not supported by facts and law. Therefore, it was not improper for the court of first instance to reject Bank of Dalian’s claim that Dalian Branch of China Railway Logistics Technology Company assumes liability of compensation by replenishment. In view of the above, this court of second instance finds that the court of first instance applied the law correctly and therefore dismiss the appeal and affirm the decision of first instance.

6 Comment on Rule In disputes over loan contracts, it is common in judicial practice that small and medium-sized enterprises apply for loans from banks by pledging movable properties of raw materials, semi-finished products, and finished products. Such pledged

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properties are usually in large quantity and feature high liquidity and banks lack specialized institutions to provide custody for such pledged properties, therefore banks often entrust professional custody companies with custody for the pledged properties. In the case where the custody company is capable of controlling the pledged property, there are relatively fewer disputes. However in the case where the bank, for lack of awareness of relevant legal provisions, agrees that the pledgor retains control over the pledged property instead of transferring the possession thereof and instructs the custodian to enter into a symbolic lease contract with the pledgor, especially when the custodian fails to achieve factual control of the pledged property and the pledgor disposes of the pledged property in violation of the pledge contract, severe disputes over whether the pledge has been legally created and the scope of the custodian’s liability may easily arise. In this regard, a people’s court needs to precisely determine the legal relation, the status of rights, and the scope of liability. 1. On whether a pledge in chattel has been created In China, the law provides a variety of methods of delivering chattel including both actual delivery and artificial delivery methods such as directive delivery and possession reformulation.4 However in creation of pledge in chattel, the requirements for methods of delivery are more stringent. Not all methods of delivery are appropriate and the bottom line is that the pledgee’s actual control over the pledged property is required in the performance of the aforesaid methods of delivery. Under the circumstance that both parties adopted the delivery method of possession reformulation, the pledged property was still under the control of the pledgor and the effective control by the pledgee was never realized. The essential basis for creation of the pledge, i.e. the pledgee’s effective control and disposal of the pledged property, never existed. In particular, the creation of a pledge is a statutory procedure during which obligations of both the pledgor and the pledgee arise. The custodian, following the instruction of the pledgee, entered into a lease contract with the pledgor with the consideration of a rent of CNY 1 to lease the pledgor’s premises to provide custody for the pledged property, therefore the pledgor’s delivery is merely symbolic. In essence, the pledgor could still dispose of the pledged property at will, which conflicts with the legal structure of pledge and does not meet the requirement for elements in creating a 4

Article 26 of the Property Law provides that “Where a third person is in possession of a movable property by law before a real right in the movable property is created or transferred, the person obligated to deliver the movable property may transfer his right to restitution against the third person as substitute for delivery.” Article 27 of the Property Law provides that “Where, upon transfer of a real right in movable property, both parties agree that the transferor continues to be in possession of the movable property, the real right in the movable property becomes effective at the time when such an agreement enters into effect.” Article 26 of the Property Law is now included as Article 227 of Civil Code: “Where a third person is in possession of a movable property before a real right in the movable property is created or transferred, the person obligated to deliver the movable property may transfer his right to restitution against the third person as substitute for delivery.” Article 27 of the Property Law is now included as Article 228 of Civil Code: “Where, upon transfer of a real right in movable property, the parties agree that the transferor continues to be in possession of the movable property, the real right in the movable property becomes effective at the time when such an agreement enters into effect.”

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pledge. In this case, Bank of Dalian alleges that the pledged property were delivered by directive, whereas the pledged property were still in the control of the pledgor instead of the third party. Essentially, the parties adopted the delivery method of possession reformulation that does not meet the requirements for creation of pledge, therefore the pledge was not legally created. 2. On whether the custodian assumes custody liability In custody for the pledged property, the pledgee entered into the custody contract with the custodian to entrust the custodian with custody for the pledged property, therefore the custody contract shall be found to be an entrustment contract. Whether on the basis of legal provisions5 pertaining to entrustment contracts or the agreement under the custody contract, the custodian’s assumption of compensation liability requires fault in accordance with the principle of fault liability. Where the custodian has fulfilled its obligations pursuant to the contract with no fault its part, the custodian does not assume compensation liability for the damage to and loss of the property in custody. Under the circumstance that the pledgee and the pledgor adopted the delivery method of possession reformulation, the custodian had no actual control of the pledged property and fulfilled its obligations such as carrying out real-time custody, notifying the pledgee, ordering the pledgor to cease infringement, and reporting to the competent public security authority for legal remedies, therefore the custodian has done its best to actively perform its custody obligations and is not at fault. The pledgee’s contention is actually that the custodian shall protect the pledged property from loss by any means including coercive measures of violence as long as a custody agreement between the parties exists. However in case of obstacles to the civil-law relation between the parties, the custodian has taken measures to the maximum extent permitted by law, therefore the custodian should not be found faulty and held liable for compensation. 3. Conclusion In creation of pledge in chattel, a pledge shall be created in manners provided by law. Due to lack of knowledge and understanding of relevant legal provisions, the parties, especially the pledgee, ignored the prerequisite requirement of actual control over the pledged property during creation of the pledge and wrongly believed that the control of the pledged property had been achieved by possession reformulation through actions such as entering into a lease contract with a rent of CNY 1, which results in damage to their rights and interests and relevant legal disputes. When hearing and adjudicating on such disputes, a people’s court shall carefully examine whether the pledge has been legally created, whether the custodian is at fault and other basic facts, thereby clarifying the legal relation thereof, defining the liability of the parties and avoiding confusion to unify the criteria of adjudication and properly handle relevant disputes.

5

See Article 406 of the Contract Law.

Sichuan Zhongding Construction Engineering Co., Ltd. v. Zhu X and Natural Resources Bureau of Wulan County (Dispute Over Contract for Building of Construction Project: In a de Facto Juristic Relation, the Actual Builder May Claim Project Payments Directly from the Employer) Jing Zhao

1 Rule The actual builder shall rely on the contract and relevant facts when claiming project payments from the party accepting affiliation. The juristic relation of affiliation is not governed by Article 26 of the Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws for the Trial of Contract Disputes over the Building of Construction Projects (repealed in 2021, hereinafter referred to as Judicial Interpretation of Contracts for Building of Construction Projects). The actual builder, by virtue of the qualification of the party accepting affiliation, entered into the contract for building of construction project with the employer, whereas the party accepting affiliation did not manifest the intention to enter into the contract for construction project with the employer, therefore there is no substantive juristic relation between the party accepting affiliation and the employer. However, the actual builder and the employer entered into a de facto juristic relation in concluding and

Collegial Bench: Jizhong Chen, Dongmin Wang and Haiyan Ou Edited by Ming Li; Translated by Daxuan Zheng and Jialiu Xiao J. Zhao (B) The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_9

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performing the contract for construction project, therefore the actual builder may claim the construction payments directly with the employer.

2 Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Sichuan Zhongding Construction Engineering Co., Ltd. (hereinafter referred to as Zhongding Construction Company) Applicant in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Zhu X Appellee in the Second Instance (Defendant in the First Instance): Natural Resources Bureau of Wulan County (hereinafter referred to as Natural Resources Bureau) 2. Procedural History First Instance: No. 13 [2016] Trial, Civ. Division, the Intermediate People’s Court of Haixi Mongol and Tibetan Autonomous Prefecture, Qinghai Province (dated May 15, 2018) Second Instance: No. 162 [2018] Final, Civ. Division, the Higher People’s Court of Qinghai Province (dated Oct. 17 of 2018) Case Reopening: No. 329 [2019] Reopening, Civ. Division, the Supreme People’s Court (dated Nov. 29 of 2019) 3. Cause of Action Dispute over contract for building of construction project

3 Essential Facts Zhu X entered into an affiliation agreement with Zhongding Construction Company. During the term of affiliation, Zhu X, in the name of Zhongding Construction Company, entered into a contract for construction project with Natural Resources Bureau and thereafter organized personnel to carry out construction. The project in question has been completed and accepted. Later, Zhongding Construction Company sent Natural Resources Bureau a business correspondence containing the statement hereunder: “(O)ur company as the winning bidder was offered by your distinguished bureau the contract of the ‘Land Development (Replenishment of Arable Lands after Expropriation of Arable Lands for Construction) Project of Tuohai Village, Keke Town, Wulan County’ in 2016 and Mr. Zhu X, who is affiliated to our company, is the actual contact and contractor of the project …”.

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On January 31, 2018, Zhu X filed a lawsuit against Zhongding Construction Company and Natural Resources Bureau, requesting the court to give orders such as Zhongding Construction Company make the project payments and Natural Resources Bureau assume joint and several liability within the scope of non-payment. The decisions of first and second instance found that Zhu X and Zhongding Construction Company are in a juristic relation of affiliation and Zhu X is the actual builder of the project in question and, by applying Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects, ordered Zhongding Construction Company to make the project payments to Zhu X and Natural Resources Bureau to assume joint and several liability under the outstanding amount of such project payments. Zhongding Construction Company contends in its petition for case reopening that it was incorrect for the decisions of first and second instance to apply Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects.

4 Issues 1. Whether Zhongding Construction Company, the party accepting affiliation, shall be liable for making the project payments; 2. Whether Zhu X, the actual builder, may claim the project payments directly with Natural Resources Bureau, the employer.

5 Holding The Supreme People’s Court, after reopening the case, held that it was not stipulated in the affiliation agreement between Zhu X and Zhongding Construction Company that Zhongding Construction Company shall make the project payments to Zhu X and Natural Resources Bureau has not made the project payments to Zhongding Construction Company either, therefore Zhu X’s claim that Zhongding Construction Company makes the project payments is not supported by facts. Zhongding Construction Company as the party accepting affiliation is not governed by Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects. Zhu X, by virtue of the qualification of Zhongding Construction Company, entered into the contract for construction project in question with Natural Resources Bureau, whereas Zhongding Construction Company did not manifest the intention to enter into the contract for construction project with Natural Resources Bureau, therefore there is no substantive juristic relation between Zhongding Construction Company and Natural Resources Bureau. Zhu X, however, entered into a de facto juristic relation with Natural Resources Bureau and therefore may claim the project payments

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with Natural Resources Bureau. In view of the above, this court reversed the decisions of first and second instance and decided that Natural Resources Bureau make the project payments to Zhu X.

6 Comment on Rule In the field of construction engineering, it is common to carry out construction in the name of a qualified construction engineering enterprise. In trial practice, views are divided on the issues of how the actual builder claims project payments, whether the actual builder may directly file a lawsuit against the contract-offering party, and whether the party accepting affiliation assumes liability of payment when the contract-offering party fails to make the project payments under the contract for building of construction project concluded by and between the employer and the affiliated party (the actual builder) in the name of the party lending its qualification (the party accepting affiliation). 1. The relation of affiliation is not governed by Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects provides that the actual builder may claim its right with the employer, the party subcontracting the construction project, or the subcontractor in violation of law, whereas Zhongding Construction Company is the party accepting affiliation rather than the contract-offering party, the party subcontracting the construction project, or the subcontractor in violation of law, therefore it was incorrect for the decisions of first and second instance to order Zhongding Construction Company to make the project payments in accordance with Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects. Even if the relation of affiliation were governed by Article 26 of the Judicial Interpretation of Contracts for Building of Construction Projects, the party accepting affiliation and the employer would not assume joint and several liability. Joint and several liability is provided by law or stipulated in contracts. However, it is not provided by law or stipulated in any contract pertaining to this case that the party accepting affiliation and the contractoffering party shall assume joint and several liability, therefore the party accepting affiliation and the contract-offering party do not assume joint and several liability. The contract-offering party and the party accepting affiliation assume independent liability. 2. Allocation of rights and liabilities in the de facto relation of the contract for building of construction project In this case, Zhu X, the actual builder, entered into the contract for construction project with Natural Resources Bureau in the name of Zhongding Construction Company, whereas Zhongding Construction Company did not manifest the intention to enter into the contract for construction project with the employer, therefore

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there is no substantive juristic relation between Zhongding Construction Company and the employer. Pursuant to the provision of Article 146 of the General Rules of the Civil Law of the People’s Republic of China that “(A) civil juristic act performed by a person and another person based on a false expression of intent is void. Where an expression of intent deliberately conceals a civil juristic act, the validity of the concealed act shall be determined in accordance with relevant laws”,1 the act concealed by Zhu X’s conspiracy with Zhongding Construction Company is borrowing Zhongding Construction Company’s qualification to enter into a contract for construction project and the concealed act is invalid since it violates mandatory provisions of law. However, Zhu X the actual builder and Natural Resources Bureau entered into a de facto juristic relation in concluding and performing the contract for construction project, therefore Zhu X may claim the project payments directly with Natural Resources Bureau. In addition, relevant materials and labor services have been materialized into the project, therefore Zhu X may also resort to the provision of Article 58 of the Contract Law of the People’s Republic of China (repealed in 2021) that “(W)here a civil juristic act is void, revoked, or is determined to have no legal effect, the property thus obtained by a person as a result of the act shall be returned, or compensation be made based on the appraised value of the property if it is impossible or meaningless to return the property. The loss thus incurred upon the other party shall be compensated by the party at fault, or, if both parties are at fault, by the parties proportionally”2 to request Natural Resources Bureau to make the project payments. Although it is stipulated in the affiliation agreement that Zhongding Construction Company also assists Zhu X in receiving the project payments, it is not agreed thereunder that Zhongding Construction Company makes the project payments to Zhu X, and Natural Resources Bureau has not made the project payments to Zhongding Construction Company either. If Natural Resources Bureau made the project payments to Zhongding Construction Company, Zhongding Construction Company would be obliged to make the project payments to Zhu X. Based on the above analysis, the actual builder may directly file a lawsuit against the employer to claim the portion of the project payments that the employer fails to make. The actual builder shall rely on contractual agreement when filing a lawsuit against the party accepting affiliation to claim the project payments. Otherwise, the party accepting affiliation only assumes liability of payment within the amount of the project payments it receives from the employer. Where the actual builder only sues the employer, a people’s court may add the party accepting affiliation as a third party of the case to ascertain the merits thereof. Where the actual builder sues both 1

This article is now included as Article 146 of the Civil Code of the People’s Republic of China (hereinafter referred to as Civil Code). Infra. 2 This article is now included as Article 157 of the Civil Code: “(W)here a civil juristic act is void, revoked, or is determined to have no legal effect, the property thus obtained by a person as a result of the act shall be returned, or compensation be made based on the appraised value of the property if it is impossible or meaningless to return the property. Unless otherwise provided by law, the loss thus incurred upon the other party shall be compensated by the party at fault, or, if both parties are at fault, by the parties proportionally.”

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the employer and the party accepting affiliation and requests the two to assume joint liability, a people’s court shall ascertain the amount of the project payments already made by the employer and respectively decide the payment liability of the employer and the party accepting affiliation.

Fujian Tinghu Real Estate Group Co., Ltd. v. Natural Resources Bureau of Xianyou County (Dispute Over a Contract for Transfer of State-Owned Construction Land Use Right: In Case of Breach of Contract Due to Objective Reasons, the Liquidated Damages Clause Shall be Applied Primarily to Cover the Loss) Min Xia

1 Rule Liquidated damages have the function of indemnifying the non-defaulting party against the loss arising out of the other party’s breach of contract, namely the indemnification function, and the function of urging the parties concerned to perform the contract in good faith, namely the punitive function. In case of intentional default by the defaulting party, a people’s court shall make use of the punitive function of liquidated damages to urge the defaulting party to perform the contract as soon as possible. In the event of default due to objective reasons not on the part of the defaulting party, the punitive function of liquidated damages shall not be overemphasized and liquidated damages shall be applied primarily to cover the loss sustained by the nondefaulting party. Where the available evidence indicates that the non-defaulting party suffers no actual loss and the defaulting party is incapable of performance due to objective reasons and it has been actively performing other contractual obligations

Collegial Bench for the Second Instance: Shu He, Feng Xiao and Chenghui Wang Edited by Ming Li; Translated by Daxuan Zheng and Jialiu Xiao M. Xia (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_10

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within its capacity, a people’s court may, in accordance with the principles of fairness and good faith, decide that defaulting party does not pay liquidated damages.

2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): Fujian Tinghu Real Estate Group Co., Ltd. (hereinafter referred to as Tinghu Real Estate Group) Appellee (Defendant in the First Instance): Natural Resources Bureau of Xianyou County (former Land and Resources Bureau of Xianyou County, hereinafter referred to as Land and Resources Bureau) 2. Procedural History First Instance: No. 159 [2017] Trial, Civ. Division, the Higher People’s Court of Fujian Province (dated Feb. 28 of 2019) Second Instance: No. 949 [2019] Final, Civ. Division, the Supreme People’s Court (dated Nov. 19 of 2019) 3. Cause of Action Dispute over a contract for transfer of state-owned construction land use right

3 Essential Facts On October 19, 2012, Land and Resources Bureau as the transferor and Tinghu Real Estate Group as the transferee entered into a contract for transfer of state-owned construction land use right (hereinafter referred to as transfer contract), agreeing that the transferor delivers the transferred parcel to the transferee before October 19, 2015; the first installment of the transfer price in an amount of CNY 229 million shall be paid before November 19, 2012, and the second installment thereof in an amount of CNY 229 million shall be paid before October 19, 2013; the transferee shall pay liquidated damages at the rate of 1‰ of the overdue amount per day from the date of delay in payment, and the transferor shall pay liquidated damages at the rate of 1‰ of the transfer price of the right to use the state-owned construction land paid by the transferee per day from the date of delay in delivery. Subparagraph 2 of the supplementary clause of the transfer contract stipulates that the winning bidder of the transferred parcel also undertakes the construction project of Administration Center of Xianyou County; should the builder delay delivering the construction project, the delivery of the auctioned parcel will be postponed accordingly and the transfer price bears no interest during this period. Subparagraph 9 of the supplementary clause of the transfer contract stipulates that prior to the delivery of the auctioned land,

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Finance Bureau of Xianyou County shall, from the date of payment of the transfer price until the date of delivery of the auctioned land and at the rate of floating at least 30% of the benchmark interest rate of one-year bank loans for the same period, pay interests for the transfer price paid by the winning bidder. On May 8, 2017, Tinghu Real Estate Group signed and executed the completion and handover certificate with CITIC Group et al. On January 3, 2017 and in 2018, People’s Government of Xianyou County applied to the People’s Government of Putian City for guidance in respect of the relocation of People’s Government of Xianyou County. In 2017 and 2018 respectively, People’s Government of Putian City reported the application to People’s Government of Fujian Province. After the approval of the relocation of People’s Government of Xianyou County, Land and Resources Bureau delivered the land in question to Tinghu Real Estate Group on January 27, 2019. Tinghu Real Estate Group, at the rate of 1‰ per day as agreed in the transfer contract, paid Land and Resources Bureau late fees in a total amount of CNY 23.7193 million for delay (from November 19, 2012 to February 10, 2014) in payment of the transfer price. Subject to subparagraph 9 of the supplementary clause of the transfer contract, Finance Bureau of Xianyou County, at the rate of floating at least 30% of the benchmark interest rate of bank loans and for the period from October 23, 2012 to January 27, 2019, paid Tinghu Real Estate Group interests in an amount of CNY 148,262,298.1. Tinghu Real Estate Group mortgaged the land use right in question in February 2014, March 2014, June 2014, and February 2016, respectively. Tinghu Real Estate Group put forward the claims hereunder in its complaint: the court (1) orders Land and Resources Bureau to deliver the land in question to Tinghu Real Estate Group; (2) and orders Land and Resources Bureau to pay Tinghu Real Estate Group liquidated damages calculated on the basis of the transfer price of CNY 398,227,161 already paid by Tinghu Real Estate Group, at the rate of 1‰ per day and for the period from October 20, 2015 to the date of actual delivery of the land in question. The Higher People’s Court of Fujian Province, after hearing, put forward the opinions hereunder: (1) On Tinghu Real Estate Group’s claim that Land and Resources Bureau delivers the land in question. The relocation of People’s Government of Xianyou County had been approved and Land and Resources Bureau delivered the land in question on January 27, 2019. (2) On whether Land and Resources Bureau shall be liable for breach of contract and the amount of liquidated damages. (a) On whether Land and Resources Bureau breaches the contract and when the calculation of liquidated damages commences and ends. Subparagraph 2 of the supplementary clause of the transfer contract stipulates that before Tinghu Real Estate Group’s delivery of the project of Administration Center of Xianyou County, Land and Resources Bureau may postpone the delivery of the land in question. Therefore, the date of delivery of the land in question shall also be postponed to May 8, 2017, i.e. the date of Tinghu Real Estate Group’s delivery of the project, and the liquidated damages for late delivery shall be calculated from the day after the date of delivery of the project, i.e. May 9, 2017, to the date of actual delivery of the land. (b) On the calculation criterion of liquidated damages. In view of the facts that Tinghu Real

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Estate Group fails to prove the loss of expected interests due to downturn of the real estate market and the loss for missing the golden sales cycle due to delayed development; that Tinghu Real Estate Group has been enjoying rights and interests relating to the land use right in dispute since February 2014; that Land and Resources Bureau failed to deliver the land in a timely manner due to the objective reason that the relocation had not been approved and the failure does not constitute a mala fide breach of contract; and that Finance Bureau of Xianyou County has paid the interests calculated up to May 8, 2017, the date of project delivery, to indemnify Tinghu Real Estate Group against the loss due to People’s Government of Xianyou County’s occupation of the funds, this court support Land and Resources Bureau’s contention that the liquidated damages for late delivery of the land in question calculated at the rate of 1‰ of the transfer price paid by Tinghu Real Estate Group as stipulated in the transfer contract is too high and should be adjusted and discretionarily adjust the calculation criterion of liquidated damages to “Land and Resources Bureau calculates the interests on the basis of the transfer price of CNY 398,227,161 paid by Tinghu Real Estate Group, at a rate of floating at least 30% of the benchmark interest rate of one-year bank loans during the same period and for the period from May 9, 2017 to January 27, 2019”. In the meantime, after May 9, 2017, Land and Resources Bureau, at a rate of floating at least 30% of the benchmark interest rate of one-year bank loans during the same period and for the period from May 9, 2017 to January 27, 2019, has paid Tinghu Real Estate Group interests in an amount of CNY 39,347,000.56, which means Land and Resources Bureau has factually fulfilled its obligation of paying the adjusted liquidated damages. Given the fact that Land and Resources Bureau had delivered the land in question and paid the adjusted liquidated damages during the lawsuit, the Higher People’s Court of Fujian Province dismissed Tinghu Real Estate Group’s complaint. No satisfied with the decision of first instance, Tinghu Real Estate Group appealed to the Supreme People’s Court, contending that (1) October 19, 2015, the date of delivery of the land in question stipulated in the transfer contract, should be the date when calculation of the liquidated damages for late delivery commences. (2) Land and Resources Bureau should pay the liquidated damages for late delivery at the rate of 1‰ per day as agreed in the transfer contract.

4 Issue Whether Land and Resources Bureau shall be liable for breach of contract and how much liquidated damages shall be paid.

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5 Holding The Supreme People’s Court, after hearing, rendered the decision hereunder: 1. On whether land and resources bureau’s late delivery of the land in question constitutes a breach of contract Before Tinghu Real Estate Group delivers the project of Administration Center of Xianyou County, Land and Resources Bureau may refuse to deliver the land in question. After May 8, 2017, the date of delivery of the project and also the date set forth in the completion and handover certificate, Land and Resources Bureau was obliged to deliver the land in question, therefore its delay in delivery constitutes a breach of contract. 2. On whether Tinghu Real Estate Group’s claim that Land and Resources Bureau pays liquidated damages for late delivery shall be sustained It is stipulated in the transfer contract that the compensation for losses and damages arising from Land and Resources Bureau’s late delivery of the land in question shall be calculated at the daily rate of 1‰ of the transfer price already paid. Paragraph 2 of Article 1141 of the Contract Law of the People’s Republic of China (repealed in 2021; hereinafter referred to as the Contract Law) provides that “Where the agreed amount of liquidated damages is excessively higher than the losses caused, a party may request the people’s court to reduce it appropriately”. With respect to adjustment of liquidated damages based on a party’s contention that the liquidated damages are too high, Paragraph 1 of Article 29 of the Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of the Contract Law of the People’s Republic of China (II) provides that a people’s court, when adjusting the contractual calculation method of liquidated damages, shall take the actual loss of the non-defaulting party as the basis and take into account factors such as the degree of fault of the defaulting party, the expected interests, and the performance of the contract. (1) On the actual loss of Tinghu Real Estate Group In the trial of first instance, Tinghu Real Estate Group claims that its losses include the capital cost of the transfer price, supporting capital investment during the land transaction, loss of expected interests during downturn of the real estate market, and 1

This article is now included as Article 585 of the Civil Code: “(T)he parties may agree that, upon default by a party, a certain amount of liquidated damages shall be paid to the other party according to the circumstances of the breach, or the parties may agree on the method of calculating the amount of compensation for the losses arising from the breach. Where the agreed amount of liquidated damages is lower than the losses caused, the people’s court or an arbitration institution may, upon request of a party, increase the amount. Where the agreed amount of liquidated damages is excessively higher than the losses caused, the people’s court or an arbitration institution may, upon request of a party, reduce it appropriately. Where the parties agree on the liquidated damages for delayed performance, the breaching party shall continue to perform the obligation after paying the liquidated damages.” Infra.

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the loss for missing the golden sales cycle due to delayed development. Given the fact that Tinghu Real Estate Group fails to prove that the interest rate of the mortgage loans it obtained from Industrial and Commercial Bank of China and other financial institutions is higher than floating at least 30% of the interest rate of bank loans during the same period; fails to specify the supporting work it did and capitals it invested before it received the land in question; and fails to prove a decline of sales prices in the real estate market of Xianyou County during the period of late delivery of land, available evidence does not indicate any loss of Tinghu Real Estate Group due to Land and Resources Bureau’s late delivery of the land in question. (2) On the degree of fault of Land and Resources Bureau Prior to the completion of relocation formalities, People’s Government of Xianyou County could not move out of the land in question and Land and Resources Bureau could not deliver the land in question to Tinghu Real Estate Group either and People’s Government of Xianyou County showed consistent activeness in handling relevant formalities for its relocation. Generally speaking, liquidated damages have the function of indemnifying the non-defaulting party against the loss arising out of the other party’s breach of contract, namely the indemnification function, and the function of urging the parties concerned to perform the contract in good faith, namely the punitive function. In case of intentional default by the defaulting party, a people’s court shall make use of the punitive function of liquidated damages to urge the defaulting party to perform the contract as soon as possible. In the event of default due to objective reasons not on the part of the defaulting party, the punitive function of liquidated damages shall not be overemphasized. In view of the fact that prior to approval of the relocation of People’s Government of Xianyou County, Land and Resources Bureau, subject to law, faced impossibility of performance in respect of the delivery of the land in question rather than subjectively refused to deliver the land in question, the liquidated damages shall be applied primarily to cover the loss of the no-defaulting party in this case. (3) On contract performance and the expected interests As agreed in the transfer contract and the supplementary clause thereto, the main obligations of Land and Resources Bureau include delivery of the land in question and payment of interests on the paid transfer price during the period of non-delivery of the land in question at a rate of floating at least 30% of the loan interest rate for the same period. People’s Government of Xianyou County and Land and Resources Bureau have been actively performing their obligations under the transfer contract within their capacity. In addition, pursuant to Article 37 of the transfer contract, the term of use of the land in question commences on the date of actual delivery of the land in question, therefore late delivery of the land in question does not affect Tinghu Real Estate Group’s income from future development of the land in question. In conclusion, the land in question was once the site of People’s Government of Xianyou County and the relocation of People’s Government of Xianyou County requires approval of higher authorities. Before the approval, Land and Resources Bureau faced obstacles of law in performing the obligation of delivering the land in

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question and did not breach the contract intentionally, therefore in this case the liquidated damages shall be paid primarily to cover the actual loss of Tinghu Real Estate Group. The evidence available in the case does not indicate any loss of Tinghu Real Estate Group due to the late delivery of the land in question and Land and Resources Bureau has been actively performing its obligations under the transfer contract in question within its capacity. In consideration of the above factors and pursuant to the principles of fairness and good faith, under the circumstance that Finance Bureau of Xianyou County has indemnified Tinghu Real Estate Group against the interest loss under the transfer price during the period of late delivery as agreed in the transfer contract, it is improper for a people’s court to decide that Land and Resources Bureau pay liquidated damages. Therefore, it was improper for the decision of first instance to order Land and Resources Bureau to pay liquidated damages, whereas the holding of rejecting Tinghu Real Estate Group’s claim with respect to liquidated damages on the ground that the interests paid by Finance Bureau of Xianyou County had fully offset the liquidated damages is correct and therefore shall be affirmed. In accordance with Paragraph 1(1) of Article 170 of the Civil Procedure Law of the People’s Republic of China (Rev. 2013), this court hereby dismissed the appeal and affirmed the decision made by the court of the first instance.

6 Comment on Rule 1. The amount of compensation for the losses arising from the breach agreed by the parties is a liquidated damages clause Paragraphs 1 and 2 of Article 114 of the Contract Law provides that “(T)he parties may agree that, upon default by a party, a certain amount of liquidated damages shall be paid to the other party according to the circumstances of the breach, or the parties may agree on the method of calculating the amount of compensation for the losses arising from the breach. Where the agreed amount of liquidated damages is lower than the losses caused, a party may request the people’s court or an arbitration institution to increase the amount. Where the agreed amount of liquidated damages is excessively higher than the losses caused, a party may request the people’s court or an arbitration institution to reduce it appropriately.” Literally, Paragraph 1 of Article 114 distinguishes between “a certain amount of liquidated damages” and “the method of calculating the amount of compensation for the losses arising from the breach”; Paragraph 2 provides that a party may request the people’s court or an arbitration institution to adjust the “the agreed amount of liquidated damages”. Some argue that “a certain amount of liquidated damages” and “the method of calculating the amount of compensation for the losses arising from the breach” are different systems since the former is a clause of liquidated damages and the latter is a clause of “agreed compensatory damages” and liquidated damages and “agreed compensatory damages” differ in purpose, whether they can be applied along with compensatory damages, whether they can be adjusted, and the basis for adjustment; where the

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parties have agreed on “the method of calculating the amount of compensation for the losses arising from the breach”, judicial adjustment can only be done by analogical application of Paragraph 2 of this Article.2 Some scholars also believe that although the above-mentioned legal provision differentiates “a certain amount of liquidated damages” from “the method of calculating the amount of compensation for the losses arising from the breach”, they are just two different forms of liquidated damages: the former is liquidated damages in the form of a certain amount and the latter is a liquidated damages clause in the form of a specific method of calculation.3 In our opinion, there is no essential difference between “a certain amount of liquidated damages” and “the method of calculating the amount of compensation for the losses arising from the breach” agreed by the parties for a party’s breach of contract. The Contract Law is based on the principle of contractual justice, therefore it is necessary to make judicial adjustment to both the “certain amount of liquidated damages” agreed by the parties and “the method of calculating the amount of compensation for the losses arising from the breach” agreed by the parties. In addition, waiving the judicial adjustment to the method of calculating the amount of compensation for the losses arising from the breach would facilitate circumvention of the rules of judicial adjustment in trading practice and therefore is definitely inappropriate.4 Therefore, from the perspective of interpretation theories, “the agreed amount of liquidated damages” set forth in Paragraph 2 of Article 114 of the Contract Law shall be deemed to include both “a certain amount of liquidated damages” and “the method of calculating the amount of compensation for the losses arising from the breach”. “The method of calculating the amount of compensation for the losses arising from the breach” agreed by the parties is a liquidated damages clause governed by Paragraph 2 of Article 114 of the Contract Law. The transfer contract between the parties concerned stipulates that where the transferor delays the delivery of the land in question, the transferor shall pay the transferee liquidated damages for each day of delay at the rate of 1‰ of the transfer price already paid by the transferee. This provision is an agreement between the parties regarding the method of calculating the amount of compensation for the losses to Tinghu Real Estate Group due to Land and Resources Bureau’s late delivery of the land in question, namely a liquidated damages clause. If Land and Resources Bureau’s allegation that the agreed amount of liquidated damages under the liquidated damages clause is excessively higher than the losses caused is ascertained, a people’s court shall, in accordance with the rules of discretionary reduction of liquidated damages, adjust the liquidated damages by law. 2. Two functions of liquidated damages clauses Theoretically, liquidated damages include punitive liquidated damages and compensatory liquidated damages. Punitive liquidated damages, also known as liquidated 王利明: 《合同法研究》 (第2卷)(第3版),中国人民大学出版社2015年版,第662–664页。 参见罗昆: 《违约金的性质反思与类型重构——一种功能主义的视角》 ,载 《法商研究》 2015年 第5期。 4 参见姚明斌: 《合同法第114条(约定违约金)评注》 ,载 《法学家》 2017年第5期。 2 3

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damages in an inherent sense, are a sanction for breach of contract agreed by the parties concerned or provided by laws and regulations. Compensatory liquidated damages, also known as prearrangement of the amount of compensatory damages, are the total amount of compensatory damages estimated in advance by the parties.5 It is generally believed that the “liquidated damages” set forth in Article 114 of the Contract Law are compensatory liquidated damages. In judicial practice, even compensatory liquidated damages have two functions: the punitive function, also known as the pressure function, and the indemnification function. (1) Punitive function Through the agreement on liquidated damages, the creditor exerts pressure on the debtor and the debtor thus strives to fulfill its obligations to avoid payment of liquidated damages.6 As the prearrangement of the consequences of non-performance, agreement on liquidated damages makes the debtor more clearly and distinctly aware of the disadvantages that may arise from its default; such foreknowledge and warning of the adverse consequences as the factual effect of the prearrangement of liquidated damages pressure the other party to act by the contract. More importantly, the rules of liquidated damages are different from provisions on general liability for breach of contract and especially the structure of compensatory damages, which allows implementation of the pressure function at the normative level.7 The punitive function of liquidated damages clauses is of great significance in prompting the debtor to perform the contract in good faith and promoting the realization of the contractual purposes. In commercial transactions, the parties concerned usually make appropriate arrangements of the rights and obligations of each party through contracts and full fulfillment of contractual obligations is also important for stabilizing transaction expectations, maintaining transaction security, and promoting the development of transactions. Therefore, although the liquidated damages provided by the Contract Law are compensatory liquidated damages primarily to cover losses, it is still necessary to leave some space for the punitive function of liquidated damages, granting the parties concerned the right to agree on liquidated damages higher than the actual loss within a certain range to make default more costly and reduce the subjective risk of default. (2) Indemnification function The primary function of liquidated damages clauses is that through prior agreement on the amount of compensation for the losses arising from the breach, the creditor may, in case of factual breach of contract, directly claim liquidated damages to cover the loss caused by the breach. Where no agreement has been reached on liquidated damages, the creditor who claims compensatory damages in case of default by the debtor shall prove matters such as the fact of losses or damages and the causal relationship. Such proof is difficult and may easily give rise to disputes, therefore 参见韩世远: 《合同法总论》 (第3版),法律出版社2011年版,第658页。 参见韩世远: 《合同法总论》 (第3版),法律出版社2011年版,第657页。 7 参见姚明斌: 《违约金双重功能论》 ,载 《清华法学》 2016年第5期。 5 6

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the parties concerned usually agree on the amount of compensatory damages or the calculation method thereof in advance to avoid such difficulties and disputes. The biggest advantage of liquidated damages over statutory compensatory damages lies in the simplified rules of proving losses and damages, that is, in the event of default by the debtor, the creditor may directly claim liquidated damages without proving each and every loss or damage it suffered. Where the creditor can reasonably explain its actual loss and the debtor fails to prove that the agreed amount of liquidated damages is excessively higher than the actual loss of the creditor, a people’s court shall support the liquidated damages claimed by the creditor as agreed in the contract. (3) Influence of the degree of fault on the part of a party on the two functions of liquidated damages clauses The punitive and indemnification functions of liquidated damages clauses are of great importance to the maintenance of freedom of contract, contractual justice, and transaction security. Where a party requests adjustment to the liquidated damages on the grounds that the liquidated damages are too high, a people’s court shall, according to the degree of fault of the defaulting party, appropriately apply the punitive and indemnification functions of liquidated damages. (1) The punitive function of liquidated damages shall be strengthened if the breach arises from a party’s willful misconduct or gross negligence The punitive function of liquidated damages means that the liquidated damages can cause psychological pressure to the debtor, prompting the debtor to actively fulfill its obligations and meanwhile, in case of non-performance, serve as penalty for breach of contract. It is an inevitable requirement of freedom of contract that all parties concerned strictly fulfill their contractual obligations after the contract is legally formed and comes into effect. In case of the debtor’s non-performance of contractual obligations due to willful misconduct or gross negligence, the debtor is in a subjective state of pursuing or overlooking the losses arising from the breach, therefore the punitive function of liquidated damages shall be strengthened to urge the debtor to fulfill its obligations. In addition, the debtor, knowing the existence of liquidated damages, chooses not to fulfill its obligations, therefore the debtor shall assume the foreseeable liability for its own actions. To strengthen the punitive function of liquidated damages means to allow the creditor to claim liquidated damages higher than the actual loss within a certain range rather than only protect liquidated damages within the scope of the actual loss. Nevertheless, given the fact that the liquidated damages provided by the Contract Law are basically compensatory liquidated damages in nature, the punitive function of liquidated damages works only to a certain extent. (2) In case of breach by a party due to objective reasons, the indemnification function of liquidated damages shall be upheld The punitive function of liquidated damages is primarily intended for urging the debtor to strictly fulfill its obligations. However, in case of breach by a party due to objective reasons, namely reasons other than the will of the debtor, the debtor is incapable of fulfilling its obligations no matter what kind of pressure is placed on it

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through the liquidated damages, therefore applying the punitive function of liquidated damages is of no use. Meanwhile, given that liability for breach of contract shall be determined following the principle of strict liability, the debtor shall also assume the compensation liability of covering the loss even if it breaches the contract due to objective reasons. In respect of this case, Land and Resources Bureau’s failure to deliver the land in question within the stipulated time constitutes a breach of contract. The reason why Land and Resources Bureau breaches the contract is that the land in question was formerly the compound of People’s Government of Xianyou County. Article 4 of the Provisions of the State Council Concerning Administration of Administrative Divisions8 (1985, repealed in 2019) provides that the relocation of a county-level people’s government shall be reported level by level to the State Council for examination and approval. Article 8 of the Regulations on the Administration of Administrative Divisions promulgated by the State Council in 2018 provides that the relocation of a county-level people’s government shall be reported level by level to the provincial people’s government for examination and approval. Prior to the examination and approval of higher authorities, People’s Government of Xianyou County could not relocate without authorization and thus could not deliver the land in question including the compound of People’s Government of Xianyou County to Tinghu Real Estate Group. In addition, People’s Government of Xianyou County showed consistent activeness in handling the examination and approval formalities for its relocation and therefore is not guilty of gross negligence in respect of the failure to deliver the land in question in a timely manner. Therefore, the liquidated damages claimed by Tinghu Real Estate Group for late delivery of the land in question shall be adjusted based on the principle of covering the actual loss. 4. Affirmation of the actual loss during adjustment of liquidated damages (1) The burden of proving the actual loss The allocation of the burden of proving the actual loss for adjustment of liquidated damages is rather controversial in trial practice. The burden of proving the actual loss contains liabilities in the following levels. First, in general, the creditor is not naturally obliged to prove the actual loss, but it shall clarify the specific content of the claim when claiming liquidated damages, that is, the creditor shall, in front of the people’s court, state the type and approximate amount of the loss caused by the debtor’s breach of contract. Second, pursuant to the general rule of proof that the one who puts forward an allegation bears the burden of proof, the debtor shall provide evidence to prove its allegation that the liquidated damages stipulated in the contract are excessively higher than the actual loss. Lastly, since the creditor has the best knowledge of the loss arising from the breach and is the closest to the evidence of loss, the creditor shall also bear the burden of proving the size of the actual loss after the debtor provides preliminary proof of the actual loss. During trial, with the view 8

Regulations on the Administration of Administrative Divisions came into force on January 1, 2019 and the Provisions of the State Council Concerning Administration of Administrative Divisions issued by the State Council on January 15, 1985 was concurrently repealed.

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of verifying the merits of the case, a people’s court may also resort to the provision of Article 8 of the Guiding Opinions of the Supreme People’s Court on Several Issues Concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation that “(A) people’s court shall correctly allocate the burden of proof. The defaulting party shall bear the burden of proving the allegation that the liquidated damages are too high, while the non-defaulting party shall also provide corresponding evidence if it alleges that the agreed liquidated damages are reasonable”, ordering the parties to prove whether the agreed liquidated damages are too high. In this case, Tinghu Real Estate Group alleges that its actual losses include the capital cost of the transfer price, supporting capital investment during the land transaction, loss of expected interests during downturn of the real estate market, and the loss for missing the golden sales cycle due to delayed development. With respect to the capital cost, according to the proof by Land and Resources Bureau, after Tinghu Real Estate Group’s payment of the transfer price, although the land in question was not delivered, Land and Resources Bureau acquired and provided Tinghu Real Estate Group with a certificate of land use right; Tinghu Real Estate Group obtained funds by mortgaging the certificate of land use right to the bank, therefore the loss of Tinghu Real Estate Group was the interest cost under the bank loan. With regard to the supporting capital investment during the land transaction, Tinghu Real Estate Group fails to specify the supporting work it did and the amount of funds it invested before receiving the land, therefore this allegation of loss is not supported by facts. As for the alleged loss of expected interests during downturn of the real estate market and the loss for missing the golden sales cycle due to delayed development, the allegation of Tinghu Real Estate Group contradicts the overall rise of the price of real estates throughout the country at that time and Tinghu Real Estate Group fails to prove the fall of prices in the real estate market of Xianyou County during the period of late delivery of the land in question, therefore this allegation of loss is not supported by facts either. (2) The benefits gained due to the breach of contract shall be deducted from the actual loss In accordance with the principle of loss-profit counteraction, the benefits gained by the creditor as a result of the debtor’s default shall be deducted from the creditor’ actual loss. Article 31 of the Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Sales Contract Disputes provides that: “(W)here a party to a sales contract gains benefits from default by the other party, a people’s court shall support the defaulting party’s claim that the benefits be deducted from the amount of compensation for losses arising from the default.” The Judicial Interpretation of the Supreme People’s Court on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Sales Contract Disputes makes it clear that the principle of loss-profit counteraction may be applied to sales contracts. In our opinion, the aforesaid principle of loss-profit counteraction may be applied not only to adjustment of liquidated damages under sales contracts, but also to other contractual disputes.

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In this case, of all losses alleged by Tinghu Real Estate Group only the loss due to People’s Government of Xianyou County’s occupation of the transfer price is verified. However, during the period of late delivery of the land in question, Finance Bureau of Xianyou County paid Tinghu Real Estate Group interests for occupation of the funds at the rate of 130% of the benchmark interest rate of one-year bank loans during the same period. If Land and Resources Bureau had delivered the land in question within the stipulated time, Tinghu Real Estate Group would have been entitled to no income of interests after the contract term. In other words, after the stipulated deadline for delivery of the land in question, the interest income became an additional benefit to Tinghu Real Estate Group from Land and Resources Bureau’s late delivery of the land in question and such additional benefit shall be deducted from the actual loss of Tinghu Real Estate Group. Given that Tinghu Real Estate Group fails to prove that the interest rate of the mortgage loans it obtained from financial institutions was higher than 130% of the benchmark interest rate of loans during the same period, this court find that Tinghu Real Estate Group did not suffer any loss due to People’s Government of Xianyou County’s occupation of the transfer price during the period of late delivery of the land in question. Therefore, the evidence available in this case does not prove that Land and Resources Bureau’s late delivery of the land in question resulted in any losses or damages to Tinghu Real Estate Group. 5. Where the defaulting party breaches the contract due to objective reasons and no actual loss is caused to the non-defaulting party, the court may decide that the defaulting party does not pay liquidated damages In case of breach by the defaulting party due to the objective reason of impossibility of performance arising from law, if the defaulting party requests a people’s court to adjust the liquidated damages, the people’s court, due to lack of necessity to urge the debtor to perform its obligations, shall apply the liquidated damages primarily to cover the actual loss of the non-defaulting party rather than emphasize the punitive function of liquidated damages. The land in question was once the site of People’s Government of Xianyou County, and the relocation of People’s Government of Xianyou County requires approval of higher authorities. Prior to the approval, Land and Resources Bureau faced obstacles of law in fulfilling its obligation of delivering the land in question and did not breach the contract intentionally, therefore in this case the liquidated damages shall be paid primarily to cover the actual loss of Tinghu Real Estate Group. However, based on available evidence, this court cannot determine any loss of Tinghu Real Estate Group due to late delivery of the land in question and Land and Resources Bureau has been actively fulfilling its obligations under the transfer contract in question within its capacity. In consideration of the above factors and pursuant to the principles of fairness and good faith, under the circumstance that Finance Bureau of Xianyou County has indemnified Tinghu Real Estate Group against the interest loss under the transfer price during the period of late delivery as agreed in the transfer contract, it is improper for a people’s court to decide that Land and Resources Bureau pay liquidated damages.

Wang X v. Bazhou Sairui Machinery & Equipment Installation Co. Ltd, Cao X (A) (Dispute Over Change of Registration: The Claim of a Resigned Legal Representative of a Company for Registration of the Changing of Legal Representative of the Company Should, Absent Other Remedies, be Accepted by the Court) Xiaofei Liu, Junhong Zou, and Ling Zhang

1 Rule Where the rights and interests of the resigned legal representative of a company are infringed following his resignation by the company’s failure to timely register the change to that effect, the lawsuit filed by such resigned legal representative on the ground of the company’s failure to do so constitutes a civil dispute between equal subjects. The legal representative employed by the company is not a shareholder thereof, standing no chance of relief by means of corporate autonomy, and the lawsuit filed by the same has litigious interest, which should, when satisfying the requirement for litigation and with no any obstacle to litigation, be accepted by the court. The court may not mix the requirements for substantive adjudication with those for litigation with the former as the standard for determining the range of civil cases to be accepted by the court.

Collegial Bench: Xiaofei Liu, Dongming Wang and Xuefeng Ren Edited by Ming Li; Translated by Xiaohua Zhu X. Liu (B) · J. Zou · L. Zhang The Sixth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Xi’an, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_11

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Where only part of the claim meets the requirement for litigation, the court shall accept that part and dismiss the rest.

2 Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Wang X 2. Procedural History First Instance: No. 25 [2019] Trial, Civ. Division, the Intermediate People’s Court of Bayingolin Mongol Autonomous Prefecture, Xinjiang Uyghur Autonomous Region (dated Jun. 24 of 2019) Second Instance: No. 392 [2019] Final, Civ. Division, the Higher People’s Court of Xinjiang Uygur Autonomous Region (dated Sep. 27 of 2020) Petition for Case Reopening: No. 88 [2020] App. Ruling, Civ. Division, the Supreme People’s Court (dated Apr. 29 of 2020) 3. Cause of Action Dispute over change of registration

3 Essential Facts Wang X asserts in his claim that he was employed on March 25, 2011 by Cao X(A), to wit: the shareholder of Bazhou Sairui Machinery & Equipment Installation Co., Ltd. (hereinafter referred to as Sairui Machinery & Equipment Installation Company), for the position of legal representative of the company with the required registration. On March 25, 2011, Sairui Machinery & Equipment Installation Company was converted into a one-person company with corresponding change registration on April 1, 2011. Wang X, upon his knowledge that Cao X(A) frequently got involved in equity disputes, did not actually participate in the company management and resigned on May 30, 2011. On November 15, 2011, Sairui Machinery & Equipment Installation Company designated Cao X(B) through its shareholders’ resolution as its executive director, general manager and legal representative. Both the Company and Cao X(A), however, have not so far registered the change of legal representative. Wang X therefore filed a lawsuit with the court, requesting the court to order Sairui Machinery & Equipment Installation Company and Cao X(A) to fulfill the company’s shareholders’ resolution and register the change to that effect, and to relieve him of liability arising from any action of Sairui Machinery & Equipment Installation Company.

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It is held by the court of first instance that, under the relevant law, the change of the legal representative of a company should be preconditioned not on a court order, but on the resolution of the shareholders’ meeting thereof with the subsequent change registration with the industry and commerce management authority. Wang X’s claim, therefore, exceeds the range of civil cases to be accepted by the court with its inconsistence with the legal requirement for case acceptance, and was dismissed by the court. It is found by the court of second instance that, Wang X filed a lawsuit against Cao X(A) with the court of first instance in 2016, demanding among other claims that the latter immediately register the cancellation of his position as the legal representative of Sairui Machinery & Equipment Installation Company, and the court of first instance dismissed all the claims on March 23, 2017 (No. 84 [2016] Trial, Civ. Division). The court of second instance held that, the claim filed by Wang X requesting the court to determine his lack of connection with any legal action of Sairui Machinery & Equipment Installation Company possesses no litigious interest and has no legal basis, and his claim for registration by Cao X(A) of change of the legal representative of the Company is essentially the same as the one he filed in the first instance for the cancellation registration by the same, constituting a repeated claim. Besides, implementation of the resolution of shareholders’ meeting constitutes an internal managerial issue of the company, falling within the company’s autonomy rather than the province of the court, and should not be enforced by the court. Therefore, the claims by Wang X for the implementation of the shareholders’ resolution and for registration of change of the legal representative of the company should not be accepted by the court. Whereupon, the court ruled to dismiss the appeal and upheld the first instance decision. Wang X applied thereafter to the Supreme People’s Court for case reopening, asserting that, following his resignation from the Company and with no further involvement in its management, his legitimate rights and interests were infringed by the enforcement of the debts of the Company due to the failure of the Company and Cao X(A) to register the change of legal representative thereof, which violates Article 13 of the Company Law and the Reply of the State Administration for Industry and Commerce1 to Questions Relating to the Change of Legal Representative of a Company. The dismissal of the claims by the court of second instance (No. 84 [2016] Trial, Civ. Division) is erroneous in its findings of fact and application of law, and the case should be dismissed on the ground that Cao X(A) is not an eligible subject. Therefore, this case does not constitute a repeated claim, and Wang X enjoys litigious interest, together with required factual and legal basis for his claims which should be accepted and tried. Whereupon, the Supreme People’s Court legally accepted the claims filed by Wang X to reverse the first instance and second instance decisions.

1

As part of China’s 2018 government administration overhaul, the State Administration for Industry and Commerce was merged, under the National Council Institutional Reform Plan of 2018, into the newly created General Administration of Market Supervision and Administration.

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4 Issue Whether the court shall accept the lawsuit filed by Wang X.

5 Holding The Supreme People’s Court holds that, whether the court shall accept the lawsuit filed by Wang X should be determined upon a thorough analysis of his claims and the factual grounds thereof. With respect to whether the claim filed by Wang X should be accepted by the court that Sairui Machinery & Equipment Installation Company and Cao X(A) should be decreed to register the change of the company’s legal representative, Wang X requests, on the ground of his resignation from Sairui Machinery & Equipment Installation Company, the termination of his agency relationship with the Company as the legal representative thereof with necessary change registration, which constitutes a civil dispute between equal subjects, with Sairui Machinery & Equipment Installation Company, on the one hand, unwilling to register the change to that effect, and Wang X, not as a shareholder of the Company, on the other hand, being unable to take advantage of such corporate autonomy approaches as the shareholders’ meeting to render through consultation the resolution concerning such change. If the court does not accept his case, Wang X will be exposed to ongoing legal risks due to the absence of available legal relief. Therefore, Wang X has litigious interest in his claim for change registration by Sairui Machinery & Equipment Installation Company, with the dispute arising between the two parties constituting a civil one between equal subjects, falling within the range of civil actions to be accepted by the court. Besides, in the first instance (No. 84 [2016] Trial, Civ. Division), the defendant was Cao X(A), against whom Wang X claimed, on the ground of the former’s infringement of his right to name, reputation and credit, for cancellation registration by the former of his position as the legal representative of Sairui Machinery & Equipment Installation Company in order to end the infringement. It’s evident that the parties, claims and factual grounds of first instance are different from those of this case. Therefore, this case does not constitute a repeated claim, and the dismissal of Wang X’s claim by the courts of first and second instance are erroneous in their application of law. There is a need to clarify that, whether Wang X’s claim has factual and legal basis and should therefore be supported by the court should only be determined through substantive trial. With respect to whether the claim filed by Wang X should be accepted by the court that he has no nexus with any legal action of Sairui Machinery & Equipment Installation Company, it’s provided under Article 119(3) of the Civil Procedure Law of the People’s Republic of China that, to file a lawsuit, “there must be a specific claim and specific factual basis and grounds.” However, the “any legal action by Sairui Machinery & Equipment Installation Company” as stated in the claim is literally

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indefinite and thus inconsistent with the aforesaid provision. Therefore, the dismissal of Wang X’s claim by the courts of first and second instance is proper and justified. The Supreme People’s Court rules after case reopening to: (1) reverse the civil ruling of the Higher People’s Court of Xinjiang Uygur Autonomous Region (No. 392 [2019] Final, Civ. Division) and the civil ruling of the Intermediate People’s Court of Bayingolin Mongol Autonomous Prefecture, Xinjiang Uygur Autonomous Region (No. 25 [2019] Trial, Civ. Division); (2) order the Intermediate People’s Court of Bayingolin Mongol Autonomous Prefecture, Xinjiang Uygur Autonomous Region to accept the claim filed by Wang X for registration by Sairui Machinery & Equipment Installation Company and Cao X(A) of the change of legal representative; and (3) dismiss the claim by Wang X that he has no nexus with any legal action of Sairui Machinery & Equipment Installation Company.

6 Comment on Rule This case involves the issue of whether a lawsuit filed by a resigned legal representative of a company should be accepted by the court for registration of the change of legal representative, which is of exemplary significance. In judicial practice, a court often encounters the case where a company would enter into an agreement with one of its employees under which the employee is to apply, as the legal representative of the company, for the required industrial and commercial registration on behalf thereof. However, where the company fails to register upon the resignation of the employee the change of legal representative in a timely manner, the legitimate rights and interests of the employee may be infringed in the course of business operation of the company. In this case, for instance, Wang X asserts that he has been concluded in the list of dishonest judgment debtors, with his legitimate rights and interests being infringed accordingly, due to the debt default on the part of Sairui Machinery & Equipment Installation Company. The courts of first instance and second instance both ruled to dismiss the lawsuit filed by Wang X, respectively on the ground that the change of legal representative was a matter of corporate autonomy, and that Wang X had already filed a lawsuit before against the shareholders of Sairui Machinery & Equipment Installation Company for registration of the change of legal representative, which constituted a repeated claim. Afterwards, Wang X applied to the Supreme People’s Court for case reopening, and the Supreme People’s Court rules, after its review on certiorari, to remand the case to the court of first instance for substantive trial. 1. The lawsuit filed by Wang X meets the legal requirement for case acceptance Article 119 of the Civil Procedure Law states: “To file a lawsuit, the following conditions must be satisfied: (1) the plaintiff must be a citizen, a legal person or any other organization with direct interest in the case; (2) there must be a specific defendant; (3) there must be a specific claim, and specific factual basis and grounds; and (4) the action must fall within the range of civil actions to be accepted by the people’s courts

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and within the jurisdiction of the people’s court with which it is filed.” In this case, Wang X presented a resolution of shareholders’ meeting concerning change of the legal representative of Sairui Machinery & Equipment Installation Company which, however, has not undertaken corresponding change registration to that effect; Wang X asserts that he is concluded in the list of dishonest judgment debtors due to the debt default on the part of Sairui Machinery & Equipment Installation Company, with his legitimate rights and interests being infringed accordingly. In summary, Wang X has a stake in this case; the lawsuit filed by him has a specific defendant, specific claims and specific factual basis and grounds; the involved dispute here is also a civil dispute between equal subjects, falling within the range of civil cases to be accepted by the court. Whereupon, it is held that Wang X’s claim meets the requirement for litigation, and the courts of first and second instance are erroneous in their dismissal of the claim. 2. Wang X has litigious interest in this case Litigious interest refers to the necessity and effectiveness with which the claims must be adjudicated by the court through judicial decision. “Necessity” in this context indicates the requirement to resolve the dispute between the parties through judicial decision, and “effectiveness” refers to the substantive resolution of the dispute through judicial decision. Wang X finds himself listed as a dishonest judgment debtors due to the debt default on the part of Sairui Machinery & Equipment Installation Company, which has led to the infringement of his legitimate rights and interests. What’s worse, Wang X is not the shareholder of the Company, thus unable to seek any relief by means of corporate autonomy. Therefore, If the court declines to accept his case, he will remain exposed to ongoing legal risks without any available legal recourse. In this scenario, there do exist necessity and effectiveness for Wang X’s case to be adjudicated by the court through judicial decision, in other words, Wang X has litigious interest in this case. 3. There exists no such obstacle as “repeated claim” to litigation in this case Cao X(A) is the defendant in the first instance (No. 84 [2016] Trial, Civ. Division) against whom Wang X claimed on the ground of the former’s infringement of his right to name, reputation and credit for cancellation registration by Cao X(A) of his position as the legal representative of Sairui Machinery & Equipment Installation Company in order to end the infringement. With the involved parties, claims and factual grounds thereof different from those of first instance, this case doesn’t constitute a repeated claim, with also no other obstacles to litigation. 4. Right of action as procedural right should not be confused with substantive right Right of action refers to the entitlement to seek a court decision based on the merits of a civil dispute. As long as the parties have a stake in the civil dispute, they have right, or litigious interest, to request the court to legally determine the rights and obligations that may be unclear in that dispute. The courts of first and second instance dismissed the claim filed by Wang X respectively on the grounds, among others, that the court

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may not force the company to make the resolution of shareholders’ meeting in respect of registration of the change of legal representative, and that the court may not force the company to fulfill the resolution of shareholders’ meeting, in which case the courts took as the prerequisite for exercise of right of action whether a substantive right has legal basis, which is obviously unjustified. In this case, whether Wang X’s claim has factual and legal basis and should therefore be supported by the court shall be determined through substantive trial of the case. The court may not deny Wang X’s right of action because of the absence of factual and legal basis of his claim, in other words, the court may not equal the requirement for substantive adjudication to the requirement for litigation in determining the range of civil cases to be accepted by the court. 5. The part of a claim which satisfies the requirement for litigation should be accepted by the court In the case where a claim partially satisfies the requirement for litigation while the remainder does not, each part should be treated distinctly. The portion in line with the requirement for litigation should be accepted by the court, while the remaining part should be defenitively dismissed through judicial ruling. The claim by Wang X in this case, asserting that he has no connection with any legal action of Sairui Machinery & Equipment Installation Company, lacks clarity in terms of the specific conduct it addresses, failing to meet the legal requirement for case acceptance, and is therefore dismissed by the Supreme People’s Court.

Peng X v. Chengdu Rural Commercial Bank Co., Ltd. Cuqiao Subbranch, Chen X, et al. (Dispute Over Suretyship Contract: Impact on the Other Guarantors’ Liability of the Creditor’s Waiver in Mixed Security of the Collateral as Provided by the Debtor) Wei Si and Zhe Liu

Collegial Bench for the Second Instance: Wei Si, Chengbo Ma and Huan Ye Edited by Ming Li; Translated by Xiaohua Zhu W. Si (B) The First Civil Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China Z. Liu The Fifth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Chongqing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_12

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1 Rule In terms of systematic legal interpretation, Articles 1941 (2) and 2182 of the Property Law of the People’s Republic of China (repealed) shall, in the case of mixed security,3 be applied on the basis of Article 176.4 In the case where the priority of suretyship liability has been clearly agreed upon between the parties, if the surety asserts their exemption from the guarantor liability to the extent of the creditor’s forfeited priority rights and interests to be paid on the ground of the creditor’s waiver of the collateral as provided by the debtor, such assertion may not be supported by the court.

2 Case Information 1. Parties Appellant (Defendant in the First Instance): Peng X

1

This article is now Article 409 of the Civil Code: “A mortgagee may waive his right to the mortgage, or waive his priority order in the line of the mortgagees. A mortgagee and the mortgagor may reach an agreement to change such things as the mortgagee’s priority order in the line of the mortgagees and the amount of the secured claim, provided that any change to the mortgage may not adversely affect the other mortgagees without their written consent. Where a debtor creates a mortgage on his own property, and the mortgagee waives his right to the mortgage and his priority order in the line of the mortgagees, or changes the mortgage, the other security providers shall be exempted from the guarantor liability to the extent of the rights and interests of the mortgagee as forfeited owing to the waiver of his priority to be paid from the mortgaged property, unless the other security providers are committed to still provide security.” The same below. 2 This article is now Article 435 of the Civil Code: “A pledgee may waive his right to the pledge. Where a debtor creates a pledge on his own property and the pledgee waives his right to the pledge, the other security providers shall be exempted from the guarantor liability to the extent of the rights and interests of the pledgee as forfeited owing to the waiver of his priority to be paid from the collateral, unless the other security providers are committed to still provide security.” Infra. 3 It is generally accepted that a claim is jointly secured when it is secured in more than one way. A mixed security occurs when securities are of different nature. As to whether the mortgage, pledge and lien are considered as securities of different nature, one view is that a single claim also constitutes a mixed security when secured by both mortgage and pledge. In this article, mortgages, pledges and liens are considered to be of the same nature and mixed security refers to the case where the same claim is secured by both a surety and a collateral. 4 This article is now Article 392 of the Civil Code: “Where a claim is secured by both a collateral and a surety, and the debtor fails to perform his obligation at maturity or any event occurs upon which a security interest is to be enforced as agreed upon by the parties, the creditor shall enforce the claim in accordance with the agreement. Where there is no agreement or the relevant agreement is unclear, if the collateral is provided by the debtor, the creditor shall first enforce the claim against the collateral, and if the collateral is provided by a third party, the creditor may choose to enforce the claim against the collateral or request the surety to assume liability. The third party, who has fulfilled his guarantor liability, may recover indemnification from the debtor.” Infra.

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Appellee (Plaintiff in the First Instance): Chengdu Rural Commercial Bank Co., Ltd. Cuqiao Subbranch (hereinafter referred to as Chengdu RCB Cuqiao Subbranch) Defendant in the First Instance: Chen X Defendant in the First Instance: Zhou X Defendant in the First Instance: He X Defendant in the First Instance: Meishan Qisheng Building Materials Co. (hereinafter referred to as Qisheng Building Materials Company) 2. Procedural History First Instance: No. 85 [2017] Trial, Civ. Division, the Higher People’s Court of Sichuan Province (dated Mar. 25 of 2019) Second Instance: No. 1631 [2019] Final, Civ. Division, the Supreme People’s Court (dated Dec. 5 of 2019) 3. Cause of Action Dispute over suretyship contract

3 Essential Facts On September 29, 2013, a project financing contract was concluded by and between Chengdu Shangfenggang Real Estate Development Co. (hereinafter referred to as Shangfenggang Real Estate Company) as the borrower and Chengdu RCB Cuqiao Subbranch, under which it is agreed between both parties upon the loan of CNY 150 million, the borrowing period, the rights and obligations of both parties and the liability for breach of contract. On the same day, Chengdu RCB Cuqiao Subbranch entered into a suretyship contract with several sureties, to wit: Chen X, Peng X, Wang X, Zhou X, He X and Qisheng Building Materials Company, under which the sureties agreed to be jointly and severally liable for the debt under the principal contract in order to guarantee the performance of the project financing contract concluded between Chengdu RCB Cuqiao Subbranch (the creditor) and Shangfenggang Real Estate Company (the debtor). Under Clause 1 of the contract concerning the mode of suretyship, “The surety agrees to provide the suretyship of joint and several liability, and confirms that, in the event of the debtor’s failure to perform the obligation as agreed upon under the principal contract, the surety may not be exempted from his suretyship liability under the principal contract, regardless of whether the creditor enjoys any other security for the claims under the principal contract (including but not limited to surety, mortgage, pledge, letters of guarantee, standby letters of credit, etc.), or when any other security mentioned above is established, whether the security is effective or whether the creditor claims his rights against other sureties, whether any third party agrees to assume all or part of the obligations under the principal contract, or whether there exists any other security provided by the debtor himself. The creditor may directly request the surety to assume his guarantor liability as contractually agreed, and the

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surety shall file no objection to that effect.” At the time of the conclusion of the suretyship contract, it is important to note that Peng X, Chen X, Zhou X and He X were the shareholders of Shangfenggang Real Estate Company. Thereafter, Chengdu RCB Cuqiao Subbranch granted a series of loans to Shangfenggang Real Estate Company as follows: a loan of CNY 110 million on October 17, 2013, a loan of CNY 10 million on January 26, 2014, a loan of CNY 20 million on February 20, 2014, a loan of CNY 5 million on March 10, 2014 and a loan of CNY 5 million on May 28, 2014, totaling CNY 150 million, all of which were transferred to the bank account designated by Shangfenggang Real Estate Company. On January 8, 2014, Shangfenggang Real Estate Company and Chengdu RCB Cuqiao Subbranch entered into a mortgage contract, under Clause 2 of which, “upon the debtor’s failure to perform his obligations under the principal contract, or under any of the circumstances concerning the enforcement of mortgage as prescribed in Clause 9 hereof, the mortgagor may not be exempted from his guarantor liability hereunder, regardless of whether the creditor enjoys any other security for the claims under the principal contract (including but not limited to surety, mortgage, pledge, letters of guarantee, standby letters of credit, etc.), or when any other security mentioned above is established, whether the security is effective or whether the creditor claims his rights against the other guarantors, whether any third party agrees to assume all or part of the obligations under the principal contract, or whether there exists any other security provided by the debtor himself. The mortgagee may directly request the mortgagor to assume the security liability as contractually agreed, and the mortgagor may file no objection to that effect.” Upon the failure of Shangfenggang Real Estate Company to repay as scheduled the loan principal and the interest thereon, Chengdu RCB Cuqiao Subbranch filed a lawsuit with the Higher People’s Court of Sichuan Province against Chen X, Peng X, Zhou X, He X and Qisheng Building Materials Company, requesting the court to hold they jointly and severally liable for the debt owed by Shangfenggang Real Estate Company. The Higher People’s Court of Sichuan Province ruled that, the sureties, to wit: Chen X, Zhou X, Peng X, He X and Qisheng Building Materials Company, shall be jointly and severally liable, within 15 days from the effective date of the judgment, for the loan principal of CNY 97,028,089 plus the interest thereon, penalty interest and compound interest owed by Shangfenggang Real Estate Company to Chengdu RCB Cuqiao Subbranch, and may, after the fulfillment of their suretyship liability, recover their loss from Shangfenggang Real Estate Company. Dissatisfied with the first instance decision, Peng X appealed to the Supreme People’s Court, requesting the court to reverse the first instance decision and dismiss all the claims filed against him by Chengdu RCB Cuoqiao Subbranch. In the second instance, Chengdu RCB Cuoqiao Subbranch acknowledged that the sales income of the real estate as released from the mortgage had not been entirely used towards the loan repayment.

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4 Issue Whether Peng X shall assume the suretyship of joint and several liability to Chengdu RCB Cuqiao Subbranch, and to what extent he should assume the liability accordingly.

5 Holding The Supreme People’s Court holds after review that, Article 176 of the Property Law of the People’s Republic of China (repealed), which deals with the relationship between collateral and suretyship, reflecting the combination of party autonomy and the priority of the security liability as indicated by the collateral provided by the debtor. The provision of the Article that “the claims shall be realized in accordance with the agreement” seeks to determine or limit the order in the line of the creditors in their exercise of security interests in mixed security; The term “the agreement” in this context refers to the agreement between the parties concerning the order in which the security interests are to be realized, rather than the one regarding the way in which the security interests are to be realized; besides, the “clarity” of the agreement means that the agreement is so clearly formulated that the parties are completely free from any disagreement as to the content thereof. In this case, under the suretyship contract, the creditor may first request the surety to assume the suretyship liability while the creditor may, under the mortgage contract, request the assumption of security liability by the mortgagor first, which indicates the manifestation of the parties’ genuine intent and the clear content of the contract, i.e. the creditor is free to choose to realize his claims from the suretyship or from the collateral. Upon the creditor’s option, the order is thus determined in which the guarantor liability will be fulfilled, with no conflict with the creditor’s straight claim for the assumption of suretyship liability by the surety, nor any conflicting understanding or ambiguity resulting from the similar agreement under the mortgage contract. Whereupon, Chengdu RCB Cuqiao Subbranch may directly request Peng X to assume his suretyship liability. Although under Article 194(2) of the Property Law of the People’s Republic of China (repealed), the third party may be exempted from the guarantor liability only “in the event that the mortgagee waives the mortgage right, or because of the priority order in the line of the mortgagees, or due to the change to the mortgage right,” with reference to the systematic interpretation of Articles 176 and 194(2) thereof, in the case of mixed security, only when the surety enjoys the order interest against the collateral provided by the debtor, which the creditor has waived, can the surety be exempted from liability to the extent of the mortgagee’s rights and interest as forfeited due to the waiver of the mortgagee’s priority in being paid from the collateral. In the absence of the order interest or in the event of the waiver thereof, the provision may not be applied. In this case, under the clear agreement between the parties concerning the liability order in the line of guarantors, Peng X does not enjoy the order interest

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against the collateral provided by Shangfenggang Real Estate Company. Peng X, Chen X, Zhou X and He X, as the shareholders of the company at the time of the conclusion of the suretyship contract, had reasonable and sufficient knowledge of the company’s business operation and its solvency, besides, the suretyship contract was concluded prior to the conclusion of the mortgage contract, the creditor’s claim for the assumption of the suretyship liability by the surety does not therefore exceed Peng X’s reasonable expectation of his suretyship liability when signing the suretyship contract, with also no extra suretyship liability imposed on him. Whereupon, absent the legal basis for Peng X’s claim for his exemption from his guarantor liability to the extent of the forfeited mortgage right of Chengdu RCB Cuqiao Subbranch, the Court rules to dismiss the appeal and uphold the first instance decision.

6 Comment on Rule In judicial practice, there exist different understandings as to whether the other guarantors may, in the case of mixed security, be exempted from their corresponding liability in the event of the creditor’s waiver of the collateral provided by the debtor. One view is that the other guarantors may be exempted from their guarantor liability to the extent of the collateral provided by the debtor, which has been waived by the creditor. The reasoning here is that, in terms of literal interpretation, Articles 194(2) and 218 of the Property Law (repealed) do not set forth the prerequisites for the application thereof; in terms of jurisprudence, the debtor is the principal obligator, and in the case where the debtor creates a mortgage on his own property, the creditor shall first claim his mortgage right from the debtor, which not only can avoid the other guarantors exercising the right of recovery after their fulfillment of liability, but also is in line with the principle of fairness. Another view is that the other guarantors shall be exempted from their guarantor liability, preconditioned on their order interest with the reason that, in terms of systematic interpretation, the application of Articles 194(2) and 218 of the Property Law (repealed) shall, in the case of mixed security, be subject to Article 176 thereof, under which, only in the case where the collateral or the order of the suretyship liability is not agreed upon or ambiguously agreed upon between the parties and the priority of the real security as provided by the debtor is clearly agreed upon, may the other guarantors enjoy against the debtor the order interest in respect of the fulfillment of liability, which may be affected by the creditor’s waiver of the real security as provided by the debtor. Whereby the other guarantors may claim under Article 194(2) or 218 of the Property Law (repealed) for the corresponding exemption from their liability. With the clear agreement between the parties upon the priority order of suretyship liability, Articles 194(2) and 218 of the Property Law (repealed) may not be applied. The essential difference between the two aforementioned views lies in the different understandings of the jurisprudential basis of Articles 194(2) and 218 of the Property Law (repealed), i.e. whether the other guarantors’ exemption from liability is based on the debtor’s status as the ultimate obligor, or on the protection of the other guarantors’ order interest. The first

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understanding is essentially based on the rule of absolute priority liability of the real security provided by the debtor, as established under the Security Law (repealed) and the Judicial Interpretation on Certain Issues Regarding the Application of the Guarantee Law (repealed).This understanding is in conflict with the rule of relative priority liability of the real security provided by the debtor as is based courteously on the principle of party autonomy under Article 176 of the Property Law (repealed), sure to lead to conceptual confusion in that aspect; the second one, however, in line with the principle of fairness that “the aggrieved party obtains corresponding compensation” and consistent with Article 176 of the Property Law (repealed), should therefore be recognized. The Property Law (repealed) should be treated as a systematic whole, the components of which should be correlated and mutually supported, free from any isolated or conflicting interpretation. 1. Hidden conditions for the application of Article 194(2) of the Property Law (repealed) Article 194(2) of the Property Law (repealed) is designed to deal with the case where the same claim is secured by both a mortgage provided by the debtor and a security provided by a third party, which may constitute a mixed security if the security by the third party consists of suretyship, thus resulting in the application of Article 176 thereof. The creditor’s waiver of the mortgage provided by the debtor is a disposal of his private rights, the effect of which shall be judicially confirmed as long as it is free from violation of any mandatory provision of relevant laws and administrative regulations, and public order and good morals. The crux of the issue here is whether the legal interest of the other guarantors will be adversely affected by such disposal. According to the principle of fairness that “the aggrieved party obtains corresponding compensation”, any other guarantor, whose legal interest is impaired by the creditor’s waiver of the mortgage provided by the debtor, may assert the reduction of or exemption from the guarantor liability. However, where any other guarantor holds no legal interest against the debtor, or such benefit is not impaired, the guarantor may not assert such reduction or exemption. On the jurisprudential level, the legal interests that the other guarantors may hold against the debtor are mainly those involving subrogation, recovery and the order of liability. Subrogation Interest Guarantor’s subrogation right is particularly recognized in civil law countries and regions, which refers to the acquisition by the guarantor, after the settlement of the debt in lieu of the debtor or the realization of the security right by the creditor, of the claim and the subordinate rights (such as security interest) of the creditor against the debtor to the extent of the claim already reimbursed.5 Where the guarantor’s subrogation right is legally granted, the third party may, upon his/her fulfillment of the security liability, acquire the status of creditor and enjoy the mortgage right of the former creditor against the debtor. Therefore, if the creditor waives the mortgage provided by the debtor, the third party cannot without the acquisition of the right obtain the mortgage, resulting in the subrogation interest being prejudiced, 参见程啸: 《混合担保中担保人的追偿权与代位权——对 < 物权法 > 第176条的理解》 ,载 《政 治与法律》 2014年第6期。

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on the ground of which the third party may assert the reduction of or exemption from liability. However, absent the current legislation regarding guarantor’s subrogation right in China,6 the third party’s subrogation interest lacks its legislative support, and the problem thus does not exist that the other guarantors’ subrogation interest may be impaired due to the creditor’s waiver of the collateral provided by the debtor. Recovery Interest Since the debtor who provides a mortgage also constitutes a mortgagor, recovery interest should therefore be approached in terms of both the recovery between guarantors and the recovery by a guarantor from the debtor. Article 176 of the Property Law (repealed) states that “a third party who provides security shall have the right to recover his loss from the debtor after his fulfillment of liability”, without, however, recognizing recovery between a surety and a collateral guarantor, which, as interpreted by the Legislative Affairs Commission of the Standing Committee of the National People’s Congress, reflects the disapproval by Article 176 of such recovery model.7 Whether collateral guarantors may recover from each other, however, is still under controversy.8 Whether or not recovery can be exercised between the guarantors, in the event of the waiver of the mortgage provided by the debtor, the debtor is still in the principal creditor-debtor relationship, from whom the other guarantors under security liability may still recover their loss. There exists one view that, the debtor may, upon the creditor’s waiver of the mortgage provided by the debor, dispose of the collateral, resulting then in the reduction of the property subject to the debtor’s repayment liability, which may adversely affect the third party who has already fulfilled the guarantor liability in recovering the loss from the debtor. Such view, however, can hardly be established because whether the debtor will dispose of the collateral after the debtor’s release from mortgage liability or whether such disposal will result in the reduction of the property subject to repayment liability is under the influence of numerous factors with much uncertainty, in other words, there does not exist necessary causal link between the creditor’s waiver of the collateral provided by the debtor and the inability to realize the recovery right of the third party who has fulfilled the guarantor liability. Whereupon, the creditor’s waiver of the collateral provided by the debtor will not adversely affect the realization of the recovery right enjoyed by any other guarantor, who, therefore, may not assert the reduction of or exemption from the guarantor liability on the ground of impaired recovery interest. Order Interest Order interest in the case of mixed security refers to the priority interest of a rear-position guarantor over a front-position guarantor concerning the sequence of the assumption of guarantor liability in the line of guarantors. If the liability order of the guarantors is determined as agreed or by law, the creditor shall first claim against a front-position guarantor; if the principal claim is satisfied upon 参见最高人民法院民事审判第二庭编著:《 < 全国法院民商事审判工作会议纪要 > 理解与 适用》 , 人民法院出版社2019版, 第353页。 7 参见胡康生主编:《中华人民共和国物权法释义》 , 法律出版社2007年版, 第381-382页。 8 参见最高人民法院民事审判第二庭编著:《 < 全国法院民商事审判工作会议纪要 > 理解与 适用》 , 人民法院出版社2019版, 第351-353页。 6

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the fulfillment of the front-position guarantor liability, the principal debt relationship will then be extinguished, with other security relationships as subordinate legal relationships extinguished accordingly, and the rear-position guarantor is thus discharged of the guarantor liability; where the principal claim is not fully satisfied, the rearposition guarantor shall be only liable for the unsatisfied portion thereof; where the creditor asserts their security rights against the rear-position guarantor rather than the front-position guarantor, the rear-position guarantor may defend themselves on the ground of their order interest; if the creditor waives their claim against the frontposition guarantor, the rear-position guarantor’s interest will surely be impaired, with their guarantor liability being expanded, upon which they may assert their reduction of or exemption from liability under Article 194(2) of the Property Law (repealed). Since the front-position guarantor does not enjoy order interest against the rearposition guarantor, the creditor’s waiver of the rear-position guarantor liability will not affect the front-position guarantor liability, and they may not thereby assert their reduction of or exemption from liability; similarly, since the guarantors with the same order in the line of guarantors do not enjoy order interest against each other, the creditor’s waiver of any security right to be assumed among them will not affect the remaining ones, and the remaining guarantors may not assert their reduction of or exemption from liability. Under the above-mentioned two circumstances, Article 194(2) of the Property Law (repealed) is not applicable. In summary, in the case of mixed security, the creditor’s waiver of the collateral provided by the debtor may only affect the order interest enjoyed by the other guarantors. Whereupon, it can be concluded that Article 194(2) of the Property Law (repealed) shall only be applied on the condition of the enjoyment by the other guarantors against the debtor of the order interest in the fulfillment of guarantor liability. 2. Determination of the order of guarantor liability (1) Legal basis The determination rules of liability order in the case of mixed security has undergone legislatively and judicially three evolutionary stages from “the absolute priority of collateral liability”9 under the Guarantee Law (repealed) through “the absolute priority of the debtor’s collateral liability + the third party’s equal suretyship liability”10 under the Judicial Interpretation on Certain Issues Regarding the Application 9

Article 28 of the Guarantee Law (repealed) states: “Where a claim is secured by both a surety and a collateral, the surety shall assume the liability other than the collateral. Where the creditor waives the collateral, the surety is exempted from his suretyship liability to the extent of the rights as waived by the creditor.” 10 Article 38(1) of the Judicial Interpretation on Certain Issues Regarding the Application of the Guarantee Law (repealed) states: “Where a claim is secured by both a surety and a collateral, the creditor may request the surety or the mortgagor to assume liability.” Article 123 states: “Where a claim is secured by several security interests, if the creditor waives the one provided by the debtor, the other guarantors shall be exempted from their liability to the extent of the rights waived.”

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of the Guarantee Law (repealed), and to “party autonomy + the relative priority of the debtor’s collateral liability + the third party’s equal suretyship liability” under the Property Law (repealed). Under Article 176 of the Property Law (repealed), the order of mixed guarantor liability shall be determined in the first place by the parties with mutual consent, in other words, the order of mixed guarantor liability shall first be determined as agreed if there is an agreement; with no or an unclear agreement, the claim shall, considering the status of the debtor as the ultimate obligor, be first realized out of the collateral provided by the debtor, in an effort to avoid the trouble of recovery from the debtor by the other guarantors after their fulfillment of liability; in the case of coexistence of a suretyship and the collateral provided by a third party, no matter which one of the two is employed in the realization of the claim, both the collateral guarantor and the surety may need to recover the loss from the debtor, the creditor therefore is granted by law the right of option for the purpose of the full realization of the claim.11 The evolution mentioned above reflects a significant change in legislative philosophy: first, the order of guarantor liability shall be determined on the basis of the principle of party autonomy, with related legal provisions as supplement; second, the equal status between suretyship and collateral provided by a third party has been confirmed. Under Article 178 of the Property Law (repealed), the provisions of the Guarantee Law (repealed) and the Judicial Interpretation on Certain Issues Regarding the Application of the Guarantee Law (repealed) conflicting with Article 176 of the Property Law (repealed) are no longer applicable, and the determination of the liability order for mixed security shall therefore be subject to Article 176 of the Property Law (repealed). (2) Connotation of “agreement” under Article 176 of the Property Law (repealed) The term “agreement” can be found three times in Article 176 of the Property Law (repealed). One is “the debtor fails to perform the debt at maturity or the event occurs upon which a security interest is to be enforced in accordance with the agreement”, one is “the creditor shall realize the claim in accordance with the agreement”, and the other one is “with no or an unclear agreement”. In terms of literal interpretation, the first “agreement” refers to an agreement between the parties upon the realization of security interest; the second “agreement” to an agreement upon the realization of claim, specifically speaking, an agreement on the “relationship between collateral and suretyship”12 ; the connotation of the third “agreement” is however unclear, in need of further analysis. There exists one view that the third “agreement” shares the same connotation as the first one, both referring to an agreement upon the realization of security interest. The basic logic here is that, in spite of its amendment to the rule of absolute priority of security liability adopted in the Guarantee Law (repealed), Article 176 of the Property Law (repealed) still specifies the rule of relative priority of security liability, by which it should first be examined whether there exists a clear agreement between the parties upon the fulfillment of security liability. With a clear 参见胡康生主编: 《中华人民共和国物权法释义》 ,法律出版社2007年版,第380-381页。 参见全国人大常委会法制工作委员会民法室: 《中华人民共和国物权法条文说明、立法理 由及相关规定》 (第2版),北京大学出版社2017年版,第356页。

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agreement, the priority of security liability is then consistent with the principle of party autonomy, and the security interest shall be fulfilled as agreed; with no or an unclear agreement, the claim shall be first realized out of the collateral provided by the debtor; only without a clear agreement between the parties upon the realization of the security interest or without a collateral provided by the debtor, is the creditor granted the right of option.13 The main problem with the view is that, firstly, from the perspective of legislative intent, Article 176 of the Property Law (repealed) mainly deals with the liability order as conditioned on the coexistence of both collateral and surety, and the restriction of the agreement between the parties to only cover how the collateral shall be fulfilled does not align with the legislative intent thereof; secondly, in terms of literal interpretation, the word “or” indicates either one of the two, reflecting a relationship of choice, in the event of the removal of the choice after “or”, i.e., “the event occurs upon which a security interest is to be enforced as agreed upon by the parties”, the first part of Article 176 will be stated as “If the debtor fails to perform the debt at maturity, the creditor shall realize the claim in accordance with the agreement; with no or an unclear agreement, and the collateral is provided by the debtor…”, which cannot indicate the necessary connection between the “agreement” and the “realization of security interest”; thirdly, in terms of jurisprudential analysis, if the “agreement” in “with no or an unclear agreement” is only confined to the realization of security interest, since it’s impossible to agree on the realization of security interest in a suretyship contract, Article 176 of the Property Law (repealed) will apply exclusively in accordance with a collateral agreement, which is obviously contrary to such legal spirits as respect for party autonomy and essential equality between different security liabilities as embodied in the provision.14 No matter how we approach it, upon legislative intent, literal interpretation or jurisprudential analysis, the “agreement” in “the creditor shall realize the claim in accordance with the agreement” and “with no or an unclear agreement” under Article 176 of the Property Law (repealed) refers to the agreement between the parties upon the liability relationship between collateral and suretyship, mainly dealing with the order of liability, and also the scope thereof. (3) Criteria for “clear agreement” and judgment on whether there exists order interest In the case of mixed security, it is an ideal state for the creditor to reach an agreement together with all the guarantors upon the order of guarantor liability. In practice, however, the creditor normally concludes separate guaranty contract with individual guarantor, who usually has no knowledge at the time of the conclusion thereof of whether the same claim is otherwise secured. Where a suretyship contract and a 参见江苏索普(集团)有限公司、上海儒仕实业有限公司与中国农业发展银行乾安县支行 保证合同纠纷案最高人民法院(2016)最高法民终40号判决;中国农业发展银行乾安县支行与 江苏索普(集团)有限公司、上海儒仕实业有限公司保证合同纠纷案最高人民法院(2016)最 高法民申2612号裁定。 14 参见高圣平: 《混合共同担保的法律规则:裁判分歧与制度完善》 ,载 《清华法学》 2017年第5 期;刘平: 《民法典编纂中混合共同担保之再认识——兼评 < 物权法 > 第176条》 ,载 《西南政法 大学学报》 2017年第6期。 13

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collateral contract are separately entered into for the same claim, with both contracts containing some agreement upon the order of liability, the involved content thereof normally consists of the following four circumstances: (a) Consistent agreements. For instance, the priority of suretyship liability is agreed upon both under the suretyship contract and the collateral contract, which case of course constitutes “clear agreement”, with the collateral guarantor enjoying an order interest against the surety in the fulfillment of guarantor liability. If the creditor asserts the security right against the collateral guarantor first, the guarantor may raise a defense on the ground of the order interest. (b) Divergent agreements. Under this circumstance, the suretyship contract specifies the priority of suretyship liability whereas the collateral contract stipulates the priority of collateral liability. The two contracts are actually not in conflict with each other, both granting the creditor the right of option, by which the creditor can choose to claim his security right from either the surety or the collateral guarantor, or from both of them simultaneously. Through such choice, the order of the guarantor liability is determined by the creditor, and the objective of “clear agreement” is consequently achieved.15 The view is too rigid that the order of liability among the guarantors must be in writing, unduly undermining the principle of party autonomy under Article 176 of the Property Law (repealed) and inconsistent with the legislative intent. In the case where the creditor is legally granted the right of option, the guarantors do not enjoy any order interest against each other, and the creditor’s waiver of the collateral provided by the debtor will not affect the liability of other guarantors, who, therefore, may not assert exemption from liability under Article 194(2) or 218 of the Property Law (repealed). (c) Conflicting agreements. Under such circumstance, the suretyship contract specifies the priority of collateral liability whereas the collateral contract stipulates the priority of suretyship liability. Based on the relativity of contract and the principle of fairness that no obligation shall be created for a third party without his consent, both the agreements upon the obligations to be assumed by the third party are void and unenforceable, which case is equivalent to non-agreement between the parties upon the order of liability. Under Article 176 of the Property Law (repealed), where the collateral is provided by the debtor, the creditor shall first claim his security interest against the debtor, with the surety also enjoying his order interest against the debtor; where the collateral is provided by a third party, the collateral liability and the suretyship liability shall be equal in legal status, with no any order interest between the collateral guarantor and the surety, and the creditor holds the right of option in the realization of security interest. (d) Similar agreements. In this case, similar security clauses are agreed upon under both the suretyship contract and the mortgage contract. As agreed, both the sureties, to wit: Peng X et al., and the debtor, also as the mortgage provider, to 参见高圣平: 《担保法前沿问题与判解研究》 (第4卷·最新担保法司法政策精神阐释),人民法 院出版社2019年版,第68-74页。

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wit: Shangfenggang Real Estate Company, expressly waived their right to raise defense based on order interests, with no any such interest between each other, by which the creditor’s waiver of the mortgage would not affect the assumption of guarantor liability, and Peng X may not assert, under Article 194(2) of the Property Law (repealed), his reduction of or exemption from suretyship liability; the creditor holds the right of option in realizing the security interest, with the order of liability being determined through such choice, and the objective of “clear agreement” can thus be essentially achieved. Similarly, Peng X may not, on the ground of “unclear agreement” under Article 176 of the Property Law (repealed), assert the priority of the satisfaction of liability out of the collateral provided by the debtor. (4) Application of legal rules invalidating standard clauses Security clauses similar to those in this case are commonly found in loan and security contracts prepared by financial institutions, which would, for the purpose of saving transaction costs and improving transaction efficiency, provide security contracts formulated in advance for repeated uses. Such case, however, leads to the issue whether the legal rules dealing with standard clauses may be applied to invalidate security contracts. In this case, for instance, the surety asserts that the suretyship contract clauses concerning the form of suretyship and the realization order of the claim constitutes standard terms, exacerbating their suretyship liability, and shall thus be deemed void. The legal rules regulating standard clauses are mainly contained in Articles 39,16 4017 and 4118 of the Contract Law (repealed). Under Article 39(2) of the Contract Law (repealed), a standard clause refers to one that is formulated in advance by one party for repeated use and will not be consulted with the other party at the time of the conclusion of a contract. In practice, it’s easier for the guarantor to prove that the terms under the security contract were pre-formulated by the financial institution than to prove that the financial institution failed to consult with them when concluding the contract. Even if such clause is found as a standard one, it 16

This article is now Article 496 of the Civil Code: “A standard clause refers to a clause formulated in advance by a party for repeated use which has not been negotiated with the other parity when concluding the contract. Upon concluding a contract, where a standard clause is used, the party providing the standard clause shall determine the parties’ rights and obligations in compliance with the principal of fairness, and shall, in a reasonable manner, call the other party’s attention to the clause concerning the other party’s major interests and concerns, such as a clause that exempts or alleviates the liability of the party providing the standard clause, and give explanations of such clause upon request of the other party. Where the party providing the standard clause fails to perform the aforementioned obligation of calling attention or giving explanation, thus resulting in the other party’s failure to pay attention to or understand the clause concerning his interests and concerns, the other party may claim that such clause does not become part of the contract.” 17 This article is now Article 497 of the Civil Code: “A standard clause is void under any of the following circumstances: (1) existence of a circumstance under which the clause is void as provided in Section 3 of Chapter VI of Book One and Article 506 of this Code; (2) the party providing the standard clause unreasonably exempts or alleviates himself from liability, imposes heavier liability on the other party, or restricts the main rights of the other party; or (3) the party providing the standard clause deprives the other party of his main rights.” 18 This article is now Article 498 of the Civil Code.

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may not necessarily be held null and void. Under Article 40 of the Contract Law (repealed), where the party providing the standard clause unreasonably exempts or alleviates them from liability, increases liability on the other party, or deprives the other party of his main rights, the clause shall be held void. A security contract is a typical unilateral contract, under which the creditor only enjoys rights without any obligation, whereas the guarantor only assumes obligations without any right, therefore, such problems would by no means exist as exempting the creditor from liability, increasing the guarantor’s liability or depriving the guarantor of his main rights by means of standard clauses. As to the order interest enjoyed by the guarantor in the case of mixed security, it does not constitute the guarantor’s main right under the security contract, and can be contractually precluded under Article 176 of the Property Law (repealed). Article 41 of the Contract Law (repealed) deals with the interpretation of standard contracts, which is of course inapplicable when the security contract clauses provided by the financial institution are clearly agreed upon with only one interpretation thereof. 3. Determination of Waiver of Mortgage Waiver of mortgage, as a unilateral civil law act, constitutes a disposal of property rights with as its basic element the express manifestation of intention. There exist two types of mortgages with different collaterals, that is, real property mortgage (the mortgage on real property) and chattel mortgage (the mortgage on personal property). In the case of mortgage, under Article 9(1)19 of the Property Law (repealed), the waiver of such mortgage shall be conditioned both on the manifestation of the intention by the creditor and on the registration of the cancellation thereof. In the case of chattel mortgage, under Articles 18820 and 18921 of the Property Law (repealed), the waiver of such mortgage takes effect upon the manifestation of the intention by the creditor to the mortgagor; in the context of a registered chattel mortgage, it cannot prevail against a bona fide third party without the registration of its cancellation. Since the waiver of mortgage may cause significant impact on the rights and obligations of the creditor, the debtor and other guarantors, the implied waiver thereof may generally not be legally recognized. In judicial practice, the waiver of mortgage may not be presumed solely based on the creditor’s default on or delay in the exercise of the mortgage right, nor is so found when the creditor does not file a lawsuit against the mortgagor or include the mortgagor in the list of obligors. From the perspective of jurisprudence, however, an implied waiver may not be denied if 19

This article is now Article 209 of the Civil Code: “The creation, alteration, assignment, or extinguishment of a right in rem in immovable property shall become effective upon registration by law, and does not take effect without registration, unless otherwise provided by law. Ownership registration is not required for natural resources as owned by the State by law.” 20 This article is now Article 403 of the Civil Code: “A mortgage on movable property shall be created at the time when the mortgage agreement takes effect; without registration, such mortgage may not be asserted against a bona fide third party.” 21 This article is now Article 404 of the Civil Code: “A mortgage on movable property may not be asserted against a buyer who has paid a reasonable purchase price and acquired the mortgaged property in the ordinary course of business.”

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the implicit way of the waiver virtually achieves the effect of an express one, or the order interests enjoyed by the other guarantors may be impaired. The determination to that effect shall be made in accordance with Article 38(3) of the Judicial Interpretation on Certain Issues Regarding the Application of Guarantee Law (repealed),22 under which an implied waiver may only be found by the court when: (1) the creditor delays the exercise of the mortgage right; (2) the collateral sustains reduced value, destruction or loss; (3) there exists a direct causal relationship between the act and the consequence; and (4) the creditor is at fault. It must be noted that Article 38(3) of the Judicial Interpretation on Certain Issues Regarding the Application of Guarantee Law (repealed) may not apply directly in determining the effect of an implied waiver, for it is just the interpretation and application of Article 28 of the Guarantee Law (repealed), which is no longer applicable due to its conflict with Article 176 of the Property Law (repealed). However, Article 38(3) of the Judicial Interpretation on Certain Issues Regarding the Application of Guarantee (repealed) does technically provide a valuable standard of judgment for our reference. 4. Scope of Exemption for the Other Guarantors There exists one view that, the scope of exemption for the other guarantors as prescribed under Article 194(2) of the Property Law (repealed) should be the proportion of the waived mortgage to the overall mixed security, with the reason that, whether or not the guarantors are jointly and severally liable, they are liable by shares, and the mortgage waived by the creditor is only the debtor’s share of the guarantor liability as the mortgagor, which is limited to the value of the collateral and may be worth less than the value thereof. Such view is preconditioned on the right of recovery between the guarantors which, however, is not set forth in the Property Law (repealed), which case has already been expressly confirmed under Article 56 of the Minutes of the National Court Work Conference on Civil and Commercial Trial.23 Therefore, such view may not be adopted in judicial practice, and the scope of exemption for the other guarantors is only confined to the value of the waived collateral unless the other guarantors still promise to provide security. Of course, in the case where the shares of liability among the guarantors are agreed upon under the security contract, the creditor’s waiver of a mortgage is essentially the waiver of the share of the mortgage liability, with the other guarantors being exempted from their liability to the extent thereof. Article 194(2) of the Property Law (repealed) provides for the impact of the waiver of the mortgage provided by the debtor on the guarantor liability to be assumed by the other guarantors, and Article 218 thereof stipulates the impact on the same of the waiver of the pledge provided by the debtor. Based on the homogeneity of the nature of mortgage, pledge and lien, together with the equal legislative attitude of Article 参见贺小荣主编: 《最高人民法院第二巡回法庭法官会议纪要》 (第1辑),人民法院出版 社2019年版,第96页。 23 参见最高人民法院民事审判第二庭编著:《 < 全国法院民商事审判工作会议纪要 > 理解与 适用》 , 人民法院出版社2019版, 第351-353页。 22

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176 of the Property Law (repealed) towards all the security interests, the abovementioned analysis of Article 194(2) of the Property Law (repealed) can equally apply to Article 218 thereof, and also, by means of analogy, to the creditor’s waiver of the lien provided by the debtor. Whereupon, a uniform adjudication rules in this aspect can be reached as follows: (1) In the case of mixed security, where the creditor waives the collateral provided by the debtor, whether or not the other guarantors may be exempted accordingly from their liability shall be determined as agreed upon under the security contract. (2) Absent the relevant agreement in the security contract, the same shall be determined on the basis of whether or not the other guarantors hold the order interests against the debtor, with which the other guarantors may be alleviated or exempted from their liability to the extent of the security right waived by the creditor, and without which the other guarantors, whose guarantor liability will not be affected, may not be alleviated or exempted from their liability. (3) Whether or not the other guarantors enjoy the order interests shall be determined in accordance with Article 176 of the Property Law (repealed), i.e. with a clear agreement among the parties, the order interests shall be determined as agreed upon; with no or an unclear agreement to that effect, the collateral provided by the debtor shall be enforced first, and the other guarantors are subject to the equal guarantor liability, with the creditor having the right of option in requesting the fulfillment of guarantor liability by any of them.

Hubei YAS Commercial Chain Co., Ltd. v. Danyang Yongsheng Motor Transport Co., Ltd. (Dispute Over Tort Liability: Criteria for the Determination of Erroneous Application for Property Preservation) Jingchuan Liu, Ge Wang, and Shuang Liang

1 Rule Whether the application for property preservation is erroneous should be grounded not simply on whether the applicant’s claim is supported by the court, but rather on whether the application meets the general requirements for tort liability, i.e., the demonstration of intent or gross negligence on the part of the applicant, the suffering of loss by the respondent and the establishment of a causal relationship between the application and the subsequent loss sustained by the respondent.

Collegial Bench: Jingchuan Liu, Lichu Yang and Huizhuo Liu Edited by Yi Yang; Translated by Xiaohua Zhu J. Liu (B) · S. Liang Case Filing Division of the Supreme People’s Court of the People’s Republic of China, Beijing, China G. Wang The Intermediate People’s Court of Xuchang City, Xuchang, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_13

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2 Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellee in the Second Instance): Hubei YAS Commercial Chain Co., Ltd. (hereinafter referred to as YAS Commercial Chain Company) Respondent in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Dangyang Yongsheng Motor Transport Co., Ltd. (hereinafter referred to as Yongsheng Motor Transport Company) 2. Procedural History First Instance: No. 00072 [2015] Trial, Civ. Division, the Intermediate People’s Court of Yichang City, Hubei Province (dated Aug. 20 of 2015) Second Instance: No. 3227 [2017] Final, Civ. Division, the Higher People’s Court of Hubei Province (dated Dec. 21 of 2017) Case Reopening: No. 314 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated Oct. 25 of 2018) 3. Cause of Action Dispute over tort liability

3 Essential Facts On February 8, 2012, YAS Commercial Chain Company filed, on the ground of partnership dispute, a lawsuit against Yongsheng Motor Transport Company with the Intermediate People’s Court of Yichang City for liquidated damages and compensation payment totaling CNY 46.94 million. The Intermediate People’s Court of Yichang City issued on February 23, 2012, upon the application by YAS Commercial Chain Company for property preservation, a civil ruling (No. 00004 [2012], Preservation for Enforcement, the Intermediate People’s Court of Yichang City, Hubei Province), ordering the seizure of both the property of Yongsheng Motor Transport Company which is worth CNY 34 million and the property of equivalent value as the collateral provided by YAS Commercial Chain Company. Meanwhile, Yongsheng Motor Transport Company filed during the trial a counterclaim for continuing contract performance. The court rendered its judgment, dismissing both the claim filed by YAS Commercial Chain Company and the counterclaim by Yongsheng Motor Transport Company. Afterwards, Yongsheng Motor Transport Company initiated a proceeding against erroneous property preservation, citing the loss sustained due to erroneous application by YAS Commercial Chain Company for property preservation.

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Yongsheng Motor Transport Company filed a lawsuit with the Intermediate People’s Court of Yichang City for the compensation by YAS Commercial Chain Company of its economic loss incurred in the amount of CNY 18 million. The Intermediate People’s Court of Yichang City, which served as the court of first instance, ruled to dismiss the claim with the holding that, there lacked sufficient evidence to justify the findings that YAS Commercial Chain Company had the intent or gross negligence to damage through the preservation the property of Yongsheng Motor Transport Company, additionally, the lawsuit was not filed with malicious intent. Dissatisfied with the judgment, Yongsheng Motor Transport Company appealed to the Higher People’s Court of Hubei Province. The court held that, YAS Commercial Chain Company had filed a claim against Yongsheng Motor Transport Company on the ground of partnership dispute, which, however, had been dismissed by the court, or had failed to gain the support from the court. Whereupon, it could be concluded that YAS Commercial Chain Company failed to exercise due care in its application for the property preservation as based on an erroneous claim, with subjective fault on its part. Besides, since YAS Commercial Chain Company applied for the property preservation on the basis of its claim filing, which was not supported by the court of first instance, its claim thus lost its legality, resulting in the illegality of the subsequent property preservation. The court therefore ruled to: (1) reverse the civil judgment of the Intermediate People’s Court of Yichang City, Hubei Province (No. 00072 [2015] Trial, Civ. Division, the Intermediate People’s Court of Yichang City, Hubei Province); (2) order YAS Commercial Chain Company to compensate Yongsheng Motor Transport Company for its economic loss in the amount of CNY 2.0825 million; (3) dismiss the remaining claims of Yongsheng Motor Transport Company. Dissatisfied with the second instance decision, YAS Commercial Chain Company petitioned to the Supreme People’s Court for case reopening and the Supreme People’s Court reopened the case via certiorari.

4 Issues 1. Whether the application by YAS Commercial Chain Company for property preservation on the part of Yongsheng Motor Transport Company constitutes an erroneous application; 2. Whether YAS Commercial Chain Company shall compensate Yongsheng Motor Transport Company for its loss.

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5 Holding The Supreme People’s Court holds after review that the application by YAS Commercial Chain Company for case reopening was legally justified based on the following facts: 1. No sufficient evidence exists to prove the demonstration of intent or gross negligence on the part of YAS Commercial Chain Company in an attempt to damage through property preservation the legitimate rights and interests of Yongsheng Motor Transport Company In respect of the assertion by Yongsheng Motor Transport Company that YAS Commercial Chain Company shall be held liable for damages on the ground of the dismissal by the court of the latter’s claim in the partnership dispute which indicates obvious error in the latter’s application for property preservation, it is found after investigation that: First, in the partnership dispute between YAS Commercial Chain Company and Yongsheng Motor Transport Company, the former filed a lawsuit, on the ground that the latter’s failure constituted a breach of contract to perform the agreed payment obligation under the partnership investment, demanding from the latter the land price in the amount of CNY 23.94 million as refunded by the government, the liquidated damages in the amount of CNY 12 million, and the compensatory damages in the amount of CNY 11 million, totaling CNY 46.94 million. To prove its case, YAS Commercial Chain Company provided such evidences as the joint bidding agreement, the bidding agreement, the supplementary agreement and the incorporation agreement concluded between both parties, with the size of its claim consistent with that stated in its contract termination letter as delivered prior to the litigation to Yongsheng Motor Transportation Company. Besides, the application during the trial by YAS Commercial Chain Company, in an effort to secure the execution of the future effective judgment, for the preservation of the premises approximately worth CNY 34 million under the name of Yongsheng Motor Transport Company does not exceed the scope of its claim. It’s in line with the law for the court of first instance to preserve the above-mentioned premises upon the application of YAS Commercial Chain Company with corresponding security provided by the same. The application for property preservation by YAS Commercial Chain Company is justified and legitimate, with its exercise of due care in the property preservation imposed on Yongsheng Motor Transport Company within the amount limit of CNY 34 million, constituting no subjective abuse of its right to property preservation. Second, although the claim filed by YAS Commercial Chain Company in the partnership dispute was not supported by the court, the court, however, sustained its objection to the counterclaim, finally found the fundamental breach of contract by Yongsheng Motor Transport Company and simultaneously dismissed the counterclaims filed by Yongsheng Motor Transport Company for continuing contract performance and confirming its 49% equity in the former passenger transport center development project. Hence, YAS Commercial Chain Company’s claim against Yongsheng Motor

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Transport Company due to the latter’s fundamental breach of contract, and its subsequent application for property preservation is founded on factual circumstances and does not constitute a malicious lawsuit. Third, the breach of contract by Yongsheng Motor Transport Company that objectively triggered its partnership dispute with YAS Commercial Chain Company, together with the counterclaim by Yongsheng Motor Transport Company after the case was remanded for retrial, heightened to a certain degree the complexity and duration of the litigation. In addition, YAS Commercial Chain Company had minimal ability to foresee the precise outcome of the case at the time of its filing the lawsuit and applying for property preservation. The differences between a claim and the final judicial decision is quite a normal state of litigation and therefore should not be adopted as the ground for the existence of error in the property preservation applied by YAS Commercial Chain Company. Whereupon, the assertion by Yongsheng Motor Transport Company that YAS Commercial Chain Company erroneously applied for property preservation on the ground that the claim of the latter was not supported by the court may not be supported by this court due to its lack of sufficient factual and legal basis. 2. The evidence presented by Yongsheng Motor Transport Company is not sufficient to prove the causal relationship between its loss and the property preservation application by YAS Commercial Chain Company The seizure of the relevant premises under the name of Yongsheng Motor Transport Company did not, however, adversely affect the normal business operation thereof. Besides, the loss of CNY 18 million incurred, as Yongsheng Motor Transport Company asserted, due to the erroneous property preservation application by YAS Commercial Chain Company, is actually the high interest on its loan resulting from its resort to private funding upon its inability to borrow money from the bank due to the seizure of its premises. In this regard, although Yongsheng Motor Transport Company presents relevant judgment and mediation letter concerning the private funding, it fails to provide precise evidence to support its loss calculation, and to prove the presence of causal relationship between the above-mentioned interest and the application for property preservation by YAS Commercial Chain Company. Whereupon, infringement by YAS Commercial Chain Company can’t be deemed established upon the available evidence. It is inappropriate for the court of second instance to find only on the ground of the judgment of dismissal that YAS Commercial Chain Company was at fault in its property preservation application and order the same to assume the liability for damages, which should be corrected. The Supreme People’s Court, therefore, rules to reverse the second instance decision and uphold the first instance decision.

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6 Comment on Rule The property preservation system is designed to secure the execution of judgment in favor of the applicant by means of interim measures as employed by the court prior to its issuance of an effective decision such as seizure, attachment or freezing of the respondent’s property for the purpose of temporarily depriving the respondent of the right to dispose of such property. There are, however, numerous cases in reality where an applicant abuses the property preservation system to the detriment of the legitimate rights and interests of the respondent. Article 105 of the Civil Procedure Law states that “(t)he applicant must compensate the respondent for any loss incurred due to the granting of a property preservation which is later found to be unjustified or erroneously granted,” without, however, any rules further specifying the nature, the subject and the compensation scope of the liability for erroneous property preservation. In judicial practice, there also exists divergent interpretations in such respect. 1. Determination of “erroneous application for property preservation” Under the Civil Procedure Law, property preservation liability occurs if: (1) the applicant erroneously applies for property preservation; and (2) the respondent suffers loss as the result of the preservation. In judicial practice, there exists much controversy over the connotation of “erroneous application for property preservation”. One view is that the application for property preservation should be subject to a reasonable claim. The applicant, who completely or partially loses the case, shall be deemed to have failed to exercise due care in his claim filing, consequently infringing the legitimate rights and interests of the other party, with his application for property preservation as based on such claim also erroneous. Moreover, for the purpose of facilitating judicial operation and fostering uniform adjudication, it is speedier and more inexpensive to determine erroneous application for property preservation on the ground that the applicant’s claim is not fully supported by the court. In this case, for example, the court of second instance held that “YAS Commercial Chain Company failed to exercise due care in its application for property preservation as based on the claim which was not supported by the court, and is therefore subjectively at fault”. Though such view is quite operative, it is normally hard for the parties to a case to foresee or estimate the precise outcome of the litigation in respect of whether the claims filed can be supported by the court or whether the application for property preservation is justified. The presence of gap between a claim and the final decision is quite normal in litigation and also a frequent risk therein. The determination of erroneous application for property preservation as based only on whether or not the claim is supported by the court will heighten the risk of the party in property preservation application, and make the party refrain from protecting his legitimate rights and interests through the property preservation mechanism out of fear of assuming the liability of unjustified or erroneous property preservation, which case is inconsistent with the purpose of the property preservation system. Therefore, for the purposes of “erroneous application” under the Civil Procedure Law, we should not take into consideration only whether the applicant’s claim is supported by the court, but shall

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explore into the “error” with in-depth investigation of the applicant’s subjective state then, i.e., whether the application meets the general requirements for tort liability, namely, whether there exists subjective intent or gross negligence on the part of the applicant, loss on the part of the respondent, and causal relationship between the preservation application and the loss. 2. Specific criteria for “erroneous application for property preservation(s)” (1) Subjective fault The court shall determine the consequent liability on the basis of the applicant’s subjective state at the time of his application for property preservation, whereby the applicant is subject to the liability only when he was then at subjective fault. It must be noted that, in the case where the applicant’s claim is not fully supported by the court, the applicant should not be deemed at subjective fault unless the respondent can show the intent or gross negligence on the part of the applicant. In this case, although the claim filed by YAS Commercial Chain Company in its partnership dispute with Yongsheng Motor Transport Company was not supported by the court, the court, however, sustained its objection, found the fundamental breach of contract by Yongsheng Motor Transport Company and simultaneously dismissed the counterclaims filed by Yongsheng Motor Transport Company for continuing contract performance and confirming its 49% equity in the former passenger transport center development project. Whereupon, though its claim was not fully supported by the court, YAS Commercial Chain Company had provided in support of its case such evidence as the joint bidding agreement, the bidding agreement, the supplementary agreement and the incorporation agreement as concluded between both parties, and the size of the claim filed by it totaling CNY 46.94 million was also consistent with that stated in its letter of termination of the contract as sent prior to the litigation to Yongsheng Motormobile Transportation Company. Besides, the application by YAS Commercial Chain Company for the preservation of the premises approximately worth CNY 34 of Yongsheng Motor Transport Company in an effort to secure the execution of the future effective judgment does not exceed the scope of its claim. Therefore, the application for property preservation by YAS Commercial Chain Company is justified and legitimate with the exercise of its due care, with no subjective abuse of its right to property preservation. (2) Loss Though the sum of damages consists of both direct and indirect losses sustained by the infringed party due to the property preservation, the involved amount should not be calculated on the full value of the preserved property. As a rule, the parties’ claim for damages is calculated on the basis of: (1) the loss of profit incurred due to the preservation of fund; (2) the breach-inflicting loss caused by the respondent against a third person due to property preservation; and (3) the loss incurred due to the decline in the value of shares, bonds or physical objects. The loss of profit due to the preservation of fund refers to the shortage of funds or the decline in profit incurred because of the freezing of the preserved fund. In this

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case, Yongsheng Motor Transport Company asserted that it suffered huge interest loss as the result of its being forced to resort to private funding due to the seizure of its property. In determining such part of loss, the court shall adopt the principle of fairness with reference to multiple factors. For example, though the court of second instance here found the practice of infringement on the part of YAS Commercial Chain Company, it did not support the claim by Yongsheng Motor Transport Company for expected loss of interest, but calculated, after taking into consideration the restriction on the use of flowing fund as suffered by Yongsheng Motor Transport Company due to the property preservation and the actual loss thereof, the loss sustained by the same on the basis of the occupation fee of the preserved fund. With regard to the determination of the breach-inflicting loss as the result of breach of contract, there is a need to first determine the presence of a genuine and valid contract between the respondent and an outsider, and then assess in accordance with the principle of reasonable foreseeability the breach-inflicting loss resulting from the property preservation. Loss as the result of the decline in value should be determined with an awareness that the price of stocks and bonds always risks sharp fluctuation whereas the fluctuation of the price of physical objects normally depends on the market supply and demand. Therefore, such part of loss shall be determined with reference to the actual market context during the property preservation. (3) causal relationship The logic used to establish a causal relationship is that, without a specific action, there can be no corresponding outcome, i.e., only specific act would normally lead to a specific damage. In this case, on the one hand, although the relevant premises of Yongsheng Motor Transport Company were seized, the Company’s normal business operation was not adversely affected accordingly, on the other hand, the alleged economic loss of CNY 18 million by Yongsheng Motor Transport Company, which it asserts is due to the erroneous application for property preservation by YAS Commercial Chain Company, is actually a huge interest loss it suffered as the result of its being forced to resort to private funding due to the seizure of its premises. In this regard, although Yongsheng Motor Transport Company presents relevant judgment and mediation letter concerning the private funding, it fails to provide precise evidence to support its loss calculation, or to prove the presence of causal relationship between the above-mentioned interest and the application for property preservation by YAS Commercial Chain Company. 3. Conclusion An erroneous property preservation is, by its nature, a tort, against which the respondent or the third party may seek legal remedy under the Tort Liability Law (repealed). Although there exists no controversy in this regard, different courts treat it differently in judicial practice with their different interpretations of Article 105 of the Civil Procedure Law. The courts shall, with reference to the nature of erroneous property preservation and strictly subject to the fundamental elements of a tort, determine whether a property preservation is erroneous.

Jiang X, Chen X, et al. v. Lin X, Weng X(A), et al. (Dispute Over Enforcement Objection: Determination on the Time When the Sealing-Up Ruling and the Notice of Assistance in Enforcement Take Effect) Chun Yang, Jiaqin Wei, and Ming Zhang

1 Rule The sealing-up of the disputed real estate becomes legally effective as of the date when the real estate registry signs for the civil ruling and the notice of assistance in enforcement. The case where the real estate registry delays in handling the sealing-up formality of the disputed real estate constitutes only an internal managerial problem, not adversely affecting the fact that the sealing-up of the disputed real estate has already become legally effective as of the date of signature.

2 Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Jiang X Collegial Bench: Chun Yang, Aizhen Zhang and Jun He Edited by Yi Yang; Translated by Xiaohua Zhu C. Yang (B) · J. Wei The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China M. Zhang Postgraduate School, East China University of Political Science and Law, Shanghai, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_14

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Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Chen X Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Peng X Respondent in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Lin X Respondent in the Reopening (Defendant in the First Instance): Weng X(A) Respondent in the Reopening (Defendant in the First Instance): Weng X(B) Respondent in the Reopening (Defendant in the First Instance): Pincheng Co., Ltd. (hereinafter referred to as Pincheng Company) Respondent in the Reopening (Defendant in the First Instance): Wuyishan Huatai Real Estate Development Co., Ltd. (hereinafter referred to as Huatai Real Estate Development Company) 2. Procedural History First Instance: No. 153 [2016] Trial, Civ. Division, the Intermediate People’s Court of Nanping City, Fujian Province, Fujian 07 (dated Dec. 28 of 2017) Second Instance: No. 980 [2018] Final, Civ. Division, the Higher People’s Court of Fujian Province (dated Nov. 7 of 2018) Application for Case Reopening: No. 2195 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated May 23 of 2019) Case Reopening: No. 192 [2018], Reopening, Civ. Division, the Supreme People’s Court (dated Jan. 17 of 2019) 3. Cause of Action Dispute over enforcement objection

3 Essential Facts Huatai Real Estate Development Company entered into a commodity housing sale contract respectively with Jiang X, on December 29, 2014, and with Chen X and Peng X on January 11, 2015, under which Jiang X, Chen X and Peng X agreed to separately purchase on a lump-sum basis three parcels of real estate located in the resort area ××××××, Wuyishan City, Fujian Province (hereinafter referred to as the disputed real estate) on the date of the conclusion thereof. Afterwards, Jiang X, Chen X and Peng X failed to make the payment as agreed, and applied instead to the credit union for loan with mortgage security created on the three parcels. On February 6, 2015, the Real Estate Management Office of Wuyishan City received the civil ruling (No. 353[2014] Trial, Civ. Division, the Intermediate People’s Court of Nanping City, Fujian Province) and the notice of assistance in enforcement from the Intermediate People’s Court of Nanping City concerning the sealing-up of certain real estate under the name of Huatai Real Estate Development Company (the disputed real estate included). On February 9, 2015 and February 10, 2015, the disputed real

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estate underwent the pre-purchase registration of commodity housing. On February 15, 2015, the Real Estate Management Office of Wuyishan City seized the disputed real estate. On May 6, 2015, Lin X, as a general creditor, applied for the enforcement of the effective judgment regarding the disputed real estate against Weng X(A), Weng X(B), Pincheng Company and Huatai Real Estate Development Company. Thereafter, Jiang X, Chen X and Peng X raised as outsiders an objection to the enforcement of the judgment and the Intermediate People’s Court of Nanping City ruled to suspend the enforcement. Lin X then filed a lawsuit with the same court, requesting the enforcement of the disputed real estate. Jiang X, Chen X and Peng X alleged in their defense that the civil ruling served by the Intermediate People’s Court of Nanping City was not effective due to the failure of the real estate registry to process sealing-up registration, prior to which, however, the disputed real estate had already undergone by law the pre-purchase registration and the pre-purchase registration thus took effect prior to the sealing-up, entitling them as the right holders of pre-purchase registration to exercise the expectancy of the disputed real estate, immune from the judicial enforcement. The court of first instance rendered a judgment on December 28, 2017 (No. 153 [2016] Trial, Civ. Division, the Intermediate People’s Court of Nanping City, Fujian Province), granting the enforcement of subject matter. Dissatisfied with the judgment, Chen X, as the defendant in the first instance, appealed to the court of second instance which rendered on November 7, 2018 its decision (No. 980 [2018] Final, Civ. Division, the Higher People’s Court of Fujian Province), dismissing the appeal and upholding the first instance decision. Jiang X, Chen X and Peng X applied to the Supreme People’s Court for case reopening, requesting the court to preclude the disputed real estates from enforcement.

4 Issue How to ascertain the effective commencement of the sealing-up, seizing and freezing ruling, as well as the notice of assistance in enforcement take effect.

5 Holding The Supreme People’s Court holds after review that the sealing-up of the disputed real estate took effect as of February 6, 2015, the date when the Real Estate Management Office of Wuyishan City signed for the civil ruling and the notice of assistance in enforcement. The failure of the Office to timely process sealing-up registration procedure on the part of the Office is just an internal managerial problem, with no any adverse impact on the fact that the sealing-up of the disputed real estate has already became effective as of February 6, 2015. Even though the certificate of the

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pre-purchase registration of commodity housing as presented by Jiang X, Chen X and Peng X in second instance is authentic, the disputed real estate had already been sealed up by law prior to the registration by the Intermediate People’s Court of Nanping City. Whereupon, the assertion by Jiang X, Chen X and Peng X contradicts the fact that the pre-purchase registration took effect prior to the sealing-up. In accordance with Article 17 of the Provisions of the Supreme People’s Court on the SealingUp, Seizing and Freezing of Property in Civil Enforcement by the People’s Courts and Article 28 of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases, for the purpose of precluding the enforcement of disputed real estate, an outsider of the proceeding, as the buyer thereof, must meet the following requirements: (1) the outsider has entered into a contract concerning the mutation of the subject matter of the enforcement with the enforcee, to wit, the nominal registrant; (2) the outsider has made the full payment of the purchase price, or has paid part of the purchase price as contractually agreed with the remaining part already delivered for enforcement upon the request of the court; (3) the outsider has already publicized, through the actual possession of the object prior to the sealing-up, his expectancy of the subject matter of the enforcement; and (4) the reason for the absence of the registration of mutation of property cannot be attributed to the outsider. Although Jiang X, Chen X and Peng X presented the commodity housing sale contracts as executed prior to the sealing-up between each of them and Huatai Real Estate Development Company, they fail to show their legal possession of the disputed real estate and to fully paid the purchase price to the company prior to the sealingup, and the three parcels of real estate are still under the name of the company. It is therefore neither unjustified nor erroneous for the court of second instance to find that the assertions of Jiang X, Chen X and Peng X fail to satisfy the prerequisites for preclusion of enforcement as prescribed in Article 28 of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases, and the claim filed by Jiang X, Chen X and Peng X, asserting their rights as pre-purchase registration holders to preclude the enforcement of the disputed real estate, can’t be established due to a lack of factual and legal basis. Whereupon, the Supreme People’s Court rules to dismiss the application for case reopening by Jiang X, Chen X and Peng X.

6 Comment on Rule The court shall, in handling the outsider’s objection to enforcement, not only determine whether there exists legitimate substantive right enjoyed by the outsider to the subject matter of enforcement, but also assess the preclusive effect of such right

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against the enforcement, determining whether the outsider’s objection can be established. In the enforcement of monetary claims, where a buyer of a pre-purchased commodity housing raises as an outsider an objection to the enforcement of the real estate as registered under the name of the judgment debtor, the court generally reviews the objection in accordance with Articles 28 to 30 of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases. The criteria for ascertaining the effective commencement of the sealing-up, seizing and freezing ruling, as well as the notice of assistance in enforcement, function as the basis and prerequisite for determining whether an outsider satisfies the requirement for preclusion of enforcement. Article 1(2) of the Provisions of the Supreme People’s Court on the Sealing-Up, Seizing and Freezing of Property in Civil Enforcement by the People’s Courts states that: “Where assistance from relevant units or individuals is required in the sealingup, seizing or freezing of property, the people’s court shall prepare the notice of assistance in enforcement and serve it thereon, together with a copy of the ruling, both of which would take effect upon delivery.” In practice, however, there exist two conflicting understandings of such provision. One is that, although the sealing-up ruling and the notice of assistance in enforcement become legally effective upon delivery, the effect thereof only constitutes the requirement for the relevant units to assist by law in the sealing-up procedure, and does not necessarily result in the legal effect of sealing-up. With regard to sealing-up of real estate, no sealing-up takes effect until the court issues a notice of assistance in enforcement with other required materials, and the real estate registry completes the required registration formality. Such view is employed in the No. 6 ruling1 (No. 6[2019], objection to enforcement, Hunan province) on the ground that the court shall, under the relevant provisions of the Property Law (repealed), the Provisional Regulations on Real Estate Registration and the Rules for the Implementation of the Provisional Regulations on Real Estate Registration, provide pertaining materials for the sealing-up of real estate, and the real estate registry shall thereafter register the notice of assistance in enforcement

1

See private lending dispute [Li X(A), Zeng X v. Xidan Company, Li X(B)] decided by the People’s Court of Zhuhui District of Hengyang City, Hubei Province on March 18, 2019 (No.6 [2019] Enforcement Objection, Enforcement Department, the People’s Court of Zhuhui District of Hengyang City, Hunan 0405). In this case, with regard to the individual private lending disputes between the two separate enforcement applicants, to wit: Li X(A) and Zeng X, and the judgment debtors, to wit: Xidan Company, and Li X(B), He X(A), He X(B) and Lei X filed a written objection with the court. The court held that, under Articles 2 and 3 of the Provisional Regulations on Real Estate Registration and Articles 90 and 91 of the Rules for the Implementation of the Provisional Regulations on Real Estate Registration, the court shall provide pertaining materials by law for the sealing-up of real estate, and the real estate registry shall thereafter register such sealing-up according to the order of the delivery of the notice of assistance in enforcement, by which It can be noted that the sealing-up of real estate may not take effect without the issuance of the notice of assistance in enforcement and other relevant materials by the court and the complete registration formality thereof by the real estate registry. Whereupon, the court dismissed the objections filed by He X(A), He X(B) and Lei X.

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upon the order of the delivery thereof.2 The establishment, change, assignment and cancellation of real property rights, as required to be registered by law, shall take effect the moment it’s set out in the real property register, and sealing-up of real estate shall also be so set out with the particulars thereof.3 The other understanding is that the sealing-up ruling and the notice of assistance in enforcement shall take effect upon its delivery to the person concerned, with the sealing-up being under the state of publicity since then, and such methods of the publicity by the administrative agency as registration of sealing-up, posting of notice and affixing of seal don’t constitute the requirement for the validity of sealing-up. Such view was adopted by the Supreme People’s Court in its civil ruling (No. 1281[2018] Appeal, Civ. Division, the Supreme People’s Court).4 The two conflicting views mentioned above reflect the inconsistency in the judicial practice regarding the determination of the legal effect of sealing-up. The Supreme People’s Court has so far adopted in most cases the second view, which is also adopted here in this case. 1. Model legislation concerning methods of sealing-up of real estate The sealing-up in civil enforcement is a mandatory measure employed by the court to secure the realization of the civil rights of the enforcement applicant5 through prohibiting the disposal or transfer by the judgment debtor of non-monetary property (including both movable and immovable). 2

Article 90 of the Rules for the Implementation of the Provisional Regulations on Real Estate Registration states: “Where the people’s court requests the real estate registry to register the sealingup, the court shall present the following materials: (1) the staff card of the people’s court; (2) the notice of assistance in enforcement; and (3) other required materials.” Article 91(A) thereof states: “Where two or more people’s courts seize the same real estate, the real estate registry shall first register the sealing-up for the people’s court the notice of assistance in enforcement issued by which is first delivered, and register for the waiting list the people’s court whose notice of assistance in enforcement is delivered later.” 3 Article 2 of the Provisional Regulations on Real Estate Registration states: “For the purposes of these Regulations, the registration of real estate refers to the act by the real estate registry of setting out by law the attribution of rights to real estate and other statutory matters in the real estate register; the real estate refers to land, sea area, as well as houses, forest trees and other fixed objects.” Article 3 of the Regulations states: “The first registration of real estate, the registration of change, transfer, cancellation, correction, objection, pre-purchase and sealing-up, etc., shall be governed by these Regulations.” 4 See the case reopening review and trial supervision initiated by Panjin Xincheng Industrial Group Co., Ltd. against Dalian Zhucheng Construction Group Co., Ltd. 5 参见程啸: 《不动产登记法研究》 ,法律出版社2011年版,第579页。There exist two different legislative modals under comparative law concerning the sealing-up of immovable property. One modal, particularly adopted in Germany, is that the sealing-up of immovable property shall only take effect upon its registration, the only method of the sealing-up thereof. Under Section 19(1) of the Compulsory Auction and Compulsory Administration Act of Germany, “The court which orders a compulsory sale must simultaneously request the registration authority to register such order in the land register. The real estate of the judgment debtor which has not been registered shall also be so registered by the registry.” The other modal is that sealing-up of immovable property can be accomplished by various fashions including but not limited to the registration thereof.

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At present, enforcement law is not available in China, nor is any definitely prescribed method of sealing-up of real estate under the current Civil Procedure Law. In terms of judicial interpretation, the second model legislation mentioned above is currently under practice, i.e., sealing-up of real estate may be exercised through various methods, including affixing of seal or posting of notice, registration of sealing-up and registration of pre-sealing-up, etc.6 Article 9(2) of the Provisions of the Supreme People’s Court on the Sealing-Up, Seizing and Freezing of Property in Civil Enforcement by the People’s Courts states: “For the purpose of sealing-up, seizing and freezing of registered real estate, specific chattel or any other property right, the relevant registry shall be notified to process the registration thereof. Any such sealing-up, seizing and freezing of property without registration may not stand against those with registration.” Article 26(3) of the same Regulations further states: “…the sealing-up, seizing or freezing of property by the people’s court without publicity may not stand against a bona fide third party.” In sum, it’s only legally provided that the sealing-up without registration by the administrative agency may not stand against other sealing-ups already registered or against a bona fide third party, but not that the sealing-up without registration is not legally effective. Whereupon, it is the delivery of the ruling and the notice of assistance in enforcement by the court to the person or the organization assisting in the enforcement, not the registration of sealing-up or any other method of publicity, that constitutes the essential requirement for effective sealing-up, seizing and freezing of property, with the legal effect of the latter only standing against a bona fide third party. 2. Protection of and restrictions on the buyer’s expectancy Protection of the buyer’s expectancy, as the theoretical basis for the priority protection of the transferee of imchattel in enforcement proceedings, refers to the case where a sales contract buyer, who has not yet acquired the ownership of the subject matter but has partially fulfilled the contractual obligation, may be granted a legal status similar to that of an owner with the expectancy standing against the enforcement. The Provisions of Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases, apart from its protection of the buyer’s expectancy, also imposes reasonable restrictions thereon. On the one hand, without prejudice to the purpose of sealing-up and the interests of the enforcement applicant, the conclusion of the house sale contract between the parties, the buyer’s possession of the real estate and the payment of the purchase price all shall, in accordance with Articles 28 (prescribing the conditions for the protection of the no-fault immovable property buyer’s expectancy) and 29 (setting forth the conditions for the protection of house buyer’s expectancy), take place “prior to the sealing-up” by the court, in an effort to reduce the possibility of malicious collusion between the judgment debtor and the third party, which embodies the appropriate intervention by the enforcement power as the public authority in civil affairs between the judgment debtor and the third party and the balancing of interests between the same. On the other hand, the right to the real estate enjoyed by the right holder of pre-purchase registration also 6

参见程啸: 《不动产登记法研究》 ,法律出版社2011年版,第579页。

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constitutes the expectancy, and the right holder, due to the absence of the required registration, has not acquired the ownership of real estate. Where the right holder filed the enforcement objection in accordance with Article 30 of the Provisions, such objection shall be conditioned on the pre-purchase registration of the seized real estate; in simpler words, the pre-purchase registration of real estate must occur before the sealing-up process. In this case, the sealing-up registration of the disputed real estate was delayed by the Real Estate Management Office of Wuyishan City. If the Intermediate People’s Court of Nanping City were to consider this delayed registration date as the effective date of the sealing-up, it might raise the possibility of malicious collusion between the judgment debtor, the third party and the real estate management office with the intention of evading enforcement, which would be incongruous with the legislative intent. 3. Impact of the rules of the determination of sealing-up of immovable property on judicial practice In accordance with the Provisions on the Sealing-Up, Seizing and Freezing of Property in Civil Enforcements by the People’s Courts and the Circular on Certain Issues Concerning the Regulation of Enforcement by the People’s Courts and Assistance in Enforcement by the Land Resources and Real Estate Administration Departments in Accordance with the Law specifying the procedure for assistance in enforcement by the real estate registration authority, the real estate registration authority is under the duty to provide assistance in enforcement such as sealing-up in accordance with the notice of assistance in enforcement issued by the court.7 It is generally accepted that, as far as the court is concerned, the real estate registry assumes, upon its signing for the notice of assistance, the assistance obligation in enforcement, and thus shall fulfill such obligation in accordance with the effective legal document. Where the real estate registry delays, or even refuses the fulfillment of such obligation on account of “internal examination”, an internal management error or major defect may occur, which shall be corrected by the court, or such delay or refusal may be so serious as to be a violation of the rules of civil procedure, resulting in corresponding sanctions or penalties. Neither of the two cases, however, negates the fact that the sealing-up of real estate becomes legally effective on the date when it’s signed for. 4. Conclusion The date of the written delivery of the sealing-up, seizing and freezing ruling, as well as the notice of assistance in enforcement, shall be deemed as the effective date thereof. Upon the due service by the court on the real estate registry of the aforesaid pertaining instruments which are then signed for by the same, the sealingup takes its publicity effect, legally resulting in the prohibition or restriction of the judgment debtor from disposing of the specific property, regardless of whether the administrative agency has registered the sealing-up, posted a notice thereof or affixed a seal thereto. 参见陈琪: 《不动产登记机构协助公安机关查封不动产相关问题研究》 ,载 《中国房地产》 2013 年第3期。

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In addition, in view of the priority enjoyed by the buyer of real estate in the enforcement proceeding, the Provisions of Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases particularly grants the buyer the expectancy of real estate to preclude the effect of enforcement. It must be noted, however, that the degree of such protection shall be in line with the purpose of sealing-up and the objective of protecting the interests of the enforcement applicant. Therefore, in a case involving enforcement objection by an outsider, the court shall, in accordance with the standard that “the sealing-up, seizing and freezing ruling, as well as the notice of assistance in enforcement become legally effective upon the delivery thereof”, duly determine whether the buyer’s substantive rights can be exercised against enforcement.

Huang X v. Xiamen Shuangrun Investment Management Co., Ltd., Fenghe (China) Co., Ltd. (The Third Party in the First Instance), Hui’an County Rural Credit Cooperative (Outsider’s Objection to Enforcement: Legal Requirements for the Objection to the Enforcement by an Equity Assignee) Min Xia

1 Rule 1. The legal requirements for the objection to enforcement by an equity assignee upon the sealing-up of the equity by the court include the occurrences prior to such sealing-up of: (1) the conclusion of a valid assignment contract out of free will, (2) the completion of the shareholder register update, and (3) the full payment by the equity assignee of the assignment price, or partial payment thereof as agreed with the remainder delivered for enforcement as required by the court, etc. 2. Where the assignee makes prior to the sealing-up the payment of the equity assignment price to a third party without the assignor’s authorization, the payment may not be deemed valid. The payment of equity assignment price after the sealing-up by the assignee will hamper the realization of property preservation by the court and infringe upon the interests of the applicant, and thus may not be accepted as a preclusive cause against enforcement. What’s more, the payment Collegial Bench for the Second Instance: Shu He, Aizhen Zhang and Qinglin Jia Edited by Yi Yang; Translated by Xiaohua Zhu M. Xia (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_15

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in such manner by the assignee constitutes a refusal of delivering the equity for enforcement, and his objection to enforcement may therefore not be sustained by the court.

2 Case Information 1. Parties Appellant (Defendant in the First Instance): Huang X Appellee (Plaintiff in the First Instance): Xiamen Shuangrun Investment Management Co., Ltd. (hereinafter referred to as Shuangrun Investment Management Company) Third Party in the First Instance: Fenghe (China) Co., Ltd. (hereinafter referred to as Fenghe Company) Third Party in the First Instance: Hui’an County Rural Credit Cooperative (hereinafter referred to as Hui’an RCC) 2. Procedural History First Instance: No. 25 [2018] Trial, Civ. Division, the Higher People’s Court of Fujian Province (dated Jun. 9 of 2016) Second Instance: No. 1946 [2019] Final, Civ. Division, the Supreme People’s Court (dated May 9 of 2020) 3. Cause of Action Outsider’s objection to enforcement

3 Essential Facts On July 28, 2017, four maximum-amount pledge contracts was concluded by and between Fenghe Company and Xiamen Siming Shuangrun Microfinance Co., Ltd. (hereinafter referred to as Siming Shuangrun Microfinance Company), under which Fenghe Company agreed to pledge the equity held by the company in Hui’an RCC to Siming Shuangrun Microfinance Company as collateral for four maximum-amount loan contracts which involve four loans in the amount of CNY 15 million for each with Siming Shuangrun Microfinance Company as the lender. Afterwards, Siming Shuangrun Microfinance Company granted the loans as agreed. On December 4, 2017, Siming Shuangrun Microfinance Company announced, on the ground of breach of contract, the early maturity of the four loans, and demanded the borrowers and the guarantors to repay immediately all the loan principal plus the interest thereof, which case has also been confirmed by the lender, the pledgor and the surety thereof. On the same day, Siming Shuangrun Microfinance Company assigned to Xiamen Gaoxunda Parking Building Investment Management Co., Ltd. (hereinafter referred

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to as Gaoxunda Parking Building Investment Management Company) the claims and other related rights under the four maximum-amount loan contracts mentioned above, with the notices of assignment of claims mailed to the involved debtors and guarantors, which had already been signed for. On December 5, 2017 and December 29, 2017, Gaoxunda Parking Building Investment Management Company respectively paid the assignment price of said claims, totaling CNY 60 million, to Siming Shuangrun Microfinance Company, which then assigned on December 5, 2017 a sum of CNY 45.12 million to the former, with the designated purpose of the amount being “intercompany accounts”, and assigned on January 30, 2018 a sum of CNY 15 million to the same with the purpose thereof as “the assignment price of the equity of Hui’an RCC”. On December 6, 2017, Fenghe Company and Shuangrun Investment Management Company filed an application with Hui’an RCC for equity assignment, which was granted on December 11, 2017 by the fourth council thereof. On the same day, a stock assignment agreement and a confirmation letter were entered into by and between Shuangrun Investment Management Company and Fenghe Company, under which Shuangrun Investment Management Company shall purchase at a price of CNY 60 million the 34,388,095 shares of Hui’an RCC’s stock formerly held by Fenghe Company. Hui’an RCC, as the “stock registration authority”, sealed the contract and processed the release of the internal system freezing of the pledged equity. Afterwards, Fenghe Company assigned a sum of CNY 34,388,095 to the stock account of Shuangrun Investment Management Company and cancelled thereafter its own stock account from which said sum was assigned, and Hui’an RCC produced accordingly a stock certificate (pending delivery) for Shuangrun Investment Management Company and processed the internal system’s stock assignment registration. On November 28, 2017, the Higher People’s Court of Fujian Province ruled (No. 133 [2017] Trial, Civ. Division, the Higher People’s Court of Fujian Province)1 to seal up and freeze the assets of CNY 500 million under the name of Fenghe Company, et al. On December 12, 2017, the same court issued the Notice of Assistance in Enforcement (No. 102 [2017], Preservation for Enforcement),2 demanding Hui’an RCC and Hui’an County Administration of Market Regulation to assist in the freezing of the 4.2% equity of Hui’an RCC under the name of Fenghe Company. Hui’an RCC endorsed on the acknowledgement receipt thereof that “Fenghe Company had no equity available for freezing in this Cooperative.” Shuangrun Investment Management Company filed with the Higher People’s Court of Fujian Province an objection to the above-mentioned equity preservation and the court ruled to dismiss the objection (No.1 [2018] Objection to Enforcement, Enforcement Department, the Higher People’s Court of Fujian Province). Shuangrun Investment Management Company filed thereafter a lawsuit, requesting the court to: (1) confirm the ownership by Shuangrun Investment Management Company of the involved equity; (2) preclude the enforcement of the involved equity and revoke the sealing-up and freezing of the involved equity as imposed by 1 2

See the private lending case initiated by the plaintiff (Huang X v. Fengrun Co., et al.). See the private lending case initiated by the plaintiff (Huang X v. Fengrun Co., et al.).

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the Higher People’s Court of Fujian Province (No. 133 [2017] Trial, Civ. Division; No. 102 [2017] Preservation for Enforcement). The Higher People’s Court of Fujian Province held after hearing that, firstly, the application for equity assignment, the conclusion of the equity assignment agreement, the approval of the application for equity assignment, the formality of equity assignment and the production of the stock certificate all occurred prior to the sealingup and freezing of the involved equity by the court. Secondly, in order to settle its debt owed to Siming Shuangrun Microfinance Company, Fenghe Company assigned the involved equity under its name to Shuangrun Investment Management Company, which, through its payment to Gaoxunda Parking Building Investment Management Company, not only fulfilled its obligation under the equity assignment agreement to make the payment of the equity assignment price to Fenghe Company, but also discharged Fenghe Company the debt the latter owed to Gaoxunda Parking Building Investment Management Company (formerly owned by Siming Shuangrun Microfinance Company), with the whole process of equity assignment being objective and genuine. Thirdly, the assignment voucher provided by Shuangrun Investment Management Company had proved its actual payment of the assignment price. With the genuine underlying claim (Siming Shuangrun Microfinance Company’s claim against Fenghe Company) and the actual assignment of claim (the assignment of claim by Siming Shuangrun Microfinance Company to Gaoxunda Parking Building Investment Management Company), available evidence is not sufficient enough to deny the authenticity of the external assignment of equity by the debtor, to wit: Fenghe Company, merely on the ground of the association between the original creditor (Siming Shuangrun Microfinance Company) on the one side, and the claim assignee (Gaoxunda Parking Building Investment Management Company) and the equity assignee (Shuangrun Investment Management Company) on the other. Whereupon, the Higher People’s Court of Fujian Province ruled to: (1) confirm the ownership by Shuangrun Investment Management Company of the involved equity under the name of Fenghe Company; (2) preclude the enforcement of the involved equity under the name of Fenghe Company; (3) immediately revoke the sealing-up and freezing of the involved equity as rendered by the Higher People’s Court of Fujian Province (No. 133 [2017] Trial, Civ. Division; No. 102 [2017] Preservation for Enforcement). Dissatisfied with the first instance decision, Huang X filed an appeal with the Supreme People’s Court.

4 Issues 1. Requirements for a valid enforcement objection by the assignee after the sealingup of equity; 2. Whether Shuangrun Investment Management Company holds the substantive right to preclude the enforcement of the involved equity.

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5 Holding The Supreme People’s Court holds after review that, the courts shall, in accordance with Article 25 of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases, identify the equity holder at the phase of enforcement with reference to the industrial and commercial registration information. When the court of first instance imposed preservation measure on the 4.2% equity of Hui’an RCC on December 12, 2017, the registered equity was still under the name of the preservation respondent, to wit: Fenghe Company, therefore, the sealing-up of the involved equity rendered by the court in accordance with the ruling of the Higher People’s Court of Fujian Province (No. 133 [2017] Trial, Civ. Division, the Higher People’s Court of Fujian Province) is in line with the judicial interpretation mentioned above. 1. Requirements for a valid enforcement objection by the assignee after the sealing-up of equity A lawsuit of enforcement objection essentially seeks to determine by means of substantive procedures the priority on the subject of the enforcement between an applicant for the enforcement of money claim under a valid judgment and an enforcement objector. Considering the basic function and value orientation of such lawsuit, after the sealing-up of the involved equity by the court, the equity assignee, when filing an objection to enforcement, are required to: (1) have concluded a genuine and valid assignment contract with the enforcee prior to the sealing-up; (2) have finalized the shareholder register update process, by which they may claim the rights of shareholder from the company; and (3) have made the full payment of the equity assignment price, or the partial payment thereof as agreed with the remainder delivered for enforcement as required by the court. 2. Whether Shuangrun Investment Management Company meets the requirements for valid enforcement objection by an equity assignee. Shuangrun Investment Management Company asserts that it has already made the full payment of CNY 60 million in two installments, the first of which in the amount of CNY 45.12 million was assigned to Gaoxunda Parking Building Investment Management Company on December 5, 2017, CNY 45 million of which was the equity assignment price, and the second of which in the amount of CNY 15 million was assigned to the same company on January 30, 2018. (1) In respect of the equity assignment price of CNY 45 million Firstly, the payment was made on December 5, 2017, prior to the conclusion of the stock assignment agreement regarding the involved equity and the approval of the stock assignment by the Council of Hui’an RCC. Secondly, Although the stock assignment agreement was concluded after the above-mentioned payment, the payment of the majority of equity assignment price by Shuangrun Investment Management Company was not recorded therein. Thirdly, from the perspective of the payment receiver, the payment was made to the account of Gaoxunda Parking

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Building Investment Management Company, not the account of the assignor, to wit: Fenghe Company. The available evidence is not sufficient to prove that Fenghe Company once entrusted Shuangrun Investment Management Company to make the payment of its assignment receivable to Gaoxunda Parking Building Investment Management Company for the repayment of the debts owed by Fenghe Company. Finally, from the perspective of the purpose of the sum, Shuangrun Investment Management Company and Gaoxunda Parking Building Investment Management Company are affiliated companies under the same de facto controller with frequent large-value liquidity between them, whereby the sum may not be deemed involved in this case without the nature of the sum being specifically stated. Therefore, it can be concluded from the available evidence that the sum of CNY 45.12 million assigned by Shuangrun Investment Management Company on December 5, 2017 to Gaoxunda Parking Building Investment Management Company may not be deemed the equity assignment price it paid to Fenghe Company. (2) In respect of the equity assignment price of CNY 15 million Firstly, the payment of CNY 15 million by Shuangrun Investment Management Company was also not made to Fenghe Company. Absent the evidence that Fenghe Company entrusted Shuangrun Investment Management to make the payment to Gaoxunda Parking Building Investment Management Company, such payment may not be deemed as the equity assignment price to be paid to Fenghe Company. Secondly, the payment was made after the sealing-up by the court of the involved equity, and may not be admitted as the factual basis to preclude the enforcement of judgment. In view of the failure of Shuangrun Investment Management Company to make an effective payment of the equity assignment price, its claim may not be sustained for precluding the enforcement of the involved equity and revoking the sealing-up and freezing thereof. In conclusion, the Supreme People’s Court rules to reverse the first instance decision and dismiss the claim filed by Shuangrun Investment Management Company.

6 Comment on Rule In this case, the difficulty in the application of law lies in the legal requirements for an enforcement objection by the equity assignee. 1. Criteria for determining the equity holder in an enforcement objection filed by an outsider Objection to enforcement by an outsider, as a part of the enforcement proceeding, is, in the value orientation, more focused on procedural efficiency, with substantive fairness taken into account as well. The procedure of enforcement objection, based on such objective, focuses more on the formal examination of the rights to the subject of enforcement, and the enforcement department of the court determines the ownership of the subject of enforcement based mainly on such external expressions of rights as

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the registration of the ownership thereof, the actual possession thereof, etc., with its determination on the enforceability of the subject accordingly.3 Such judicial practice is mainly based on two reasons: one is the required efficiency of enforcement with which the claims recognized by an effective judgment must be realized in a speedy manner without any delay or interruption; the other is the required separation of enforcement from trial, by which the enforcement department does not have the power to examine and determine the ownership of substantive rights. As to the examination of the subject of enforcement in an enforcement objection by an outsider, the principle of property rights disclosure and reliance on appearance of right shall be adopted, whereas in the case where the subject of enforcement consists of rights and interests other than corporeal objects (e.g. equity, intellectual property, etc.), the reliance on appearance of right can serve as the standard for the determination by the enforcement department on the ownership.4 Article 25(1) of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases states “The people’s court shall determine whether the outsider who files the objection is the right holder under the following criteria: …(4) the ownership of equity shall be determined based on the registration with the industrial and commercial administration authority and the information publicized in the enterprise credit information publicity system …” In other words, at the phase of enforcement, the court shall determine the equity holder according to the registration information filed with the industrial and commercial administration authority and the information publicized in the enterprise credit information publicity system. In the procedure of enforcement objection by an outsider, however, there is possibility of mistaking the outsider’s property for the enforcee’s property subject to repayment liability if the examination of equity holder is based on the registration information filed with the industrial and commercial administration authority and the information publicized in the enterprise credit information publicity system. 2. The basic function and value orientation of the lawsuit of enforcement objection After the sealing-up of equity, the outsider, who is dissatisfied with the judicial ruling to dismiss his objection to enforcement, may file a lawsuit of enforcement objection within the specified period. Attributable to the similarities and commonality between the lawsuit of enforcement objection and the objection by an outsider to enforcement, until the issuance of a particular legal framework for the lawsuit of enforcement objection, the lawsuit of enforcement objection is generally handled with reference to the relevant provisions of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases. 3

See the case of outsider’s objection to enforcement (Chen X v. Shanghai Zhu’an Construction Development Co., Ltd.) ruled by the Supreme People’s Court (No. 49 [2019] Reopening, the Supreme People’s Court). The case ruled by the Adjudication Committee of the Supreme People’s Court, with the reasoning of the judgment significantly instructive for the handling of the case of enforcement objection by an outsider. 4 参见肖建国: 《执行标的实体权属的判断标准——以案外人异议的审查为中心的研究》 ,载 《 政法论坛》 2010年第3期。

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The lawsuit of enforcement objection, as a follow-up procedure of an objection to enforcement, is, however, a complete substantive procedure independent thereof. Besides, the lawsuit of enforcement objection, as an important relief mechanism and device against enforcement, aims at precluding or revoking the enforcement by the enforcement department of the subject,5 seeking to preclude the substantive loss sustained by the outsider due to the unjustified enforcement by the court.6 Article 312 of the Judicial Interpretation of the Supreme People’s Court on Application of the Civil Procedure Law of the People’s Republic of China states that: “As to the lawsuit of enforcement objection filed by an outsider, the people’s court shall, after its hearing: (1) rule to preclude the enforcement of subject matter where the civil rights and interests enjoyed by the outsider concerning the subject matter subject to enforcement are sufficient to preclude the enforcement thereof…” In other words, in respect of the value orientation, the lawsuit of enforcement objection prioritizes fairness together with efficiency, seeks to identify, by means of substantive examination, the ownership of the subject of enforcement, and further determines whether the civil rights and interests enjoyed by the outsider is sufficient to preclude the enforcement, in an effort to provide relief against enforcement and protect the outsider’s civil rights and interests. The basic function of the lawsuit of enforcement objection is to determine by means of substantive procedures who may enjoy the priority right on the subject of enforcement, the applicant for the enforcement of money claims with a valid judgment, or the enforcement objector. Therefore, the basic value orientation of the lawsuit of enforcement objection is based on the principle of fairness, by which the qualified objector may, on the precondition of substantive examination, enjoy the protection priority over ordinary creditors. 3. Requirements for the lawsuit of enforcement objection by the assignee after the sealing-up of equity Based on the basic function and value orientation of the lawsuit of enforcement objection, the assignee, who petitions for the preclusion of enforcement on the ground of his priority right to the subject thereof, shall satisfy, unless otherwise provided by law, the following conditions: (1) The assignee’s right to the subject of enforcement is genuine and has come into existence long before its sealing-up by the court Genuinity serves as a prerequisite for a valid objection to enforcement by the assignee whose right to the subject of enforcement, if not genuine, may not be protected, let alone enjoying protection priority. The sealing-up mechanism is designed to maintain the current state of the debtor’s property, securing the repayment of the claims confirmed through trial or other proceedings, which therefore has the effect of prohibiting the debtor from his disposal of the sealed-up property.7 In other words, following the court sealing, any disposal of the subject of enforcement shall be null 参见张卫平: 《案外人异议之诉》 ,载 《法学研究》 2009年第1期。 参见唐力: 《案外人执行异议之诉的完善》 ,载 《法学》 2014年第7期。 7 参见李磊明: 《论查封的法律效力》 ,载 《中外法学》 1998年第1期。 5 6

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and void, and the actual existence of the assignee’s right prior to the sealing-up constitutes therefore a prerequisite for a valid objection to enforcement. Whereupon, a genuine and valid assignment agreement shall be entered into prior to the court sealing by and between the assignee and the enforcee. (2) The assignee is in actual possession of or control over the subject of enforcement Without actual possession of or control over the subject of enforcement, the assignee only enjoys the right to request the enforcee to deliver as agreed the subject of enforcement, which is an obligatory claim of equal nature and cannot resist enforcement. After acquiring the actual possession of or control over the subject of enforcement by virtue of the enforcee’s performance of contract, the assignee’s right to the subject of enforcement would be transformed into a claim in rem with his consequent capability of possessing, using and benefiting from the subject of enforcement, which would no longer be enjoyed by the enforcee. The court shall, at the phase of enforcement, exercise enforcement measures to the limit of the property or the property interest actually enjoyed by the enforcee. Once the enforcee loses his possession of or control over the subject, which results in his lack of any right or interest thereon, such property may be precluded from enforcement. Therefore, the actual possession of or control over the subject of enforcement by the assignee constitutes a substantive requirement for the grant of protection priority. Where the subject of assignment is equity, the assignee’s actual control over the subject of enforcement shall be determined in consideration of the basic characteristics of equity. Equity (right) refers to the rights of shareholders or contributors of a company to obtain return on assets, participate in major decision-makings and select management. Article 32 of the Company Law states that, “A limited liability company should keep a list of shareholders with the following specified items: (1) names or both names and domiciles of shareholders; (2) capital contribution by the shareholders; and (3) serial number of the capital contribution certificate. The shareholders whose names are stated in the register of shareholders may assert their rights of shareholders thereby. The company shall register the names of the shareholders with the company registration authority; if there is any changes to the registered informaton, such change must also be registered. Without registration or registration of change, the rights concerned may not resist a third party.” In sum, the shareholders exercise their rights according to the register of shareholders. The prerequisite for the assignee’s capability of actually exercising his equity is that the register of shareholders of the company has already been changed, with the assignee already stated as a shareholder in the register of shareholders. Therefore, the assignee shall update the register of shareholders of the company prior to the court sealing, by which the assignee may assert the shareholder rights from the company. (3) The enforcee’s property subject to repayment liability has not been unduly diminished by the assignment First of all, the subject of enforcement was formerly the enforcee’s property subject to repayment liability, which can be disposed of by the court upon the creditor’s application for the settlement of debt. Under the general rule, all the property of the

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enforcee shall be subject to repayment liability, preconditioned on that such property must be owned by the enforcee at the time of enforcement.8 The possession of or control over the subject of enforcement acquired by the assignee is based on the assignment contract, under which the enforcee assigns the subject of enforcement in exchange for the assignment price. The assignment of the subject of enforcement by the enforcee and the payment of the assignment price by the assignee constitute mutual considerations, interdependent and forming the basis for a receipt-payment relationship. In the case where the assignee has made the full payment of the assignment price, or the partial payment thereof as agreed with the remainder delivered for enforcement by the court, the property under the name of the enforcee is converted accordingly from the subject of enforcement into the assignment price, with the property subject to repayment liability not being unduly reduced by such assignment. In the case where the assignee performs the main contractual obligations such as the payment of assignment price, the assignee is entitled to maintain the receipt-payment state, with the granted right to preclude enforcement. Nevertheless, in the case where the assignee fails to pay the consideration as contractually agreed, the assignee, with the failure to fulfill the obligation to pay the consideration, loses the foundation for the continued possession of the subject of enforcement, and therefore may not be granted the right to preclude enforcement. Secondly, the fundamental value of the lawsuit of enforcement objection lies in the principle of fairness, which refers to the maximization of the concept of “everyone gets what he deserves”, with the justice in exchange involving the fair and reasonable treatment to be enjoyed among individuals in property transactions.9 In the case where the assignee fails to pay the assignment price and is unwilling to deliver the remaining price to the court for enforcement, if the creditor has already taken the measure of sealing-up against the subject of enforcement, with the claims already paid for the consideration, the protection priority granted to the assignee over the creditor will be inconsistent with the fundamental value of the system of the lawsuit of enforcement objection. Finally, the payment of assignment price is, under the existing judicial interpretations, an essential requirement for the preclusion by the assignee of the enforcement. Article 17 of the Provisions on the Sealing-Up, Seizing and Freezing of Property in Civil Enforcement by People’s Courts issued in 2004 states that, “The people’s court may seal up, seize or freeze the property of the enforcee which has been sold to a third party who has paid part or all of the price and is in actual possession of the property, and which has not yet gone through the title assignment procedure as legally required; the people’s court may not seal up, seize or freeze the property, however, when the bona fide third party has paid the full price and is in actual possession thereof without the title assignment procedure.” Article 28 of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases issued in 2015 states that, “In the enforcement of a monetary claim, with the buyer(the assignee)’s right to preclude the enforcement, the court shall sustain the 8 9

参见宋刚: 《论财产责任下的责任财产》 ,载 《法学评论》 2014年第1期。 参见易军: 《民法公平原则新诠》 ,载 《法学家》 2012年第4期。

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buyer’s objection to the enforcement of the real estate registered under the name of the enforcee when: (1) a valid written sales contract has been concluded before the sealing-up thereof by the people’s court; (2) the buyer was already in the legal possession of the real estate prior to the sealing-up thereof by the people’s court; (3) the buyer has paid the full price, or part of the price as agreed with the remainder delivered to the people’s court for enforcement; (4) the title assignment has not been registered for reasons other than the buyer’s fault.” Such Article is basically in line with Article 17 of the Provisions on the Sealing-Up, Seizing and Freezing of Property in Civil Enforcement by People’s Courts, with an even broader definition for the payment of assignment price as “full payment of the price, or partial payment of the price as contractually agreed with the remainder delivered for enforcement as required by the people’s court”. What’s more, even under Article 29 of the Provisions of the Supreme People’s Court on Several Issues Concerning Enforcement Objection and Reconsideration Cases which grants the highest protection priority to housing consumers on account of the principle of “the right of survival being the highest priority”, a housing consumer who “has paid more than 50% of the total price of the housing as agreed” may preclude the enforcement thereof. In a lawsuit of enforcement objection, the equity assignee may not enjoy a more favorable position than a housing consumer. Therefore, the case constitutes one necessary requirement for the preclusion of enforcement where the equity assignee has made the full payment of the assignment price, or part thereof with the remainder delivered for enforcement as required by the court. In summary, after the sealing-up of equity by the court, the legal requirements for the lawsuit of enforcement objection filed by the equity assignee shall include: (1) the conclusion of a genuine and valid assignment contract by and between the assignee and the enforcee prior to the sealing-up; (2) the completion by the assignee of the shareholder register update prior to the sealing-up, by which the assignee may claim the rights of shareholder from the company, and (3) the full payment by the assignee of the assignment price prior to the sealing-up, or the partial payment thereof by the same as agreed with the remaining delivered for enforcement as required by the court. 4. Handling of This Case According to the aforementioned analysis, the payment of equity assignment price constitutes one core requirement for the lawsuit of enforcement objection to be filed by the assignee thereof. In this case, the equity assignee asserts that it has fulfilled the obligation to pay the equity assignment price with the majority of the equity assignment price paid before the sealing-up and the remainder paid after the sealingup. However, this Court holds that, neither of the two payments asserted by the assignee in this case constitutes a valid payment of equity assignment price on the grounds that:

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(1) Unauthorized payment by the assignee to the third party may not be deemed a valid payment of equity assignment price The first payment of CNY 45 million asserted by the assignee is part of the amount of CNY 45.12 million paid on December 5, 2017 to an outsider, to wit: Gaoxunda Parking Building Investment Management Company. Under the stock assignment agreement concluded on December 11, 2017, Shuangrun Investment Management Company was to make the payment of the equity assignment price to Fenghe Company after the agreement took effect. However, the equity assignment price asserted now by Shuangrun Investment Management Company was paid to an outsider, to wit: Gaoxunda Parking Building Investment Management Company, not Fenghe Company. Shuangrun Investment Management Company asserts that it paid the equity assignment price to Gaoxunda Parking Building Investment Management Company just because the latter was the creditor of Fenghe Company. The court of first instance held that, said payment by Shuangrun Investment Management Company fulfilled not only its obligation to pay the assignment price, but also the debt owed by Fenghe Company to Gaoxunda Parking Building Investment Management Company. However, this Court holds that the above-mentioned assertion by Shuangrun Investment Management Company and the findings by the court of first instance may not be established. It is clearly agreed under the equity assignment agreement that the equity assignment price would be paid to the equity assignor, to wit: Fenghe Company, and Shuangrun Investment Management Company shall perform its payment obligation as contractually agreed. Absent the evidence concerning the authorization by Fenghe Company of the payment of assignment price to a third party, Shuangrun Investment Management Company has no right to unilaterally modify the agreement regarding the receiver of the payment. Besides, considering also such issues as the timing of the payment and the use of the sum, the payment therefore may not be deemed a valid one of equity assignment price to Fenghe Company. (2) Payment after the sealing-up of equity may not preclude enforcement In this case, the assignee also asserts that it assigned on January 30, 2018 a sum of CNY 15 million to Gaoxunda Parking Building Investment Management Company. Such payment was made after the court sealing, with the payee not being the equity assignee. First of all, after its knowledge of the sealing-up of the involved equity, Shuangrun Investment Management Company was aware that the involved equity could not undergo the subsequent equity change procedures, with potential legal obstacles to its assigned equity. Shuangrun Investment Management Company, however, continued to make the payment of the equity assignment price to Gaoxunda Parking Building Investment Management Company without regard to potential risks, expressly refusing, through its conduct, to deliver the equity assignment price to the court for enforcement. Secondly, although Shuangrun Investment Management Company asserts that it’s free to continue the payment of equity assignment price due

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to the failure of the court of first instance to serve on it a notice of assistance in enforcement ordering it to stop payment, the purpose of the preservation measure taken by the court is to effectively control the enforcee’s property and prevent the assignment thereof. If the payment made by Shuangrun Investment Management Company after the sealing-up is deemed valid, the preservation effort will fail because the sum is no longer in the control of the court. Finally, after having filed its objection to enforcement, Shuangrun Investment Management Company should be aware that, in the event of its objection being sustained by the court, the court could still protect the legitimate rights and interests of the applicant by means of preserving the equity assignment price; if it continued to make the payment of the equity assignment price to Gaoxunda Parking Building Investment Management Company, there would be no remaining equity assignment price to be preserved upon the sustentation by the court of its objection, surely resulting in the infringement upon the applicant’s legitimate rights and interests. In view of the fact that the aforementioned payment by Shuangrun Investment Management Company was not made to Fenghe Company, that the payment was made after the sealing-up of the involved equity, and that the payment was detrimental to the legitimate rights and interests of the applicant, such payment may not therefore be deemed to have been validly made to Fenghe Company. On account of the available evidence, Shuangrun Investment Management Company did not make the payment of the equity assignment price to Fenghe Company prior to the court sealing, but continued to make the payment to Gaoxunda Parking Building Investment Management Company upon its knowledge of the court sealing, rather than offering to deliver the equity assignment price to the court for enforcement. Besides, given the conduct of Shuangrun Investment Management Company during the litigation, it arbitrarily took an intercompany accounts transaction with an affiliated company as the evidence of its payment of the involved equity assignment price in an attempt to avoid its obligation to pay the equity assignment price. What’s mentioned above sufficiently indicates the refusal by Shuangrun Investment Management Company of the delivery of the equity assignment price to the court for enforcement. Given the fact that the failure of Shuangrun Investment Management Company to validly pay the equity assignment price results in the undue reduction of the property of Fenghe Company as subject to its repayment liability, Shuangrun Investment Management Company enjoys no substantive right sufficient to preclude enforcement. Whereupon, the claims filed by Shuangrun Investment Management Company may not be established for precluding the involved equity from enforcement and lifting the freezing of the involved equity.

Guilin Zhangtai Group Co., Ltd., Guangxi Lichengdong Investment Co., Ltd. et al. (Enforcement Review of the Ruling on Dispute over Recovery of Financial Distressed Debt: Identification of Interest in Cases of Enforcement Against Dispute over Recovery of Financial Distressed Debt) Guohui Xiang and Xin Ye

1 Rule The Summary of the Work Symposium of the Supreme People’s Court on the Adjudication of Cases Involving Transfer of Financial Distressed Debts is a set of special rules established for processing cases involving transfer of financial distressed debts during a specific period of time and in specific fields, and therefore, the scope of application of such rules should be taken into consideration when they are applied, and in cases involving the transfer of ordinary financial distressed debts that are beyond the applicable scope of such rules, the accrual of interest should not be terminated after such transfer is completed.

Collegial Bench for Enforcement Review: Guohui Xiang, Huizhuo Liu and Jianguo Sun Edited by Yang Yi; Translated by Zhijian Cao G. Xiang (B) · X. Ye Enforcement Department of the Supreme People’s Court of the Peoples’ Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_16

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2 Case Information 1. Parties Applicant for Review (Applicant for Enforcement): Guilin Zhangtai Industry Group Co., Ltd. (hereafter referred to as Zhangtai Industry) Applicant for Review (Party Subject to Enforcement): Guangxi Lichengdong Investment Co., Ltd. (formerly Guangxi Liyuan Investment Co., Ltd., hereinafter referred to as Lichengdong Investment) Applicant for Reconsideration (Party Subject to Enforcement): Huang X 2. Procedural History Basis for Enforcement: No. 21 [2017] Mediation, Civ. Division, the Higher People’s Court of Guangxi Zhuang Autonomous Region (dated Jul. 24 of 2017) Objection to Enforcement: No. 19 [2018] Enforcement Objection, the Higher People’s Court of Guangxi Zhuang Autonomous Region (dated Dec. 28 of 2018) Review of Enforcement: No. 45 [2019] Enforcement Review, the Supreme People’s Court (dated Nov. 22 of 2019) 3. Cause of Action Enforcement review of the ruling on dispute over recovery of financial distressed debt

3 Essential Facts The Higher People’s Court of Guangxi Zhuang Autonomous Region, after hearing the case, Guangxi Branch of China Great Wall Asset Management Co., Ltd. (hereinafter referred to as GWAMC Guangxi Branch) v. Lichengdong (formerly Guangxi Liyuan Investment Co., Ltd.) and Huang X, in connection with a dispute over recovery of financial distressed debts, issued a civil mediation document (No. 21 [2017] Mediation, Civ. Division, the higher People’s Court of Guangxi Zhuang Autonomous Region), the main content of which is as follows: (1) As of July 11, 2017, the defendant, Lichengdong Investment, owed the plaintiff, GWAMC Guangxi Branch, CNY 367.4 million in loan principal, CNY 54,722,488.91 in interest thereon, CNY 5,147,297.1 in compound interest, and CNY 4,307,800.16 in liquidated damages, totaling CNY 431,577,586.17, which was required to be repaid in one lump sum prior to July 31, 2017. Interest accrued from July 12, 2017 to the date of full repayment shall be calculated at the rate of 17.9% per annum based on the principal amount of CNY 367,400,000.00 and shall be paid in one lump sum prior to July 31, 2017. In the event of default, interest shall continue to be accrued at the rate of 17.9% per

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annum on the outstanding principal until the principal is repaid in full. (2) If the defendant, Lichengdong Investment, failed to perform its obligation within the time limit as had been agreed, the plaintiff, GWAMC Guangxi Branch, shall have priority in being repaid from the value converted from or proceeds from the auctioning or sale of the mortgaged property in accordance with law. (3) The defendant, Huang X, shall be jointly and severally liable to pay off the debts of the defendant, Lichengdong Investment under the first item above. After the mediation agreement came into effect, Lichengdong Investment and Huang X failed to fulfill their obligations as stipulated under the relevant legal documents on time. In view of this, GWAMC Guangxi Branch applied to the Higher People’s Court of Guangxi Zhuang Autonomous Region for enforcement on August 11, 2017; on the same day, the court accepted the case as Enforcement Case No. 11 (2017) of the Higher People’s Court of Guangxi Zhuang Autonomous Region and decided on enforcement. On June 7, 2018, the GWAMC Guangxi Branch issued a public bidding and transfer announcement for the debt assets of Lichengdong Investment, which stated: “Debt description: Debt 1: CNY 213,537,600 in principal and interest thereon, as well as penalty interest, liquidated damages …”. On June 12, 2018, GWAMC Guangxi Branch and Zhangtai Industry Group concluded a creditor’s right transfer agreement, which stated under Article 2.1.6 thereof that the balance of principal of the creditor’s right underlying the loan specified in the agreement and annexes thereof, which was owned by Party A (GWAMC Guangxi Branch), was based on confirmation by and between Party A and the debtor; The book interest, in the amount of CNY 17,640,846.76, was calculated and accrued up to the base date of May 31, 2018, according to the provisions of the effective civil mediation document, including both general debt interest and double interest for the period of delay in performance (which should be accrued if it was so specified in the mediation document). Party A would not make any judgmental conclusion on the above defects or risks, if any, and Party B (Zhangtai Industry) shall make its own judgment at its sole discretion, and Party A shall not assume any responsibility for such judgment. Annex 1 to the creditor’s right transfer agreement, i.e. specification of the creditor’s rights underlying the loan, indicates that the debtor in the case is Lichengdong Investment and the guarantors are Lichengdong Investment and Huang X; the balance of the book principal is CNY 213,537,619.08, book interest is CNY 7,644,646.76, book compound interest is CNY 5,147,297.10, book liquidated damages are CNY 4,307,800.16, and the refundable fees for case filing, property preservation and assessment are CNY 1,045,255.50, totaling CNY 231,682,618.60. On June 12, 2018, GWAMC Guangxi Branch, the enforcement applicant, submitted to the Higher People’s Court of Guangxi Zhuang Autonomous Region an application for replacing the enforcement applicant, stating that the GWAMC Guangxi Branch had transferred the remaining creditor’s rights in the case to Zhangtai Industry, and therefore it applied that Zhangtai Industry should be the enforcement applicant. On July 30, 2018, the Higher People’s Court of the Guangxi Zhuang Autonomous Region meted out a ruling, No. 11–7 (2017) Enforcement Ruling of the Higher People’s Court of the Guangxi Zhuang Autonomous Region, changing the

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enforcement applicant of the case from the GWAMC Guangxi Branch to Zhangtai Industry. In the enforcement process, a total of CNY 488,142,416.83 had been properly repaid by July 6, 2018, through enforcement by the Higher People’s Court of the Guangxi Zhuang Autonomous Region, either by way of automatic performance by the enforcee, and surrogate repayment by outsiders of the case. Of the amount repaid through enforcement, CNY 252,141,934.27 was automatically transferred to the account of GWAMC Guangxi Branch by the enforcee, Lichengdong Investment; The remaining part of the amount repaid through enforcement, CNY 236,000,482.56, was credited to the account of the court through the enforcement measures taken by the court. After the above-mentioned amounts were properly repaid through enforcement, the Higher People’s Court of the Guangxi Zhuang Autonomous Region determined the calculation formula for the interest involved in the case in accordance with law. After calculation according to the formula, the remaining amount that was subject to enforcement and payable by the enforcee in the case should be CNY 232,939,272.86 (including principal, interest, compound interest, liquidated damages and legal fees), which was then paid to Zhangtai Industry from the enforcement account of the court. In addition, after deducting the enforcement application fee, in the amount of CNY 500,017.84, the court has also refunded the excess part of the amount repaid through enforcement, i.e., CNY 2,561,191.86, to the enforcee, Lichengdong Investment. Thus, the actual amount paid by the court to the enforcement applicant was CNY 485,081,207.13, and accordingly, the court issued a case closing notice, No. 11–9 (2017) Case Closing Notice of the Higher People’s Court of the Guangxi Zhuang Autonomous Regionon on July 30, 2018. Not satisfied with No. 11–9 (2017) Case Closing Notice of the Higher People’s Court of the Guangxi Zhuang Autonomous Region, the enforcement applicant, Zhangtai Industry, filed a written objection to the court, stating that the notice had failed to specify the calculation standard and calculation method, and the calculation of interest therein was incorrect in that the interest payable for the period starting from June 12, 2018, i.e., the date when the creditor’s rights were assigned to it by the GWAMC Guangxi Branch, to the date of actual repayment, had failed to be included into the calculation; furthermore, the double interest payable for the period of delay in performance by the enforcee, i.e. starting from August 1, 2017 to the date of repayment, had also failed to be included. Therefore, the enforcement applicant requested the court to cancel the notice and requested that the enforcee should be required to repay CNY 21,517,970.12 in accordance with law through enforcement measures. The Higher People’s Court of the Guangxi Zhuang Autonomous Region issued No. 19 [2018] Enforcement Objection Ruling, Higher People’s Court of Guangxi Zhuang Autonomous Region, revoking the No. 11–9 (2017) Case Closing Notice of the Higher People’s Court of the Guangxi Zhuang Autonomous Region, and ordered that the above-mentioned interest payable to Changtai Industry by Lichengdong should be recalculated.

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Zhangtai Industry, Lichengdong Investment and Huang X were not satisfied to the No. 19 [2018] Enforcement Objection, the Higher People’s Court of Guangxi Zhuang Autonomous Region, and applied to the Supreme People’s Court for reconsideration.

4 Issue 1. In this case, whether the interest accrual should be stopped in accordance with the Summary of the Work Symposium of the Supreme People’s Court on the Adjudication of Cases Involving Transfer of Financial Distressed Debts after Zhangtai Industry is assigned with the creditor’s rights; 2. In this case, whether accrual of interest at double rate during delay in performance should be supported.

5 Holding The Supreme People’s Court found through proper review that the Summary of the Work Symposium of the Supreme People’s Court on the Adjudication of Cases Involving Transfer of Financial Distressed Debts is a set of special rules established for processing cases involving transfer of financial distressed debts during a specific period of time and in specific fields, and therefore, the scope of application of such rules should be taken into consideration when they are applied. If ordinary cases involving the transfer of financial distressed debts that are beyond the applicable scope of the Summary were to be processed in accordance with the rules underlying the Summary on a mutatis mutandis basis, there would be no clear legal or judicial basis, and it would also go against the judicial spirit of equal protection of property rights and interests of all civil subjects according to law. As neither the time of the initial transfer of the debts involved in this case nor the initial transferor of such debts meets the requirements under Article 12 of the Summary, the requirement under the Summary that the accrual and payment of interest should be terminated as of the date of transfer cannot be applied. In accordance with Article 19 of the Provisions of the Supreme People’s Court on Certain Issues Regarding Civil Mediation in People’s Courts, in the event that a party assumes its civil liabilities as are specified in the mediation paper and nonetheless the other party requests that the former should assume the liabilities for delay in performance as stipulated in the Civil Procedure Law, such request will not be supported by the people’s court. After the debts were transferred to Zhangtai Industry, the claim exerted against Lichengdong Investment for interest at double the original rate was then not supported under law and contravened the principle of party autonomy. Accordingly, the Supreme People’s Court issued a ruling (No. 45 [2019] Enforcement Review, the Supreme People’s Court) on November 22, 2019, rejecting the reconsideration application of Zhangtai Industry, Lichengdong Investment and Huang X, and upholding the ruling

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of the Higher People’s Court of the Guangxi Zhuang Autonomous Region under No. 19 [2018] Enforcement Objection Ruling.

6 Comment on Rule The decision in this case is in essence confirmation of the calculation and determination of interest in an enforcement case, which involved disputes over financial distressed debt recovery. In practice, controversy tends to arise rather easily over interest calculation in enforcement cases that are initiated over recovery disputes following the transfer of financial distressed debts. Such controversy is highly complicated, as on the one hand, the CNY interest rate determined by by the People’s Bank of China includes compound interest and penalty interest, and on the other hand, according to the provisions of relevant judicial interpretations, the people’s courts generally calculate both the ordinary interest on the debts involved and the double interest on such debts in the enforcement process. In view of the fact that cases involving disputes over transfer of distressed financial debts are large in number and significant in impact, and involve considerable sums of fund, the Supreme People’s Court promulgated a regulatory document in March, 2009 concerning major issues involved in the adjudication of cases involving the transfer of distressed financial debts, stipulating that interest shall not be accrued after the date of the assignment of such debts, so as to properly and impartially adjudicate cases involving the transfer of distressed financial debts in accordance with the law, prevent the loss of state-owned assets, and ensure smooth disposal of distressed financial debts. 1. Application of relevant rules under the Summary of the Work Symposium of the Supreme People’s Court on the Adjudication of Cases Involving Transfer of Financial Distressed Debts mutatis mutandis is subject to the pre-condition that the transfer of distressed financial debts must be lawful and valid Validity of a civil juristic act, in turn, is subject to the following conditions: the civil subject(s) involved shall have the corresponding capacity for civil conduct, such civil subjects’ expression of will is true and does not violate the mandatory provisions of applicable laws and administrative regulations, and such act does not contravene public order and good morals. Article 791 of the Contract Law stipulates: “A creditor may assign a claim thereof in whole or in part to a third person, except where: (1) the claim is not assignable by virtue of its nature; (2) the claim is not assignable as agreed by the parties; or (3) the claim is not assignable in accordance with law.” Article 1

This article is now included as Article 545 of the Civil Code: “A creditor may assign his claim in whole or in part to a third person, except that: (1) a claim is not assignable by virtue of its nature; (2) a claim is not assignable as agreed by the parties; or (3) a claim is not assignable in accordance with law. Where the parties agree that a non-pecuniary claim may not be assigned, such agreement shall not be asserted against a bona fide third person. Where the parties agree that a pecuniary claim may not be assigned, such agreement shall not be asserted against a third person.”

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802 thereof stipulates: “Where a creditor assigns a claim thereof, the creditor shall notify the debtor thereof. Otherwise, the assignment shall not be effective against the debtor. The notice of the assignment of a claim may not be revoked, unless consented to by the assignee.” In this case, the transfer of the financial distressed debts does not violate the prohibitive provisions of the above-mentioned law; in view of this, the creditor can transfer, and the transferee can obtain, the debts in accordance with law. The debts confirmed by the document, No. 21 [2017] Mediation, Civ. Division, the Higher People’s Court of the Guangxi Zhuang Autonomous Region, have been transferred in accordance with law, and Zhangtai Industry has acquired the qualification as applicant for enforcement of such debts; therefore, the debtor, Lichengdong Investment, shall fulfill its obligation of payment to the transferree of the debts, Zhangtai Industry. 2. Whether the interest accrual in this case should be stopped in accordance with the Summary of the Work Symposium of the Supreme People’s Court on the Adjudication of Cases Involving Transfer of Financial Distressed Debts after Zhangtai Industry is assigned with the creditor’s rights First, Article 9 of the Summary of the Work Symposium of the Supreme People’s Court on the Adjudication of Cases Involving Transfer of Financial Distressed Debts, which is a regulatory document formulated by the Supreme People’s Court in consultation with relevant departments in 2009, stipulates that payment of interest shall be terminated as of the date of transfer of financial distressed debts, and Article 12 limits the scope of application of the Summary, including the time of transfer of financial distressed debts and the transferor thereof. Therefore, the Summary has become in essence a set of special rules for cases involving the transfer of distressed financial debts in a specific period and within a specific scope, which are intended to ensure cases involving the transfer of distressed financial debts will be heard fairly and properly in accordance with law, to prevent the loss of state-owned assets, to guarantee the smooth disposal of distressed financial debts, safeguard the social and public interests and the lawful rights and interests of relevant parties. The provisions on its scope of application shall be applied on a mutatis mutandis basis. If ordinary cases involving the transfer of financial distressed debts that are beyond the applicable scope of the Summary were to be processed in accordance with the rules underlying the Summary on a mutatis mutandis basis, there would be no clear legal or judicial basis, and it would also go against the judicial spirit of equal protection of property rights and interests of all civil subjects according to law. In the present case, the initial transfer of the financial distressed debts involved in the case took place on April 25, 2014, and such debts were transferred by Xingye Trust Company to GWAMC Guangxi Branch; the debts were transferred for the second time on June 12, 2018 from GWAMC Guangxi Branch to Zhangtai Industry. It can then be seen that the initial transfer of the debts fails to meet the requirements under Article 12 of 2

This aricle is now included as Article 546 of the Civil Code: “Where a creditor assigns his claim but fails to notify the debtor thereof, the assignment is not effective against the debtor. The notice of the assignment of a claim may not be revoked, unless consented to by the assignee.”

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the Summary in terms of the time of transfer and the parties involved. Therefore, the provisions in the Summary that interest shall cease to accrue as of the date of transfer shall not apply. Further, although Zhangtai Industry does not have the functions of a financial institution, the interest rate of 17.9% agreed on by both parties does not exceed the upper limit of the annual interest rate for private loans; therefore, as the transferee of the underlying financial creditor’s rights, Zhangtai Industry is entitled to the creditor’s rights interest according to the agreement between the parties. Second, Article 12 of the Summary stipulates: “The content and spirit of the Summary are only applicable to relevant cases that are still within the stage of firstinstance or second-instance trial proceedings and in which the initial transferor is a state-owned bank or a financial asset management company, which seeks to dispose of non-performing assets by way of creditor’s rights transfer.” From the perspective of providing policy support for facilitating reform of the financial system, promoting the disposal of financial distressed debts and solving left-over problems by history, Reply No. 4 (2013) Enforcement of Other Affairs, the Supreme People’s Court makes it clear that the aforementioned stipulation is also applicable to the accrual of interest payable for delay in performance in the enforcement procedures, on a mutatis mutandis basis. However, the distressed financial debts in the cases referred to in the Reply are limited to those within the specific scope as stipulated in Article 12 of the Summary. Therefore, the basic facts of the cases referred to in the Reply are inconsistent with those of the present case and therefore cannot serve as guidance for the present case. In view of this, the present case does not qualify as a case of transfer of financial distressed debts within the specific scope stipulated in the Summary, and therefore, the claims of Lichengdong Investment and Huang X, i.e., the provisions of Article 9 of the Summary should be applied and the accrual of interest should terminate after Zhangtai Industry was transferred with the creditor’s rights, should not be supported. 3. Whether accrual of interest at double rate during the period of delay in performance of the case should be supported According to the facts already ascertained in the case, GWAMC Guangxi Branch and Lichengdong Investment agreed in No. 21 [2017] Mediation, Civ. Division, the Higher People’s Court of the Guangxi Zhuang Autonomous Region: “Interest accrued from July 12, 2017 to the date of full repayment shall be calculated at the rate of 17.9% per annum based on the principal amount of CNY 367, 400, 000. 00 and shall be paid in one lump sum prior to July 31, 2017. In the event of default, interest shall continue to be accrued at the rate of 17.9% per annum on the outstanding principal until the principal is repaid in full.” After holding consultations, GWAMC Guangxi Branch and Lichengdong Investment voluntarily decided to add interest, compound interest, liquidated damages, etc. to the annual interest rate of 13% agreed in the original contract, with the annual interest rate finally set at 17.9%; and if the loan cannot be repaid on time, interest shall continue to be accrued on the outstanding part of the principal at the rate of 17.9% per annum until all the principal is repaid in full. According to Article 10 of the Provisions of the Supreme People’s Court on Certain Issues Regarding Civil Mediation in People’s Courts, the people’s court shall allow

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a mediation agreement to stipulate that one party thereto shall bear civil liabilities for non-performance of the agreement. Article 19 hereof stipulates that where the conditions of the guarantee terms or the conditions for assuming civil liabilities as determined in the mediation document are fulfilled, if the parties concerned apply for enforcement, the people’s court shall enforce in accordance with law. In the event that a party that fails to perform the mediation agreement assumes its civil liabilities as are specified in the mediation document and nonetheless the other party requests that the former should assume the liabilities for delay in performance as stipulated in the Civil Procedure Law, such request will not be supported by the people’s court. Furthermore, judging from the creditor’s rights transfer agreement signed between GWAMC Guangxi Branch and Zhangtai Industry, Annex I thereto and the interest calculation table listed in Annex 1, as well as the creditor’s rights transfer announcement of GWAMC Guangxi Branch, GWAMC Guangxi Branch did not claim against Lichengdong Investment for double interest for the period of delay in performance. In view of this, after the debts were transferred to Zhangtai Industry, the claim exerted against Lichengdong Investment for interest at double the original rate was then not supported under law and contravened the principle of autonomy of will for the parties concerned, and therefore should not be allowed.

Zhou X v. Xiamen Baixiang Shouli E-business Co., Ltd. (Dispute Over Online Shopping Contract: Determination of the Adjustment Benchmark of Agreed Punitive Liquidated Damages) Chun Yang, Jiaqin Wei, and Fu Chen

1 Rule In the event that a consumer claims for the agreed punitive damages based on the contract concluded between the consumer and the merchant, or based on the promise of the merchant, and that such punitive damages agreed on are excessively high, the merchant may then apply to the competent people’s court or arbitration institution for an appropriate reduction thereof in accordance with Article 114 of the Contract Law. When determining the basis for discretionary reduction of the punitive liquidated damages, the people’s court may adjust the amount of liquidated damages reasonably in accordance with Article 29 of the Judicial Interpretation of Contract Law (II), and in light of the provisions on the amount of legal compensation under the Food Safety Law of the People’s Republic of China and other relevant laws and regulations, so as to fairly solve the problems relating to liability for breach of contract.

Collegial Bench for Reopening Review: Chun Yang, Aizhen Zhang and Jun He Edited by Yi Yang; Translated by Zhijian Cao C. Yang (B) · J. Wei The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China F. Chen Postgraduate School, Shanghai University of Finance and Economics, Shanghai, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_17

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2 Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellant in the Second Instance): Zhou X Respondent in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Xiamen Baixiang Shouli E-Business Co., Ltd. (hereinafter referred to as Baixiang Shouli E-Business Co., Ltd.) 2. Procedural History First Instance: No. 67 [2016] Trial, Civ. Division, the Intermediate People’s Court of Huaian City, Jiangsu Province (dated Nov. 14 of 2017) Second Instance: No. 54 [2018] Final, Civ. Division, the Higher People’s Court of Jiangsu Province (dated Apr. 18 of 2018) Petition for Case Reopening: No. 3216 [2019] Appeal, Division, the Supreme People’s Court (dated Jun. 25 of 2019) 3. Cause of Action Dispute over online shopping contract

3 Essential Facts Baixiang Shouli E-business Co., Ltd. promised through its outdoor advertising placed at the Xiamen Airport, promotion brochures and announcements posted on the website shouliwang.com that should any of the tea products sold by it was found to be fake, it would pay damages to the buyer at the rate of 10,000-fold of the price of such product. On November 12, 2015, Zhou X purchased 630 cartons of premium Dahongpao tea from Baixiang Shouli E-business Co., Ltd. through shouliwang.com, with a total price of CNY 17,640. Later, Zhou X, claiming that the tea purchased from Baixiang Shouli E-business Co., Ltd. was substandard, demanded that Baixiang Shouli E-business Co., Ltd. should assume its liability for breach of contract by paying 50% of what it had promised, i.e., 5,000 times of the price that Zhou X had paid for the tea. It was later found through identification commissioned by the court of first instance that the Dahongpao tea involved in this case failed to meet relevant standards. On November 14, 2017, the court of first instance meted out the first-instance judgment, finding that Baixiang Shouli E-businesss Co., Ltd. had breached the contract and should therefore bear the liability for breach of contract. However, it held that the liquidated damages agreed on by the two parties were too high, and should be lowered to ten times of the price paid for the underlying products in accordance with Article

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148 of the Food Safety Law. The two parties filed an appeal respectively thereafter; the court of second instance upheld the first instance judgment and rejected the two parties’ appeals. After the decision of the second instance came into effect, Zhou X submitted a petition to the Supreme People’s Court for reopening the case on the ground that the liquidated damages supported by the court of first instance and court of second instance were excessively low.

4 Issue Whether the identification of the rate of liquidated damages payable by Baixiang Shouli E-business Co., Ltd. in the effective judgments is appropriate or not.

5 Holding The Supreme People’s Court found through proper review that the tea purchased by Zhou X from Baixiang Shouli E-business Co., Ltd. had been identified to be substandard in terms of quality and therefore not the “genuine” products promised by Baixiang Shouli E-business Co., Ltd. Therefore, the claim by Zhou X as the buyer, that Baixiang Shouli E-business Co., Ltd. should assume the liability for breach of contract is in compliance with the relevant provisions of the Contract Law as well as relevant terms and conditions of the contract between the two parties. Based on Baixiang E-business Co., Ltd.’s promise of “10,000-fold liquidated damages”, Zhou X applied to the court of first instance for liquidated damages equivalent to 5,000 times of the price that Zhou X had paid for the tea he purchased from Xiamen Baixiang Shouli E-business Co., Ltd.; during the hearing of the case by the court of second instance, Zhou X claimed for liquidated damages equivalent to 100 times of the price paid he purchased from Xiamen Baixiang Shouli E-business Co., Ltd. However, Zhou X did not present to the court of first instance or the court of second instance any evidence proving the value of the loss that he actually sustained from his purchase of the tea products underlying the present case. According to Article 29(1) of the Judicial Interpretation of Contract Law (II), in the event that a party claims that the agreed liquidated damages are excessively high and therefore requests for an appropriate reduction thereof, the people’s court shall, on the basis of actual losses involved and taking into account factors such as the performance of the contract, degree of fault of the defaulting party and the expected benefits, mete out its decision on the basis of an assessment of the case according to the principles of fairness and good faith. In view of the fact that the liquidated damages claimed by Zhou X during hearing by the court of first instance, equivalent to 5,000 times of the price of the tea products underlying the case, were obviously excessive, and that in response to

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the claim, Xiamen Baixiang Shouli E-business Co., Ltd. explicitly had applied for an appropriate reduction of the excessive liquidated damages during the hearing by the court of first instance, it is appropriate for the second instance decision to uphold the first instance judgment that Xiamen Baixiang Shouli E-business Co., Ltd. should pay liquidated damages to Zhou X, in light of the fact that tea is categorized as edible agricultural products and is different from ordinary daily necessities, and therefore producers and sellers thereof must be subject to strict regulation in terms of product quality, as well as is required under Article 148 (2) of the Food Safety Law. Zhou X’s claim that Xiamen Baixiang Shouli E-business Co., Ltd. should pay liquidated damages at the rate of 100 times of the price of the tea products cannot be established. Therefore, Zhou X’s claims in his petition for reopening the case are rejected.

6 Comment on Rule In essence, adjudication of this case has established a judicial approach to adjusting excessively high punitive liquidated damages for breaches of contract in special fields, i.e., making appropriate discretionary reduction on the basis of statutory punitive liquidated damages. The core dispute of this case consists of: (1) whether the agreed liquidated damages, which are obviously punitive in nature, can be reduced by applying the provisions of Article 114 of the Contract Law; (2) in the case of such special sectors, whether the discretionary reduction of punitive liquidated damages should still be based on the Judicial Interpretation of Contract Law (II); (3) if the Judicial Interpretation of Contract Law (II) is not adopted as the basis, then what shall serve as the basis for the judicial adjustment of punitive liquidated damages, and whether the basis for such reduction is properly justified. 1. Justification of the adjustment of the agreed punitive liquidated damages According to the theoretical classification of liquidated damages agreed on by and between parties to a contract, liquidated damages can be divided into compensatory liquidated damages and punitive liquidated damages from the perspective of functions thereof. The difference between the two is that the agreed compensatory liquidated damages is regarded as the total amount of compensation for breach of contract, that is, the expected damages for the party concerned, while the punitive liquidated damages is often greatly more than the expected damage of the party concerned, and the excess part takes on a clearly punitive significance. Generally speaking, agreement in a contract on liquidated damages, regardless of whether they are compensatory liquidated damages or punitive liquidated damages, is part of the contract in nature, and shall therefore be protected by the principle of autonomy of will and shall not be subject to excessive judicial intervention. However, if there were no intervention in such agreement on liquidated damages, parties to the underlying transaction might be subject to unlimited punishment, especially in the case where the parties are

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unequal in terms of their status and power. Therefore, in order to protect the disadvantaged and prevent unlimited liquidated damages from harming the real economy, it is justified to subject liquidated damages to judicial adjustment. Therefore, Article 114 of the Contract Law grants the people’s courts with the discretion to reduce excessive contractual liquidated damages. What remains controversial is whether Article 114 of the Contract Law can be applied to adjust punitive damages. There is a view that Article 114 of the Contract Law can only be applied to the adjustment of compensatory liquidated damages; as for limitation on punitive liquidated damages, contractual agreement on such liquidated damages can be regulated through a legal regime that may invalidate or rescind such agreement, or by applying Article 911 of the Guarantee Law by analogy on a mutatis mutandis basis, in view of the fact that punitive liquidated damages and what is provided under Article 91 of the Guarantee Law are both “private law sanctions” provisions, so that punitive liquidated damages shall not exceed 20% of the subject matter of the main contract.2 Another view holds that the liquidated damages under Article 114 of the Contract Law have both the compensatory and punitive functions, and can therefore adjust both compensatory liquidated damages and the punitive liquidated damages.3 We agree with the latter point of view. Article 114 of the Contract Law stipulates in clear terms that when the parties agree on liquidated damages, they can either agree on a specific amount of liquidated damages or on the calculation formula of compensation payable for losses arising from breach of contract. In the event that the parties agree on the calculation formula of compensation payable, such an approach is in essence the anticipation by both parties of the expected losses, and therefore, such liquidated damages may be deemed as compensatory in nature. On the other hand, however, if both parties agree on a specific amount of liquidated damages, then the agreed amount may either be the anticipated amount of expected loss or an amount that also includes punitive liquidated damages, as is exemplified by the agreement on “10,000-fold liquidated damages for any fake product” in the present case. Moreover, Article 114 of the Contract Law adopts the expression of “agreed liquidated damages” when defining adjustable liquidated damages, without distinguishing punitive liquidated damages and compensatory liquidated damages. In addition, although there are clear definitions of the two types of liquidated damages in jurisprudence, in practice, most contracts do not make any clear distinction between compensatory liquidated damages and punitive liquidated damages when they stipulate liquidated damages; and it is impossible for the people’s courts to sub-divide the liquidated damages agreed on by the parties and apply different adjustment or 1

This article is now included as Article 586 of the Civil Code: “(T)he parties may agree that one party provides earnest money with the other party to secure the claim. An earnest money contract is formed upon actual delivery of the earnest money. The amount of the earnest money shall be agreed by the parties, except that it may not exceed 20% of the value of the object of the principal contract, and any excessive amount does not have the effect of earnest money. Where the amount of the earnest money actually delivered is more or less than the agreed amount, the agreed amount of the earnest money is deemed to have been changed.” 2 参见韩世远: 《合同法总论》 (第4版),法律出版社2018年版,第827~835页。. 3 参见王利明: 《合同法研究》 (第2卷),中国人民大学出版社2003年版,第696页。.

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limitation rules to the two types of liquidated damages respectively. Therefore, we believe that the discretion granted by Article 114 of the Contract Law to courts to reduce liquidated damages apply to all agreed liquidated damages, including both compensatory liquidated damages and punitive liquidated damages. In the present case, Zhou X filed a complaint to the people’s court on the ground of the dispute over online shopping contract, and claimed for liquidated damages equivalent to 5,000 times of the price he had paid for the products underlying the complaint (later the amount had been changed to 100 times of the price when the case was submitted to the court of second instance), on the basis of the agreement between the two parties on “10,000-fold liquidated damages for any fake product”; however, he failed to present any evidence proving that he had sustained such heavy losses as to justify the liquidated damages he claimed for; furthermore, it is rare in practice that any purchase of goods many generate expected benefits that are 5,000 or 100 times of the price of the good purchased. Therefore, the agreed liquidated damages involved in this case are obviously too high and should therefore be adjusted. Given their amount, the liquidated damages claimed by Zhou X were essentially agreed liquidated damages (which were concurrently compensatory and punitive in nature), and as such, shall be subject to Article 114 of the Contract Law. In view of this, the people’s court has the right to adjust the amount upon request of Xiamen Baixiang Shouli E-business Co., Ltd. 2. Whether the Judicial Interpretation of Contract Law (II) should serve as the guidelines for the discretionary reduction of punitive liquidated damages in special fields According to Article 29 of the Judicial Interpretation of the Contract Law (II), “(i)n the event that a party claims that the agreed liquidated damages are excessively high and therefore requests for an appropriate reduction thereof, the people’s court shall, on the basis of actual losses involved and taking into account factors such as the performance of the contract, degree of fault of the defaulting party and the expected benefits, mete out its decision on the basis of an assessment of the case according to the principles of fairness and good faith.” Where the liquidated damages agreed on by the parties exceed the resultant losses by 30%, they may generally be deemed as “excessively higher than the losses caused” as is provided under Article 114(2) of the Contract Law. This provision further clarifies the reasonable extent to which the people’s court may exercise the discretion to reduce the amount of liquidated damages, i.e., adopting 30% of the value of losses as the benchmark. However, the term “general” used in the above provision, viewed from the perspective of semantic interpretation, indicates that the people’s court may make a judgment allowing exception, according to the actual circumstances of the case, subject to sufficient justification. The purchase of tea products underlying in this case involves food safety. According to Article 148 of the Food Safety Law, “In the event that any manufacturer produces food that does not conform to food safety standards or distributes food while being aware of its non-conformity with food safety standards, the customer can demand the producer or distributor to pay a penalty of 10 times the amount paid

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for the food or 3 times of the loss sustained therefrom, in addition to the compensation for the loss thereof. If the additional compensation is less than CNY 1,000, such additional compensation shall be increased to CNY 1,000”, therefore, in the absence of any pre-existing agreement between the parties on liquidated damages, the party who is the consumer shall have the right to directly claim for extra statutory liquidated damages that are equivalent to ten times of the price of the merchandise in question or three times of the loss that such party sustains therefrom. In the event that the two parties have explicitly agreed on a higher rate of punitive liquidated damages, and nonetheless the rate is adjusted to be “30% of the value of actual losses” because the plaintiff claims for the agreed liquidated damages, then it will obviously result in substantive injustice in resolving the case. Therefore, in view of the fact that the subject matter at the center of the dispute underlying the present case is tea, which is categorized as food and agricultural products and hence different from ordinary daily necessities, the quality of such tea products, whether produced or sold, must be subject to stricter regulation and hence the lowered rate of “30% of the value of actual losses” is not applied. 3. Basis for adjusting punitive liquidated damages in disputes involving special fields The people’s courts should always exercise restraint and respect the parties’ autonomy of will to the greatest extent when exercising the discretionary power related to liquidated damages, and their exercising of such discretionary power must be properly justified. Although the basis for discretionary reduction under Article 29 of the Judicial Interpretation of the Contract Law (II) does not apply in this case, the factors justifying discretionary reduction established thereby may provide appropriate guidance for the disretionary reduction of liquidated damages: “the people’s court shall, on the basis of actual losses involved and taking into account factors such as the performance of the contract, degree of fault of the defaulting party and the expected benefits, mete out its decision on the basis of an assessment of the case according to the principles of fairness and good faith.” Considering the uniformity of the adjudicative scales and the certainty of the liquidated damages, and adopting Article 148 of the Food Safety Law as the basis, it is decided on a discretionary basis that the liquidated damages in the present case shall be 10 times of the price paid for the tea products in question, which not only strikes a proper balance between the amount of liquidated damages payable when there is pre-existing agreement between the two sides, and that when there is no such agreement, it provides stable expectations for similar civil acts, but also discourages the possibility that excessive support for punitive liquidated damages may motivate people to maliciously and knowingly purchase fake products to seek such liquidated damages, and prevent connivance of foodstuff counterfeiting that may be caused by mechanically applying Article 29 of the Judicial Interpretation of the Contract Law (II).

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7 Conclusion The judicial adjustment of liquidated damages is an exception to the principle of autonomy of will in private law, which also grants the courts with greater judicial discretion. The process of adjusting liquidated damages is often marked by the extreme self-restraint of the judiciary when it explores the boundary of the inviolable sphere of autonomy. In the process, proper consideration must be given to the balance of interests of both parties, and the potential impact on the processing of similar future cases must also be properly addressed, so as to avoid inconsistency in adjudication scales; furthermore, the exercise of judicial discretion must be standardized and controllable, and any exercise of discretion must be based on sufficient justification. “The lex lata is by far the greatest compromise and consensus that can be reached on the issue of value judgment … it is the product of the most comprehensive value measurement to date.”4 Thus, if the lex lata provides a pre-emptive answer to a similar question, then the response made in a specific individual case with reference to that answer is also “the product of the most comprehensive value measurement to date”. In view of this, when there is a statutory standard for liquidated damages in a special field, and the application of the general liquidated damages adjustment rules would lead to injustice, appropriate adjustments may be made with reference to the statutory liquidated damages standard for that special field, so that the gap between what is agreed on between the parties and what is provided by law can be managed in specific cases, and achieve justice in the case and realize the value of the lex lata to the greatest extent.

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许德风: 《论法教义学与价值判断 以民法方法为重点》 ,载 《中外法学》 2008年第2期。.

Yunnan Copper Company Co., Ltd. v. Kunming Wanbao Jiyuan Biotechnology Co., Ltd. Yunnan Zhongheng Innovation Investment Company Co., Ltd. (Dispute Over Sales Contract: Identification of the Nature and Validity of the Closed Circular Sales Contracts) Lan Ma and Yingyue Mao

1 Rule In the closed-loop circular purchase & sale transactions among three or more enterprises, a party to such transactions often engage in practices in which the same goods are purchased at a high price and sold at a lower price later within a specific period of time, while all bills and other documents related to such purchase and sale are drawn, issued and received in the same way as in normal transactions, but the goods fail to be traded. Such an abnormal trading pattern is obviously contrary to the operational purposes and business common sense of profit-making legal persons. Such practices are essentially bill discounting, borrowing or other legal acts among the parties concerned under the disguise of purchase and sale contracts. In accordance with Article 146 of the General Rules of the Civil Law, a civil juristic act performed by a person and another person based on a false expression of intent is void, and where an expression of intent deliberately conceals a civil juristic act, the validity of the concealed act shall be determined in accordance with the relevant laws.

Collegial Bench for the Second Instance: Wensheng Feng, Hongtao Ge and Lan Ma Edited by Li Zhong; Translated by Zhijian Cao L. Ma (B) · Y. Mao The Fifth Circuit Court of the Supreme People’s Court of the People’s Republic of China, Chongqing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_18

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2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): Yunan Copper Co., Ltd. (hereinafter referred to as Yunnan Copper Company) Appellee (Defendant in the First Instance): Kunming Wanbao Jiyuan Biotechnology Co., Ltd. (hereinafter referred to as Wanbao Jiyuan Biotechnology Company) Appellee (Defendant in the First Instance): Yunan Zhongheng Innovation Investment Co., Ltd. (hereinafter referred to as Zhongheng Innovation Investment Company) Appellee (Defendant in the First Instance): Yunnan Hengchen Real Estate Development Co., Ltd. (hereinafter referred to as Hengchen Real Estate Company) Appellee (Defendant in the First Instance): Gao X Appellee (Defendant in the First Instance): Huang X Appellee (Defendant in the First Instance): Zhang X (A) Appellee (Defendant in the First Instance): Yunan Wanlong Investment Co., Ltd. (hereinafter referred to as Wanlong Investment Company) Appellee (Defendant in the First Instance): Yunnan Lanjin Commercial and Trading Co., Ltd. (hereinafter referred to as Lanjin Commercial and Trading Company) Appellee (Defendant in the First Instance): Zhang X (B) 2. Procedural History First Instance: No. 61 [2017] Trial, Civ. Division, the Higher People’s Court of Yunnan Province (dated Dec. 28 of 2018) Second Instance: No. 1347 [2019] Final, Civ. Division, the Supreme People’s Court (dated Oct. 9 of 2019) 3. Cause of Action Dispute over sales contract

3 Essential Facts On November 2, 2011, Wanbao Jiyuan Biotechnology Co., Ltd. and Kunming Branch of Minsheng Bank Co., Ltd. (hereinafter referred to as the Kunming Branch of Minsheng Bank) entered into a cooperation agreement in connection with bill discounting service (with interest paid by the seller), according to which Minsheng Bank, upon proper verification, would enter into a specific bill discounting agreement with a supplier holding the acceptance bill of Wanbao Jiyuan Biotechnology Co., Ltd., transfer a corresponding amount of money to the deposit account of the supplier based on the par value of the bill in question, and then directly deduct the interest payable for such bill discounting from the deposit account of Wanbao Jiyuan Biotechnology Co., Ltd.

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From January 10, 2012 to June 18, 2012, Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company signed 10 supply orders for the sale and purchase of commodity copper. Each of the contemplated transactions thereunder would follow roughly the same pattern, i.e., Yunnan Copper Company (the Supplier) and Wanbao Jiyuan Biotechnology Company (the Buyer) would sign a supply order, specifying the quantity and total price of the subject matter of the transaction, namely, commodity copper, and agree that the delivery date would be the date when the contract, was signed and that the settlement and term of the payment in each transaction shall be cash and spot. On the same day, Shanghai Jinjin Industry Co., Ltd. (hereinafter referred to as Jinjin Industry Company) or Shanghai Shining Metal Material Co., Ltd. (hereinafter referred to as Shining Metal Material Company) (the Supplier) signed an order with Yunnan Copper Company (the Buyer), according to which the same kind and quantity of commodity copper would be sold, the delivery time shall be the date when the corresponding contract was signed, and the term of payment would be cash on delivery; Wanbao Jiyuan Biotechnology Co., Ltd. (the Supplier) and Jinjin Industry Company or Shining Metal Material Company (the Buyer) signed a purchase and sale confirmation letter, agreeing that the type and quantity of the commodity copper to be purchased and sold would be consistent with the aforementioned supply orders and order confirmations, and determining the term of payment settlement shall be real-time bank remittance and delivery upon receipt of payment. Several days after the transactions, Yunnan Copper Company, as the holder, applied to Minsheng Bank for discounting the commercial acceptance bills endorsed and transferred by Wanbao Jiyuan Biotechnology Company, to obtain the discounted amount thereof, with the discount interest to be paid by Wanbao Jiyuan Biotechnology Company. Subsequently, Yunnan Copper Company effected payment to Jinjin Industry Company or Shining Metal Material Company, and Jinjin Industry Company or Shining Metal Material Company in turn made payment to Wanbao Jiyuan Biotechnology Company. After receiving the payment, Jinjin Industry Company or Shining Metal Material Company issued a bill of lading to Yunnan Copper Company; Shanghai Yuntong Trading Co., Ltd., an affiliated company of Yunnan Copper Company, added a remark, “Transferred to Wanbao Jiyuan Biotechnology Company” onto the stub of the bill of lading, which was stamped with the special seal for delivery of goods of Wanbao Jiyuan Biotechnology Company. Throughout the transaction, Jinjin Industry Company and Shining Metal Material Company were engaged in the practice of “selling low and buying high”, and the price difference earned by Yunnna Copper was not adequate to cover the discount interest payable. Concerning the discounting of the commercial acceptance bills involved in the present case, Yunnan Copper Company (the Discounting Applicant) and Minsheng Bank (the Discounting Service Provider) signed a commercial bill discounting agreement, stipulating that Minsheng Bank could seek recourse against Yunnan Copper Company if the bills were not honored at maturity thereof. According to the evidence retrieved, when Yunnan Copper Company provided the commercial acceptance bills, which were used by Wanbao Jiyuan Biotechnology Company to pay for the goods it purchased, to the bank for bill discounting, the underlying transaction

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contracts submitted by Yunnan Copper Company to the bank were all sales contracts concerning 1# electrolytic copper. As was shown by the contracts, the parties to the contracts were Yunnan Copper Company (as the Supplier) and Wanbao Jiyuan Biotechnology Company (as the Buyer), and the contract was signed on August 16, 2011, and specified name, variety, specifications, quantity, supply time, pricing and payment method of the products underlying the 1# electrolytic copper business from 2011 to 2012, as well as liability for breach of contract. On August 20, 2012, Yunnan Copper Company (Party A) and Wanbao Jiyuan Biotechnology Company (Party B) signed a contract dated February 1, 2012 concerning the sale and purchase of cathode copper, which includes provisions in connection with the product quality standards, settlement and payment method, and liability for breach of contract related to the sale and purchase of cathode copper and cathode copper (Class A) between February 1, 2012 and December 31, 2013. On November 19, 2012, Yunnan Copper Company signed a repayment agreement with Wanlong Investment Company and others. Wanbao Jiyuan Biotechnology Company confirmed that it still owed CNY 180 million Yuan to Yunnan Copper Company as of November 9, 2012. On January 10, 2013, Wanbao Jiyuan Biotechnology Company issued to Yunnan Copper Company a confirmation of creditor’s rights, confirming that as of January 30, 2013, a total of CNY 274 million in loan principal was owed to Yunnan Copper Company, excluding liquidated damages, interest, penalty interest, etc. Yunnan Copper Company filed a lawsuit with the court of first instance, i.e., the Higher People’s Court of Yunnan Province, requesting that Wanbao Jiyuan Biotechnology Company be ordered to pay CNY 194 million in loan principal as well as an corresponding amount of interest thereon, and Zhongheng Innovation Investment Company and others should assume the corresponding guarantee responsibilities. After hearing, the court of first instance held that at the core of the case was a sales contract dispute filed by Yunnan Copper Company based on the 10 supply orders signed between Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company, in which Yunnan Copper Company requested that Wanbao Jiyuan Biotechnology Company should pay the outstanding payment and the guarantor should assume its guarantee responsibilities. Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company had established a true and effective purchase-andsale contractual relationship based on the aforementioned 10 supply orders, and Yunnan Copper Company had actually fulfilled its supply-related obligations and had also assumed the relevant burden of proof. According to the evidence on file, the sales contract in the present case was entered into not for the purpose of assigning the ownership of the subject matter contemplated therein, but for the purpose of obtaining the proceeds from the discounting of the commercial acceptance bills, i.e., Yunnan Copper Company applied for the discounting of the bills, Wanbao Jiyuan Biotechnology Company bore the interest thereon and received the proceeds from the discounting of such bills; and in the process, there was no real and effective legal relationship between Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company that was supposed to be established by the sales contract. In view of this, the request by Yunnan Copper Company that Wanbao Jiyuan Biotechnology Company

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should pay the overdue payment for the goods contemplated in the contract shall not be supported, and therefore, the court ruled to reject all the claims of Yunnan Copper Company. Yunnan Copper Company refused to accept the ruling by the court of first instance, and appealed to the Supreme People’s Court.

4 Issue How should the validity of the contractual relationships between the parties be determined.

5 Holding In accordance with Article 143 of the General Rules of the Civil Law, true expression of intention is one of the preconditions for the vality of a civil juristic act. In the present case, there was no true expression of intention to buy or sell between Yunnan Copper Company and the Wanbao Jiyuan Biotechnology Company; instead, the two parties signed the supply orders and relevant agreements not for the purpose of buying or selling the underlying subject matter thereof, but for the purpose of enabling Wanbao Jiyuan Biotechnology Company to obtain the proceeds (in cash) from the discounting of commercial acceptance bills (with Yunnan Copper Company handling matters related to the discounting of the bills, and Wanbao Jiyuan Biotechnology Company bearing the interest thereon). First of all, in terms of the overall agreement underlying the bills related to goods involved in the present case, the contemplated transaction therein does not have the basic characteristics of transactions under normal sales contracts in the market. Although the supply orders, orders and purchase and sale confirmations stipulated the quantity and price of commodity copper contemplated therein, thus representing in form the intention of all parties involved to buy and sell the goods. However, judging by the actual flow of goods, the goods under the 10 supply orders were all sold to Yunnan Copper Company by Jinjin Industry Company or Shining Metal Material Company on the same day, and then resold to Wanbao Jiyuan Biotechnology Company through Yunnan Copper Company, before being finally sold to Jinjin Industry Company and Shining Metal Material Company by Wanbao Jiyuan Biotechnology Company, i.e., the goods were initially sold and ultimately repurchased by Jinjin Industry Company and Shining Metal Material Company. In this way, a self-trading closed-looped transaction was formed through such a mode of transaction. In addition, from the perspective of the flow of funds, it can be seen that according to the agreement in the supply orders and orders that the goods should be delivered against the payment of cash and the price payable for the goods should be paid in full on the date when the relevant contract was entered into, Yunnan Copper Company should pay Jinjin Industry Company or Shining Metal Material Company

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for what was purported to be purchased, and after that, Wanbao Jiyuan Biotechnology Company should pay Yunnan Copper Company for what was purported to be purchased. However, in terms of actual payment, the following arrangement was invariably followed in each and every case: Yunnan Copper Company was paid from proceeds from the discounting of acceptance bills that were issued by Wanbao Jiyuan Biotechnology Company and later endorsed and transferred, as well as bank transfers that made up the difference; after Yunnan Copper Company obtained the proceeds from bill discounts and the bank transfers, it would then transfer part of the money it so received to Jinjin Industry Company or Shining Metal Material Company; after receiving the payment from Yunnan Copper Company, the two companies would transfer part of the payment to Wanbao Jiyuan Biotechnology Company at a higher rate as agreed in relevant contracts, and transfer the remaining part of the payment back to Wanbao Jiyuan Biotechnology Company at the original rate. Secondly, judging from the prices specified in the orders for the goods involved in the present case, the profit margin that Wanbao Jiyuan Biotechnology Company could earn through “buying low and selling high” from Yunnan Copper Company in accordance with relevant contracts was obviously insufficient to cover the interest that it was required to pay to Minsheng Bank in connection with the acceptance bill discounting, which is contrary to business common sense. Moreover, as both the initial seller and the final buyer, Jinjin Industry Company and Shining Metal Material Company, engaged in the practice of “selling low and buying high” in connection with the same kind and quantity of goods, which did not have the characteristics of normal and profit-making business operations. Therefore, the relationship between Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company is not based on any genuine sales contract; instead, it is actually based on the purpose of discounting the acceptance bills through closed-loop trading. In accordance with Article 130 of the Contract Law,1 a sales contract is a contract through which the ownership of the subject matter contemplated thereby is transferred. Judging by the process through which the orders in the present case were fulfilled, the transactions involved in the present case did not involve any genuine transfer of goods. First, Yunnan Copper Company did not submit any evidence proving the actual condition and handover process of the subject matter under the contracts. Apart from the written bill of lading and the stub thereof, Yunnan Copper Company did not provide any other evidence concerning the transfer of the goods under the contracts. Second, both the bill of lading and the stub thereof are noted with the words “Transferred to Wanbao Jiyuan Biotechnology Company”. Further, Yunnan Copper Company also claims that it fulfilled its obligation of delivery through endorsing and transferring the bill of lading (with appropriate noting thereon). However, according to the investigation conducted by the court of first instance at the warehouse referred to in the bill of lading, Wanbao Jiyuan Biotechnology Company did not open an account with the company that owns the warehouse, and therefore could not have transferred the bill of lading. In addition, the bill of lading in question is not in the form that ordinary bills of lading are usually prepared in; 1

This article is now included as Article 595 of the Civil Code.

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as a result, an account could not be opened due to the lack of a card number and therefore the goods represented by the bill could not be claimed, and during the term of validity of the bill of lading, no claim was made for the goods underlying it. Third, the statements made by Wanbao Jiyuan Biotechnology Company on the delivery method are contradictory with each other. According to the inquiry records during the trial of first instance, Zhang X (B), legal representative of Wanbao Jiyuan Biotechnology Company, stated that Wanbao Jiyuan Biotechnology Company had sent a fax to Yunnan Copper Company, requiring it to transfer the goods to Jinjin Industry Company and Shining Metal Material Company by fax; this claim, however, was denied by Yunnan Copper Company; on the other hand, during the trial of second instance, the agent ad litem of Wanbao Jiyuan Biotechnology Company confirmed the claim of Yunnan Copper Company, i.e., the goods had been transferred through endorsing the bill of lading, thus violating the principle of estoppel. In view of this, the bill of lading and the stubs thereof are not sufficient as evidence proving that the transactions underlying the present case actually involve genuine transfer of goods. Based on a comprehensive review of the transaction process, relevant evidence and statements of all parties involved in the present case, it is concluded that the relationships between Yunnan Copper Company, Wanbao Jiyuan Biotechnology Company, Jinjin Industry Company or Shining Metal Material Company were not based on any genuine trading in copper, and were instead intended to facilitate acceptance bill discounting in the form of trading in copper. The transaction contracts concluded by and between Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company in the present case were actually merely only one link in the above-mentioned closed transaction chain. The existing evidence can only prove that the transactions in the present case involved the transfer of funds, but cannot prove that the genuine transfers of goods occurred in the process, and therefore such transactions did not have the basic characteristics usually inherent in sales contracts. As the relationships between Yunnan Copper Company and Wanbao Jiyuan Biotechnology Company were not based on genuine and valid sale and purchase contracts, the court of first instance did not support Yunnan Copper Company’s request that Wanbao Jiyuan Biotechnology Company should effect the payment of the amounts payable for the goods based on the sales and purchase contracts. Such a judgment is solid in terms of both facts and law, and therefore should be upheld. For the disputes arising from the financingoriented trading involved in the present case, the parties concerned may otherwise seek solutions under law.

6 Comment on Rule In recent years, it is not rare to see sudden interruptions in the capital flow of some businesses due to sharp drops in the prices of crude oil, commodity copper, iron ore and other commodities in the international market. When enterprises that are in need of financing cannot obtain loans from banks, they sometimes resort de facto to borrowing in the form of sales, joint ventures, certificates of deposit, and bills,

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among others. Therefore, a variety of financing-orientated transaction modes have emerged between business enterprises, with transactions as the means, goods as the vehicle and expanding the business of enterprises involved as the ultimate goal. Of the different modes of such transactions, closed-loop transactions are one of the most typical ones and are widely and frequently encountered in judicial practice. 1. Characteristics of closed-loop sales contracts Closed-loop sales contracts, also known as closed-loop trading, usually involve three or more parties that are business enterprises. The participating parties will conclude purchase and sale contracts in pairs, so that the underlying goods and the purported payments thereof will form closed-loop “dual circulations”. Closed-loop trading is often characterized by “placing and accepting orders, drawing and receiving bills without any actual turnover of goods”, i.e., orders, bills and other documents related to purchase and sale are placed, drawn, issued and received in the same way as in normal transactions, but the goods purported to be underlying such documents fail to be traded. The entire process of trading only involves formal and nominal trading contracts, does not involve the transfer of ownership of goods or goods, and may even involve no goods whatsoever at all. In judicial practice, if one or more of the parties to such contract voluntarily provide evidence to the court that the true intention between the parties at the time of concluding the contract is not to buy or sell, but for other purposes, such as financing and borrowing, then the process of ascertaining such facts is relatively simple; however, if the relevant parties intentionally conceal the true purposes of the contract and try their best to conceal their covert activities, it will undoubtedly be a test for the judges’ expertise, wisdom and experience. It is found through a proper review that lawsuits involving such closed-loop trading feature the following characteristics: First, in a lawsuit of this type, the party that initiates the lawsuit is mostly the party that provides the funds involved in such trading. Motivated by its strong desire to recover the funds it invests, the party will bring a lawsuit in a timely manner once it becomes aware of the risk that the party receiving such funds may be unable to repay such funds. This is often the starting point of legal proceedings triggered by subsequent disputes. Second, the party receiving the funds generally will not deny its obligations to repay; however, it is unable to make such repayment. Once it refuses to repay, it will, in most cases, invoke the principle of privity of contract to defend itself on the ground that there is no real contractual relationship of sale and purchase with the party that provides the funds. Third, the third party, which plays an auxiliary role, usually claims that it is not aware of the closed-loop trading, that it denies the validity of the contract on the ground that it has been the victim of fraud, or claims that the party that pays is the actual borrower, and therefore the third party should not bear any responsibility for this. Therefore, it has become a sticking point in judicial practice to identify closed-loop trading and the nature and effectiveness of the contracts involved therein.

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2. Identification of closed-loop trading The identification of closed-loop trading activities may start with the characteristics of such activities. The parties, funds and circulation of goods involved in closed-loop trading have the following characteristics: (1) Closed-loop trading is completed by the parties involved. The basic mode of such trading is: the party providing the funds for the trading purchases goods from the upper-stream auxiliary party, and then re-sell the goods to the party that needs the funds; such party then again re-sells the goods to such upper-stream auxiliary party of the party providing such funds. To make such trading more opaque, a further party, i.e., a lower-stream auxiliary party, may emerge, or alternatively, the trading between auxiliary parties may involve multiple steps; however, the trading remains a tightly closed-loop throughout the process. The third-party auxiliary enterprises, for their part, usually play two roles: the first is to carry out nominal serial trading between the party providing the funds and the party receiving the funds, with the funds ultimately returned to the supplier thereof through repurchase by such fund supplier of goods from the recipient of funds; the second is to carry out the aforementioned repurchase, as the affiliate or partner of the party receiving the funds, and then return the funds, in the form of loan(s), to the party that originally supply such funds; after that, the closed-loop circulation of the funds will be completed through internal trading and settlement between affiliated enterprises. (2) The parties to the transaction do not have any genuine intention to engage in such transaction, and each party is aware of this. As for the genuine intentions of such parties, they mainly include financing & borrowing, bill discounting, and artificially boosting business performance, among others. That is also the fundamental difference between a closed-loop sale and a normal sale, i.e. the inconsistency between the will and the act of declaration. (3) Both the source and ultimate destination of funds involved are the party supplying such funds, and the highest and lowest prices agreed under the contracts are associated with the party in need of such funds. That, however, is not necessarily always the case. As is shown in the present case, the highest and lowest points of the prices agreed under the sale and purchase contracts appear with the third-party auxiliary enterprise. The reason behind this is that the party that needs the funds has to pay the price for its financing and bill discounting. Therefore, it usually agrees in advance on a price difference that is unfavorable to itself without considering the actual market price. In this way, such party sells the same goods at a low price before repurchasing them at a high price, which appears to be loss-making transactions and in fact is intended to pay interest or remuneration. (4) Absence of genuine turnover of goods. In a closed-loop transaction, the purchase and sale contracts involved therein are usually identical or essentially the same

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in terms of the type, quantity and quality of the subject matters of such contracts, with the exception of the price thereof. As has been mentioned above, as the parties to such a transaction have no genuine intention to sell or buy the goods underlying the contracts, nor do they have any genuine need for them; therefore, the goods, which are the subject matter of the contracts, are not delivered or circulated along with the transaction process; rather, there may even be collusion between the party supplying the funds and the warehousing enterprise involved to fabricate bills of lading, warehouse receipts and other documents of title, so as to carry out purchase and sale that involves the flow of funds but no actual turnover of goods. Generally, none of the parties to the transaction dispute the availability of the goods before a lawsuit is initiated. 3. Determination of the validity of closed-loop sale contracts The nature and validity of closed-loop sale contracts should be assessed and determined in accordance with Article 146 of the General Rules of the Civil Law. In judicial practice, there has always been significant controversy over the validity of such contracts. One point of view is that the Rechtsschein Theorie of commercial law should be followed, and the appearance of the parties’ act should be adopted as the basis, i.e., the true expression of intent of the parties to a sales contract should be determined according to the external appearance of the sale contract. If the content of the contract does not violate any mandatory provisions of the applicable laws, the contract should then be determined to be lawful and valid, and therefore the responsibilities of the parties involved in the contract should be defined according to the principles applicable to valid contracts. Another point of view is that closed-loop trading violates normal commercial rules, with the parties involved therein harboring ulterior intent that is disguised by the purported intent to engage in trading. Therefore, such a contract is concluded apparently for the purpose of “trading” but is instead entered into for the purpose of financing. In this sense, the contract should be regarded as invalid, and the responsibilities of the parties thereto should be determined according to the principles applicable to invalid contracts. Further, Article 146 of the General Rules of the Civil Law, which stipulates that “A civil juristic act performed by an actor and another person based on a false expression of intention is void. Where an expression of intent deliberately conceals a civil juristic act, the validity of the concealed act shall be determined in accordance with the relevant laws”, provides basis and guidance for dealing with the issues underlying closedloop sale contracts: such a sale contract is invalidated by its false expression of intent; as for the civil juristic conducts disguised by such a contract, their validity should be assessed in accordance with relevant provisions of applicable laws. We believe that there is justification for the existence of such an approach. First, from the perspective of civil law, the expression of intent refers to an act through which the intent to achieve certain effects under private law is manifested. Its constituent elements include the purported intent that specifies the content of a civil juristic act, the effectual intention of the actor that indicates the purported legal effect that the content of the actor’s manifestation gives rise to, and the manifestation itself that externalizes the intent of the actor, i.e., the manifestation of intention

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is effected through a three-stage process, that is, some kind of “motivation”, the “effectual intention” and “the act of manifestation”. Generally speaking, the nature of transaction behaviors should be identified on the basis of the act of manifestation, and in commercial law, it should be identified according to the Rechtsschein Theorie. However, in the event that the transaction behaviors are so obviously contrary to the general norms of transaction that it can be reasonably suspected that the actual inner intention of the party concerned is inconsistent with the external manifestations, i.e., there is any cover-up of implicit behaviors, or even any cover-up of any illegal purpose and evasion of legal regulation, the doctrine of intention should be adopted and they should adopt the meaning doctrine to explore the true intention of the party concerned. An example of the latter scenario is the identification of closedloop sale, which constitutes false manifestation of intention in civil law. From the perspective of methodology, an effective approach of such identification is to find out the obvious differences between a closed-loop sale and a normal sale through a comprehensive assessment of such external formal evidence as the content of the sales contracts underlying such closed-loop sale, as well as the communication process and procedure of such closed-loop sale, and then reveal the real motivation and purpose behind such differences. Second, based on the foregoing analysis, the parties entered into the contracts not for the purpose of purchase and sale, but for other purposes, such as financing loans and bill discounting. If the parties attempt to cover up their illegal purposes by apparently legal means, and the court nonetheless mechanically applies the doctrines of the Rechtsschein Theorie, the court may easily and unwittingly become a de facto “accomplice” of the parties’ illegal purposes, which in turn gives rise to frequent occurrence of malicious litigation. Therefore, any purchase and sale that is used as disguise should be ruled as invalid according to law; the validity and effectiveness of the behaviors covered up by such disguise should be determined in accordance with the relevant provisions in the section headed “Validity of Civil Juristic Acts” in the General Rules of the Civil Law and other provisions related to the validity of juristic acts. The status of validity of the behaviors covered up by such disguise ranges from valid, invalid, undetermined, to rescindable, depending the actual circumstances of such behaviors. If the actual purpose of the parties is to engage in lending and borrowing, the validity of the underlying contract shall be determined in accordance with the relevant provisions of the Judicial Interpretation on Private Lending. Provided that the mandatory provisions of laws and administrative regulations on validity are not violated and public order and good morals are upheld, the contract should be viewed as valid in principle. However, if the actual intent of the party or parties are to transfer the assets, it should then be necessary to ascertain whether there is any invalidating circumstance involving damages to the interests of the state, any collective or any third party. Furthermore, Article 53 of the Provisions of the Supreme People’s Court on Evidence in Civil Proceedings provides, “If, in the process of litigation, the nature of any legal relation alleged by a party concerned or the validity of any alleged civil acts is inconsistent with the findings of fact made by the people’s court on the basis of the facts of the case, the people’s court shall then adopt such nature of legal relation or validity of civil act as the focal point in hearing the case,

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except where the nature of legal relation or validity of civil act does not affect the grounds or results of the court’s judgment, or where relevant issues have been fully debated by the parties concerned. In the event that any party alters its claim on the ground of the circumstance under the preceding paragraph, the people’s court shall then allow such alteration and specify the time limit for production of evidence anew.” Therefore, in the event that the court, after hearing a case, considers that the nature and effect of a contract involved in the case are inconsistent with the claims by the parties, the court shall then center on such nature and validity in hearing the case, and properly exercise its right of interpretation. The parties, for their part, may alter their claims according to the court’s adjudication or insist on not altering the original claim. According to the principle of disposition, if a party sticks to its original claim, the court then cannot require the party to alter its claim; instead, the court must issue its judgment in a timely manner, which, however, will not prevent the party from bringing another lawsuit in the future on the basis of the legal relationship or the validity of civil act as determined by the court. 4. Further attention-worthy issues in adjudication practice There are the following further issues in adjudication practice to which sufficient attention must be paid so that they can be properly addressed: First, in the scenario where a party to a sales contract sues one or more counterparties only in accordance with the sales contract, and such counter-party or counterparties counter-plead that the contract involves circular sale that serves to disguise any loan, and provide sales contracts that are signed in connection with the same subject matter on the same date or separately on dates that are very close to each other, and that are identical to each other in terms of the content and quantity of what is sold and purchased thereunder, the court then shall, as may be necessary, include all potential contracting parties to such circular sale into the litigation, so as to accurately ascertain the nature of the case. Second, regarding the actual delivery of goods, if the parties concerned only provide receipt acknowledgment of such goods, instead of property right transfer certificate or shipment documents, then statements by the party in need of the fund are more probable, because such party is usually the starting point and the end point of the goods circulated through the contract, and it is also the actual recipient of the goods. However, if it is still impossible to ascertain the delivery of the goods, the court may then investigate the party warehousing or producing such goods, or it may include such party as a participant in the lawsuit, so as to verify the true condition of the goods. Third, in the scenario where confirming warehouse transaction based on acceptance bills is involved, the case may be heard according to Article 69 of the Summary of the National Civil and Commercial Trial Work Conference of Courts, which provides that: “A confirming-warehouse transaction must be subject to genuine sale and purchase between the buyer and seller. Where there is no genuine sellerbuyer relationship between the parties, such transaction is then actually a loan contract disguised as a confirming warehouse transaction, leading the invalidity of the confirming warehouse transaction for it constitutes a false manifestation of intent,

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and the disguised loan contract is the party’s true manifestation of intent and shall be determined to be valid unless there is other circumstance invalidating the contract. The idenfication of a confirming warehouse transaction as a relationship of a loan contract does not affect the effect of the guarantee relationship between the seller and the bank, and the seller shall still bear the guarantee liability. Therefore, payment made by a buyer to a seller by way of a bank acceptance bill in the absence of a genuine transaction relationship between them is usually intended for financing purposes; in view of this, it can then be deemed that the relationship between the two parties is that between a lender and a borrower. If such a lender-borrower relationship does not violate Article 153 of the General Rules of the Civil Law, Article 52 of the Contract Law or Article 14 of the Judicial Interpretation on Private Lending, then it will be inappropriate to deny its validity.

Zhongkong Guorong New Energy Development Co., Ltd. v. Fuzhou Dade Industry Co., Ltd. (Dispute Over Sales Contract: Determination and Application of Deposit-Related Penalty Rules for Partial Performance of Contracts) Genhui Xia

1 Rule In judicial practice, the criterion for determining whether the parties to a contract have fully performed the contract is whether the purpose(s) of the contract have been fulfilled. In the event that a party to the contract rescinds the contract due to delay in performance or breach of contract by the other party thereto, and therefore the purpose(s) of the contract cannot be fulfilled, then the deposit-related penalty rules shall apply. If the parties partially fulfill their contractual obligations, but the contract is completely rescinded due to subsequent breach of contract, and consequently the purpose(s) of the contract cannot be achieved, then the deposit-related penalty rules shall apply even if the parties have by then fulfilled certain contractual obligations. Partial performance of a contract by a party thereto refers to the scenario where the party has performed part of the contractual obligations thereof and the purpose(s) of the contract has been partially achieved, and even if the contract were rescinded, the purpose(s) corresponding the performed part of the contract that have already been achieved could not be eliminated; in this case, the deposit-related penalty rules

Collegial Bench: Yaling Liu, Feng Xiao and Ying Zhang Edited by Li Zhong; Translated by Zhijian Cao G. Xia (B) The Third Circuit Court of the Supreme People’s Court of the People’s Republic of China, Nanjing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_19

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shall be applied on a pro rata basis according to the proportion of the contract that remains unperformed.

2 Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Defendent in the Counterclaim, Appellant in the Second Instance): Zhongkong Guorong New Energy Development Co., Ltd. (hereinafter referred to as Zhongkong Guorong) Applicant in the Reopening (Defendant in the First Instance, Plaintiff in the Counterclaim, Appellant in the Second Instance): Fuzhou Dade Industry Co., Ltd. (hereinafter referred to as Dade Industry Company) 2. Procedural History First Instance: No. 439 [2017] Trial, Civ. Division, the Intermediate People’s Court of Fuzhou City, Fujian Province (Fujian 01) (dated Nov. 11 of 2017) Second Instance: No. 265 [2018] Final, Civ. Division, the Higher People’s Court of Fujian Province (dated Jul. 31 of 2018) Petition for Case Reopening: No.246 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated Mar. 30 of 2019) No. 183 [2019] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 30 of 2019) 3. Cause of Action Dispute over sale contract

3 Essential Facts On May 11, 2016, Dade Industry Company, as Party A, and Zhongkong Guorong, as Party B, signed a lease and sale contract and a real estate transfer framework agreement. According to the lease and sale contract, Zhongkong Guorong intends to purchase a number of properties, including Blocks C and D of Dade Plaza, from Dade Industry Company. In view of the fact that the underlying properties do not meet the conditions the purchase contemplated in the contract, Party B shall first access the above-mentioned properties through lease; after the underlying properties meets the transaction conditions, Party B shall then access the said properties by way of purchase. In that event, Party A and Party B will conclude another sales contract in accordance with the transfer terms and conditions agreed in the first contract,

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and Party A will sell the properties to Party B. If the underlying properties cannot be transferred according to such transfer terms and conditions within 3–5 years, both parties shall sign a supplementary purchase contract on the payment method. The real estate transfer framework agreement stipulates that Zhongkong Guorong shall purchase from Dade Industry Company part of the real estate underlying the above-mentioned Block C as well as 103 parking spaces, and for such purchase, Zhongkong Guorong shall pay CNY 30 million as security deposit or earnest money, and shall pay the purchase price according to the timetable thereunder. In the event that Zhongkong Guorong fails to pay any of the installments of the purchase price, Dade Industry Company shall have the right to unilaterally terminate the Agreement. After the above-mentioned contract was concluded, Zhongkong Guorong paid to Dade Industry Company the security deposit of CNY 30 million for the real estate purchase under the framework agreement. However, as Zhongkong Guorong failed to pay the second installment of the purchase price for the real estate under the framework agreement, in the amount of CNY 130 million, both parties concluded on August 15, 2016 a memorandum, agreeing that Zhongkong Guorong shall pay to Dade Industry Company CNY 1 million by August 11, 2016 and that by September 20, 2016, the total amount paid in real estate purchase price shall reach CNY160 million. Both parties confirmed in the memorandum that the nature of the security deposit, in the amount of CNY30 million, which had already been paid, shall remain unchanged. Then in September 2016, Zhongkong Guorong paid a total of CNY11.9 million to Dade Industry Company in real estate price payment. On October 27, 2016, Dade Industry Company sent via its entrusted lawyer to Zhongkong Guorong a document, Reminder for the Immediate Payment of the Outstanding Second Installment of the Real Estate Purchase Price for Dade Plaza. Thereafter, Dade Industry Company sent another document to Zhongkong Guorong on February 15, 2017, Notice on Qualification of Block D of Dade Plaza for Property Delivery and Call for Immediate Payment of Deposit and Rent Thereof, notifying Zhongkong Guorong that relevant properties in the said Block D had reached the real estate delivery conditions and requesting Zhongkong Guorong to effect the corresponding payments and handle the relevant property delivery procedures. On March 22 and March 23, 2017, Dade Industry Company and its entrusted lawyer respectively sent to Zhongkong Guorong a notice on the rescission of the lease and sale contracts and a notice on the rescission of the real estate transfer framework agreement, informing Zhongkong Guorong that the said lease and sale contract and the real estate transfer framework agreement shall be rescinded as of the date when Zhongkong Guorong received the corresponding notices. After that, Zhongkong Guorong filed a lawsuit, requesting that the real estate transfer framework agreement between the two parties should be rescinded and demanding that Dade Industry Company Company should return the payments that had been made by then as well as accrued interest thereon. Dade Industry Company Company filed a counterclaim, requesting that the real estate transfer framework agreement should be confirmed as having been rescinded and that the deposit penalty rules should be applied, according to which the deposit paid by Zhongkong Guorong

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should not be refunded and the accrued interest thereon should be paid by Zhongkong Guorong. The court of first instance ruled that as the real estate transfer framework agreement involved in the case had been rescinded because Zhongkong Guorong had failed to effect the payment of the real estate purchase price as agreed, which constituted a fundamental breach of contract, the ground based on which Zhongkong Guorong claimed for rescission of the agreement could not be established. Given that the purposes of the contract could not be achieved due to default on the part of Zhongkong Guorong, the application by Dade Industry Company of the deposit penalty rules according to law shall then be supported, the part of the real estate purchase price already paid by Zhongkong Guorong shall be refunded, and other claims of both parties shall be rejected. Neither Zhongkong Guorong nor Dade Industry Company was satisfied with the first-instance judgment and both lodged an appeal. The court of second instance ruled that as Zhongkong Guorong had paid CNY 11.9 million in real estate purchase price as agreed, and had performed part of the underlying contract, the deposit penalty rules should be applied in proportion to the partial performance of the contract. Therefore, Dade Industry Company shall refund CNY 1.08 million from the deposit to Zhongkong Guorong, together with the corresponding interest on the refunded amount, and the other parts of the ruling by the court of first instance shall be upheld. Neither Zhongkong Guorong nor Dade Industry Company was satisfied with the second instance decision and lodged a petition to the Supreme People’s Court for reopening the case. The Supreme People’s Court ruled on December 30, 2019 for reopening the case via certiorari.

4 Issue Whether the pro rata application of deposit penalty rules should be applied in this case in proportion to the partial performance of contract.

5 Holding In this case, Zhongkong Guorong and Dade Industry Company concluded a real estate transfer framework agreement, which stipulates that Zhongkong Guorong shall purchase from Dade Industry Company properties in Block C and the corresponding parking spaces involved in this case, and Zhongkong Guorong shall pay the purchase price of CNY130 million within 3 months after signing the agreement. During the performance of the agreement, Zhongkong Guorong failed to pay as agreed. Both parties then signed a memorandum on postponement of payment; nonetheless, Zhongkong Guorong paid only CNY 11.9 million after that; therefore, Dade Industry Company rescinded the contract between the two parties. In view of this, Dade Industry Company has the right to demand according to the deposit

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penalty rules that the deposit should not be refunded. The specific reasons are as follows: First of all, the purposes of the agreement cannot be achieved because the agreement has been rescinded due to failure by Zhongkong Guorong to pay the real estate purchase price thereunder; therefore, the deposit penalty rules shall be directly applied. According to the agreement, Zhongkong Guorong was required to pay the purchase price of CNY 130 million in real estate purchase price as agreed; however, it actually paid only CNY 11.9 million only instead. After both parties signed a memorandum on payment postponement, Zhongkong Guorong again failed to pay as agreed; therefore, Dade Industry Company then had the right to rescind the contract as agreed by both parties, and the real estate transfer framework agreement involved in this case has been rescinded accordingly. Given the rescission of the real estate transfer framework agreement, which is attributable to default on the part of Zhongkong Guorong, the contractual purposes of Dade Industry Company cannot be achieved. According to Article 120(1) of the Judicial Interpretation of the Guarantee Law, where one party to a contract breaches the contract and therefore the purposes of the contract cannot be achieved, the deposit penalty rules may be directly applied. Secondly, the real estate transfer framework agreement involved in this case contemplates the purchase of a building as a whole together with the relevant parking spaces, and does not cover the scenario where the properties involved should be purchased in several parts or by several stages; hence, there is no partial or incomplete performance under the agreement, and therefore, the provisions under Article 120(2) of the Judicial Interpretation of the Guarantee Law shall not apply. The underlying agreement stipulates the purchase of real estate as a whole and the parties thereto have not agreed that the subject matter of the agreement can be divided, nor have they agreed that the subject matter can be delivered in parts on a pro rata basis according to the payment progress in the actual performance process. Therefore, the payment of CNY 11.9 million by Zhongkong Guorong does not constitute partial performance of the agreement; on the contrary, the underlying agreement has been rescinded because the purposes thereof cannot be achieved due to default on the part of Zhongkong Guorong; in this sense, the conduct of Zhongkong Guorong cannot be categorized as partial performance of the agreement. Finally, judging from the consequences of the rescission of the real estate transfer framework agreement underlying the case, Dade Industry Company should fully refund the CNY 11.9 million paid by Zhongkong Guorong in real estate purchase price, which indicates that such payment did not fulfill the relevant requirements in underlying agreement involved in the case, nor has Dade Industry Company obtained any contractual benefits therefrom, and as a result, its contractual purposes have failed to be achieved in any manner whatsoever. The legislative intent of applying the deposit penalty rules on a prorata basis is that in the event of partial performance of a contract and the non-defaulting party obtains certain benefits from such partial performance of the contract, for the sake of balance of interest, deduction will be made from the penalty on a prorata basis in proportion to the performed part of the contract. In view of this, the deposit penalty rules should be directly applied in accordance with Article 120(1) of the Judicial Interpretation of the Guarantee

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Law, instead of on a pro rata basis in proportion to the partial performance of the contract. Therefore, the finding in the decision of the second instance that Zhongkong Guorong has partially performed the agreement, and therefore the deposit penalty rules shall be applied on a pro rata basis in proportion to the unperformed part of the agreement involves an incorrect application of law, which shall be corrected. Accordingly, this Court modified the second-instance decision by canceling items 3 and 4 thereof, and upholding item 3 of the first-instance judgment, i.e. the CNY 30 million in security deposit paid by Zhongkong Guorong under the real estate transfer framework agreement shall be owned by Dade Industry Company.

6 Comment on Rule Article 120 of the Judicial Interpretation of the Guarantee Law provides, “(w)here the purposes of a contract cannot be achieved due to delay by a party thereto in performance thereof or any other breach of contract by such party, the deposit penalty rules may be applied, except as otherwise provided by law or agreed by the parties. Where a party to the contract fails to fully perform the contract, the deposit penalty rules shall be applied in accordance with the proportion that the unperformed part of the contract account for in terms of the content of the contract.” The above-mentioned part of the Judicial Interpretation is in essence a provision on the specific application of deposit penalty rules: Paragraph 1 provides that the deposit penalty rules shall be directly applied in the event that default by a party to a contract renders it impossible to achieve the purposes of the contract; Paragraph 2 states that a party’s partial performance of the contract does not constitute a fundamental breach thereof, and in this case, the deposit penalty rules shall be applied on a pro rata basis according to the proportion that the unperformed part accounts for in the total content of the contract. The main difference between the above two paragraphs in terms of application lies in whether the purposes of the contract can be achieved. In the event that a party to the contract fundamentally breaches the contract and as a result, the purposes of the contract cannot be achieved, then the deposit penalty rules shall be directly applied. From the perspective of the legislative intent stipulated under Paragraph 2, should the deposit penalty rules also be fully applied where the subject matter of the contract can be divided proportionally, it would likely lead to the imbalance between the parties in terms of rights and interests, and ultimately results in injustice; therefore, it is stipulated that the penalty rules shall be applied according to the proportion that the unperformed part of the contract accounts for in the event of partial performance by a party. Therefore, partial performance of a contract by a party thereto means that the contract has actually been partially performed, and such performance means that part of the content of contract has been completed, subject to the precondition that the subject matter of the contract can be divided; subsequent breach of contract by the party that partially performs the contract will not result in the failure to achieve overall purposes of the contract and therefore will not constitute a fundamental breach

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of the contract. In this case, part of the contract has been performed, and the deposit penalty rules may be applied on a pro rata basis accordingly. In the present case, the real estate transfer framework agreement contemplated the overall transfer of properties in a building, Block C, together with underground parking spaces. Although Zhongkong Guorong paid part of the purchase price in accordance with the agreement, it failed to effect the payment of the remaining purchase price on time; therefore, Dade Industry Company had the right to rescind the contract as had been agreed, which resulted in the failure to achieve the purposes of the agreement; in this sense, such a scenario cannot be categorized as a case of partial performance of contract. The court of second instance held that as long as part of the real estate purchase price was paid, the contract should be deemed as having been partially performed, which, in fact, was based on an improper interpretation of Article 120 of the Judicial Interpretation of the Guarantee Law, as a result of which realization of contractual purposes failed to be adopted as the standard as to whether the deposit penalty rules should be applicable, and the substantive qualification requirements for partial performance of contract also failed to be accurately understood. In practice, it is not unusual for a sales contract to be rescinded after one party fails to fulfill all payment obligations thereof in accordance with the contract. In this case, if it were held that the contract is partially performed as long as the buyer pays part of the purchase price and therefore the deposit penalty rules should be applied on a pro rata basis, such a holding would not only contravene the legislative intent of the deposit penalty rules, but also would not be conducive to the performance of the contract and the normal and orderly social and economic development.

Zhongrong Hengsheng Wood Industry Co., Ltd. (Beijing) v. Crosplus Home Furnishings (Shanghai) Co., Ltd. and Nanjing Mengyang Furniture Shop (Dispute Over Copyright Infringement: Factors Contributing to Copyright Protection of Works of Applied Art) Rong Li

1 Rule Works of applied art protected by copyright law must be artistic, which is determined by the nature of the applied art itself. Applied artwork is artwork with practical use, lack of artistry does not constitute artwork, let alone applied artwork, but only practical goods, and the copyright law protects the artistry of applied artwork rather than practicality. A work of applied art protected by copyright law must satisfy the condition that its artistic and practical quality can be separated. In determining whether an applied artwork constitutes a work of applied art, a distinction should be made between the stylistic component determined by the practical function and the purely artistic expression element. If its practicality and artistry are not independent of each other, the protection of its artistry essentially protects its practical function at the same time, resulting in the extension of copyright protection to the practical function, which will have the consequence of using copyright as a means to achieve technical control and monopoly, which runs contrary to the basic principles of copyright law. Collegial Bench: Yuanming Qin, Rong Li and Rong Wu Edited by Wenyan Ding; Translated by Daxuan Zheng and Duping Wang R. Li (B) The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_20

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Applied artworks with originality, practicality, artistry and reproducibility, and whose practicality and artistry can be separated, can be identified as works of applied art and protected by copyright law as works of fine arts; flat or three-dimensional designs that are “aesthetically pleasing” but do not possess a certain degree of artistry and originality, can be protected via design patents through application.

2 Case Information 1. Parties Applicant in the Reopening (Defendant in the first instance, Appellee in the second instance): Beijing Zhongrong Hengsheng Wood Industry Co., Ltd. (hereinafter referred to as Zhongrong Hengsheng Wood Industry Company) Appellee (Plaintiff in the first instance, Appellant in the second instance): Crosplus Home Furnishings (Shanghai) Co., Ltd. (hereinafter referred to as Crosplus Home Furnishings Company) Defendant in the first instance, Appellee in the second instance: Nanjing Mengyang Furniture Shop (hereinafter referred to as Mengyang Furniture Shop) 2. Procedural History First Instance: No. 126 [2014] Trial, Civ. Division, the Intermediate People’s Court of Nanjing City, Jiangsu Province (dated Dec. 16 of 2014) Second Instance: No. 00085 [2015] Final, Civ. Division, the Higher People’s Court of Jiangsu Province (dated Aug. 30 of 2016) Reopening: No. 6061 [2018] Appeal, Civ. Division, the Supreme People’s Court (dated Dec. 29 of 2018) 3. Cause of Action Dispute over copyright infringement

3 Essential Facts Crosplus Home Furnishings Company claimed in the first instance that it created and completed the furniture named “Tang Yun Checkroom Combination Cabinet” on February 1, 2009. Mengyang Furniture Shop is the agent dealer of Zhongrong Hengsheng Wood Industry Company in Nanjing, Jiangsu Province. Crosplus Home Furnishings Company found that the mahogany checkroom with the brand name of “Yue Jie” sold in Mengyang Furniture Shop is exactly the same as the “Tang Yun Checkroom Combination Cabinet”. As the “Tang Yun Checkroom Combination Cabinet” is a practical artwork, Zhongrong Hengsheng Wood Industry Company has thus infringed on the right of reproduction and right of distribution on the work

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of Crosplus Home Furnishings Company; Mengyang Furniture Shop has infringed upon the right of distribution on the work of Crosplus Home Furnishings Company. Crosplus Home Furnishings Company petitioned to the court that: (1) Zhongrong Hengsheng Wood Industry Company shall cease the production and sale of “Tang Yun” mahogany furniture which has infringed on the copyright of Crosplus Home Furnishings Company; (2) Mengyang Furniture Shop shall cease the sale of “Tang Yun” mahogany furniture that has infringed upon the copyright of Crosplus Home Furnishings Company; (3) Zhongrong Hengsheng Wood Industry Company shall also publish a statement on its official website and on Xinmin Evening News to remove the undue impact; (4) Zhongrong Hengsheng Wood Industry Company and Mengyang Furniture Shop shall jointly make a compensation of CNY2,000,000 to Crosplus Home Furnishings Company for the economic loss; and (5) Zhongrong Hengsheng Wood Industry Company and Mengyang Furniture Shop shall make a compensation for the reasonable expenses incurred by Crosplus Home Furnishings Company, totaling CNY 95,513.5 and cease the infringement. The court of first instance held that the production of “Tang Yun Mahogany Checkroom” by Zhongrong Hengsheng Wood Industry Company was not an act of copy in the sense of copyright law, thus, the claims raised by Crosplus Home Furnishings Company’s claim were dismissed. The court of second instance held that “Tang Yun Checkroom Furniture” manufactured by Crosplus Home Furnishings Company fall into the category of the works protected by Chinese copyright law, and the allegedly infringing products “Tang Yun Mahogany Checkroom” were substantially the same as “Tang Yun Checkroom Furniture” and that Zhongrong Hengsheng Wood Industry Company infringed the copyright of “Tang Yun Checkroom Furniture” produced by Crosplus Home Furnishings Company and should be liable for the tortious liability. The court of second instance ruled that Zhongrong Hengsheng Wood Industry Company shall cease the infringement and compensate Crosplus Home Furnishings Company for its economic loss (including reasonable expenses) of CNY 300,000. Unsatisfied with the decision of second instance, Zhongrong Hengsheng Wood Industry Company appealed to the Supreme People’s Court for reopening.

4 Issues 1. How to ascertain the right requested by Crosplus Home Furnishings Company in this case; 2. Whether “Tang Yun Checkroom Furniture” produced by Crosplus Home Furnishings Company constitutes a work protected by the copyright law; 3. Whether Zhongrong Hengsheng Wood Industry Company has infringed on the copyright of the work alledged by Crosplus Home Furnishings Company.

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5 Holding Upon review, the Supreme People’s Court holds that: works protected by copyright law in China must simultaneously meet the following three requirements: (1) must be intellectual creations in the fields of literature, art and science; (2) must be original; and (3) must be able to be reproduced in tangible form. In addition to satisfying the above three elements of the general composition of a work, special elements of a work of fine art must also be satisfied: (1) they are created in lines, colors or other media such as painting, works of calligraphy and sculpture; (2) they are aesthetically pleasing; and (3) they are flat or three-dimensional art works. In China’s current judicial practices, works of applied art are protected by Chinese copyright law as fine art works. What Chinese copyright law protects is the original expression of the author in the work, but not the idea reflected in the work itself. Practical artworks are both practical and artistic. Practical functions are not protected by Chinese copyright law because they fall into the category of ideas, what is protected as a work of applied art is only its artistic nature, i.e., the original artistic shape or artistic pattern of the work of applied art, that is, the structure or form of the work of art. In addition to satisfying the general requirements of a work and the special requirements of a work of art, a practical work of art protected by copyright law shall also satisfy the condition that its practicality and artistry can be separated from each other: the two can be physically separated from each other, i.e., the practicality with practical function and the artistry embodying artistic beauty can be physically detached from each other and can exist separately; the two can be conceptually disaggregated from each other, i.e., any change in the artistry in a practical work of art will not bring about a substantial loss of its practical function. The practicality of the “Tang Yun Checkroom Furniture” lies mainly in the design of the internal storage space of the cabinet, which allows it to set clothes in place and display them, as well as the L-shaped corner design of the cabinet, which allows it to be used in specific home environments. The artistry of the furniture is mainly reflected in the pattern of panels, the metal accessories, and the Chinese symmetry and other designs, which gives it a distinctive Chinese style. Any change to the pattern of the boards or panels, metal fittings, Chinese symmetry and other stylistic designs of the “Tang Yun Checkroom Furniture” in the said case will not affect its function as checkroom furniture for placing and displaying clothes. Therefore, the practicality and artistry of the furniture in question can be separated and exist independently. The work in question, through a combination of board or panel pattern, metal fittings, Chinese symmetry and other designs, presents a distinctive Chinese style and has considerable aesthetic appeal, attaining the height of artistic creation as provided for in the Copyright Law for an art work. In view of the above, the furniture in question, as three-dimensional art works with both practical function and aesthetic significance, should be protected by China’s copyright law as art works. On December 29, 2018, the Supreme People’s Court ruled to dismiss the reopening application submitted by Zhongrong Hengsheng Wood Industry Company.

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6 Comment on Rule 1. At present, applied works are protected by copyright law in China as fine art works The types of works provided for in Article 3 of the Chinese Copyright Law (2001) comprise written works, oral works, musical compositions with or without words, drama, opera, works relating to dance and acrobatics, fine art, architectural works, photographic works, cinematographic works, works created in a way similar to filmmaking, such graphic works as engineering designs, product designs, maps and schematic diagram, model works, computer software, and other works provided for by laws and administrative regulations. The works of applied arts are excluded. However, Article 2 (7) of the Berne Convention for the Protection of Literary and Artistic Works provides that it shall be a matter for legislation in the countries of the Union (the countries to which this Convention applies constitute a Union for the protection of the rights of authors in their literary and artistic works) to determine the special protection to industrial designs and works of applied art; and if there is no such special protection, such works shall be protected by copyright law as artistic works. Article 7 (4) of the Berne Convention also provides that it shall be a matter for legislation in the countries of the Union (the countries to which this Convention applies constitute a Union for the protection of the rights of authors in their literary and artistic works) to determine the term of protection of works of applied art in so far as they are protected as artistic works; however, this term shall last at least until the end of a period of twenty-five years from the making of such a work. China is one of the signatories to the Berne Convention for the Protection of Literary and Artistic Works and is thus obligated to undertake the commitments of the Convention. Article 4 (8) of the Regulations on Implementing the Copyright Law provides that works of art refer to paintings, calligraphy, sculpture and other flat or three-dimensional works that are aesthetically significant which are composed of lines, color or in other means. Article 2 (4) of the Patent Law provides that “design” means the new design done onto the product shape, pattern or combination thereof, as well as the combination of color and shape, pattern that are aesthetically pleasing and capable of industrial application. As the Berne Convention for the Protection of Literary and Artistic Works expressly provides that works of applied art shall be protected, taking into account the fact that works of applied art and works of fine art focus more on artistry, while designs focus more on industrial design, works of applied art can be taken to be works of fine, enjoying the copyright protection in judicial practices in China. 2. Assessment of the artistry and originality of works of applied art that are protected by copyright law in China as fine art works Works of applied art is a general term for flat or three-dimensional objects that are both practical and artistic. Practical artwork can be divided into general practical artwork and special practical artwork. Practical artworks and works of applied art are not the

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same thing, and not all practical artworks can become works of applied art, enjoying the copyright law protection. Only when certain requirements or prerequisites are met can practical artworks become special practical artworks, that is, works of applied art protected by copyright law and/or graphic design or three-dimensional design protected as design patent. The works of applied art protected by copyright law must be artistic, which is determined by the nature of practical artwork itself. As practical artworks are artworks with practical use, any lack of artistry does not constitute an artwork, let alone practical artwork, it can only be considered a practical object. What copyright law protects is the artistry rather than the practicality of works of applied art. In assessing the extent of artistry of a work of applied art, on the one hand, considering that a design is a combination of technology and art, with a focus on protecting the technical constituent, the requirement of being “aesthetically pleasing” for artistry can be cut off from functional design, while a work of applied art focuses more on the protection of artistry. In assessing the extent of artistry of a work of applied art, on the one hand, considering that a design is a combination of technology and art, with a focus on protecting the technical constituent, the requirement of being “aesthetically pleasing” for artistry can be cut off from functional design, while a work of applied art focuses more on the protection of artistry. On the other hand, works of applied art as fine art works are protected by the existing copyright law, the artistic requirements of fine art works need to be “aesthetically pleasing”. Influenced by the environment, atmosphere and inspiration in the process of creation, the creator integrates his passion into his works through use of lines, colors, spatial formations, contrast of light and dark, design of patterns, and use of materials to manifest certain aesthetic significance of works of applied art. Therefore, works of applied art protected by China’s copyright law as fine art works should possess a certain degree of artistry. Article 2 of the Regulations on Implementing the Copyright Law provides that the term “works” used in the Copyright Law refers to intellectual creations in the fields of literature, art and science that are original and can be reproduced in some tangible form. The requirements for works of applied art to be protected by copyright law as works of fine art are that they must meet both the general requirements provided in Article 2 and the special requirements provided in Article 4 (8) of the Regulations on Implementing the Copyright Law. In combination with their practical characters, it can be summarized that works of applied art shall have practicality, artistry, originality and reproducibility.1 The objects of copyright are works, any work protected by copyright law must possess certain originality, and works of applied art are no exception. The artistry of works of applied art is embedded in their originality. Originality is a matter to be judged in accordance with specific facts, no uniform standard is applicable to all works; in fact, the requirement for originality varies

参见高赟燕: 《实用艺术作品的著作权保护研究》 ,厦门大学2006年硕士学位论文,第一章第 二节。.

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from one type of work to another.2 The requirement of originality for applied art works should be consistent with the goal of legal protection. The protection of works of applied art is directed at protecting the expression of artistic beauty and enhancing the aesthetics of life, to wit, the actual use or the function of the works. The artistic creation of a work of applied art is limited by its practical function, and the freedom for creation is relatively limited. For works of applied art with more practical factors, only works with a high degree of originality can demonstrate the existence of their artistry. The practical factors are positively correlated with the tough requirements for originality, which is the particularity of the judgment of originality in works of applied art.3 In judging whether the applied artwork possesses originality, the conception of the work and the expression process involving the graphic design sketches, revisions, final drafts, as well as carving statements, can be used as evidence to judge the independent creation.4 The assessment of originality should focus on its overall effect of expression, coherence, coordinated balance, and the degree of combination of practicality and aesthetics, together with the creator’s intent and aesthetic context are taken into account. 3. Works of applied art protected by copyright law must meet the requirements that their artistry and practicality can be separated In determining the scope of protection of a work, the people’s courts usually follow the basic rule of a “dichotomy of idea and expression”, that is, what is protected by China’s copyright law is the author’s expression of the work with originality, that is, forms or manifestations used to express the ideas or emotions, excluding the ideas or emotions themselves. The so-called ideas include the knowledge of physical existence, objective facts, human emotions and mode of thinking, which are described and expressed, a subjective category. Only when the creator, with the help of material medium or media, expresses his ideas in the form of transforming imagination into image, changing abstraction into concrete, turning subjectivity into objectivity, and moving from intangible into tangible, can his process of creation be perceived by others, and the original expression of formations becomes a work protected by copyright law. The practicality or usability of a work of applied art reflects the scope of such ideas as technical solutions and practical functions, so it should not be protected by copyright law. In determining whether a practical work of art constitutes a work of applied art, a distinction should be made between the formational components determined by the practical function and the pure artistic expression component, i.e., after eliminating the stylistic component determined by the practical function that cannot be separated, we then decide whether the independent artistic expression possesses a degree of originality and thus the work constitutes a work of applied art. 参见乐高公司与广东小白龙动漫玩具实业有限公司、北京华远西单购物中心有限公司侵 害著作权纠纷案, 最高人民法院(2013)民申字第1262号裁定。. 3 参见冯晓青、付继存: 《实用艺术作品在著作权法上之独立性》 , 载 《法学研究》 2018年第2期 。. 4 参见丁丽瑛: 《实用艺术作品著作权的保护》 ,载 《政法论坛》 2005年第3期。. 2

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If its practicality and artistry cannot be separated from each other, the protection of its artistry is essentially equivalent to the protection of its practical function, resulting in the extension of copyright protection to the practical function, which will bring about technical control and monopoly by way of copyright protection, and thus contrary to the basic principle of copyright law. The separation of the two includes physical or conceptual separation, that is, the practicality with practical function and the artistry embodying artistic beauty can be physically separated from each other and exist separately, and any change in the artistry in the practical artwork will not lead to a substantial loss of its practical function. 4. Conclusion In make a decision of infringement involving works of applied art, we firstly have to determine whether the plaintiff’s right to claim protection constitutes a work of applied art, and then make a judgment of “contact + substantial similarity”. This requires an accurate grasp of the relationship between practical artworks and works of applied art, relationship among works of applied art, works of fine art and industrial designs, and the boundary among general practical artworks, works of applied art protected by copyright law and designs protected by patent law. The works of applied art protected by China’s copyright law are practical, artistic, original and reproducible, and separable between practicality and artistry from each other. Works of applied art that do not have originality and whose practicality and artistry cannot be separated, shall per se be excluded from copyright protection. Practical artworks with originality, practicality, artistry and reproducibility, and separability between practicality and artistry, should be identified as works of applied art and protected by copyright law as works of fine art; graphic or three-dimensional designs that are “aesthetically pleasing” but do not contain certain degree of artistry and originality, can seek the patent protection. It is worth noting that the main difference works of applied art differentiates from works of fine art is predicated on the practicality, which can be restrained by the materials, the markets and functions, limiting the modes of expression and creation for works of applied art, so the extent of the artistry cannot be too demanding, otherwise, a large number of works of applied art may fail to be protected by the copyright law.

JDB (China) Drinks Co., Ltd. v. Guangzhou Wanglaoji Health Industry Co., Ltd. (Dispute Over False Advertising: Determination of False Advertising) Xiaohong Qian and Jiayin Cao

1 Rule The determination of whether an act constitutes false advertising under Article 9(1) of the Anti-Unfair Competition Law of the People’s Republic of China (1993) shall be founded on whether the public is likely to be misled on the basis of such factors as daily life experience, the attention paid by the general public, the fact that a misunderstanding has occurred, the actual situation of the audience being advertised and whether the goodwill of others has been improperly appropriated.

2 Case Information 1 Parties Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): JDB (China) Drinks Co., Ltd. (hereinafter referred to as JDB Drinks Co., Ltd.)

Collegial Bench: Yanfang Wang, Xiaohong Qian and Weike Du Edited by Wenyan Ding; Translated by Daxuan Zheng and Xiaohua Zhou X. Qian (B) · J. Cao The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_21

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Appellee in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Guangzhou Wanglaoji Health Industry Co., Ltd. (hereinafter referred to as Wanglaoji Health Industry Company) 2. Procedural History First Instance: No. 00345 [2013] Trial, Civ. Division, the Fifth Intermediate People’s Court of Chongqing Municipality (dated Jun. 26 of 2014) Second Instance: No. 00318 [2014] Final, Civ. Division, the Higher People’s Court of Chongqing Municipality (dated Dec. 15 of 2015) Reopening: No. 151 [2017] Reopening, Civ. Division, the Supreme People’s Court (dated May 28 of 2019) 3. Cause of Action Dispute over false advertising

3 Essential Facts Wanglaoji Health Industry Co., Ltd. is the licensee of No. 3980709 “Wong Lo Kat” (WLK) trademark in Class 32 for non-alcoholic beverages, fruit juices and plant beverages, etc. and has the right to defend the legitimate rights and interests of the WLK brand by means of advertising, notary public or litigation, etc. Wanglaoji Health Industry Company filed a lawsuit with the Fifth Intermediate People’s Court of Chongqing Municipality, claiming that JDB Drinks Co., Ltd. had printed the advertising slogans “The red canned herbal tea leading national sales has been renamed Jiaduobao” and “The national leading selling red canned herbal tea Jiaduobao” on the outer packaging of its red canned JDB herbal tea products; that JDB Drinks Co., Ltd. had printed the advertising slogan “The red canned herbal tea leading national sales has been renamed Jiaduobao” on its product’s handbag; that JDB Drinks Co., Ltd. had advertised with the words “The red canned herbal tea leading national sales has been renamed Jiaduobao” and “The original red canned WLK herbal tea has changed its name to JDB herbal tea” when the sales and the promotion of the products were advertised on the Internet, newspapers, magazines and other media; and that JDB Drinks Co., Ltd. had reported on TV, online newspapers and other media with the headlines “The red canned WLK herbal tea renamed Jiaduobao with unchanged formula and craftsmanship”, “The red canned WLK herbal tea renamed Jiaduobao”, “Jiaduobao is the former Wong Lo Kat”, “The red canned WLK is officially renamed Jiaduobao”, “The nationally listed red canned WLK herbal tea is officially renamed JDB herbal tea”, etc. Therefore, Wanglaoji Health Industry Company requested the court to rule: (1) the act of publishing advertisements containing the language “The red canned herbal tea leading national sales has been renamed Jiaduobao” by JDB Drinks Co., Ltd. constituted false advertising; (2) JDB Drinks Co., Ltd. is to cease the sales of product packaging containing the advertising slogan “The red canned

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herbal tea leading national sales has been renamed Jiaduobao” or similar advertising slogans, and to stop releasing advertisements containing the above content on TV, Internet, video and any print media; (3) JDB Drinks Co., Ltd. is to destroy, delete and replace promotional materials such as advertising brochures, videos and packaging boxes containing the above advertising slogans; (4) JDB Drinks Co., Ltd. shall apologize publicly to Wanglaoji Health Industry Company on national television and newspapers to eliminate the influence; (5) JDB Drinks Co., Ltd. is to compensate Wanglaoji Health Industry Company for economic losses at CNY 5 million; (6) JDB Drinks Co., Ltd. shall bear attorney’s fees and reasonable expenses for investigation and collecting evidence incurred by Wanglaoji Health Industry Company in defending its rights; and (7) JDB Drinks Co., Ltd. shall bear all litigation costs in this case. In the first instance, Wanglaoji Health Industry Company clarified that the advertising slogan similar to “The red canned herbal tea leading national sales has been renamed Jiaduobao” was “The national leading selling red canned herbal tea—Jiaduobao”. The Fifth Intermediate People’s Court of Chongqing Municipality rendered a judgment, numbered No. 00345 [2013] Trial, Civ. Division, the Fifth Intermediate People’s Court of Chongqing Municipality, partially supporting the claims of Wanglaoji Health Industry Company. Unsatisfied with the above-mentioned judgment, JDB Drinks Co., Ltd. lodged an appeal to the Higher People’s Court of Chongqing Municipality. The Higher People’s Court of Chongqing Municipality rendered a judgment, numbered No. 00318 [2014] Final, Civ. Division, the Higher People’s Court of Chongqing Municipality, dismissing the appeal and affirming the original judgment. JDB Drinks Co., Ltd. refused to accept the decision of second instance and appealed to the Supreme People’s Court for reopening.

4 Issue Whether the use of the advertising slogan “The red canned herbal tea leading national sales has been renamed Jiaduobao” by JDB Drinks Co., Ltd. constitutes false advertising.

5 Holding The Supreme People’s Court held that whether the use of the advertising language “the leading red canned herbal tea in the country is renamed Jiaduobao” by JDB Drinks Co. Ltd. constitutes false advertising should be adjudged in the light of the specific circumstances of the case, the attention paid by the general public, whether the advertising language in question is one-sided or ambiguous, and whether the public is susceptible to misunderstand the advertising.

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Firstly, in the fact-finding, the court found that JDB Drinks Co., Ltd. and its affiliated companies, the licensee of the WLK trademark, have made the red canned WLK herbal tea highly famous in the herbal tea market through years of advertising and continuous use. While the WLK trademark was used under license, Guangzhou Pharmaceutical Holdings Limited (GPHL) did not produce and sell the red canned WLK herbal tea. Therefore, the description of the first part of the advertising slogan, to wit, “the red canned herbal tea leading national sales” is consistent with the relevant statistical findings and is not false, and is clearly directed to the red canned WLK herbal tea produced and sold by JDB Drinks Co., Ltd. and its affiliated companies. On May 9, 2012, after the WLK trademark license agreement was invalidated by the Arbitration Commission, JDB Drinks Co., Ltd. began to produce the red canned JDB herbal tea and thus the latter part of the advertising language, which states that the company has “changed its name to Jiaduobao”, is also a description of objective facts. Secondly, during the period of trademark licensing, JDB Drinks Co., Ltd. and its affiliated companies have significantly increased the popularity of the red canned WLK herbal tea through years of continuous and large-scale advertising and use, so the public is generally aware of the red canned WLK herbal tea produced by JDB Drinks Co., Ltd. and its affiliated companies rather than the red canned WLK herbal tea produced and sold by Wanglaoji Health Industry Company under the authorization of GPHL in June 2012. The use of the advertising language by JDB Drinks Co., Ltd. is in fact an exercise of the duty to inform the public that the former red canned WLK herbal tea is now trademarked as “Jiaduobao” after JDB Drinks Co., Ltd. and its associated companies no longer produce the red canned WLK herbal tea. Otherwise, the public would have mistakenly believed that the red canned WLK herbal tea produced by Wanglaoji Health Industry Company was the original red canned WLK herbal tea produced by JDB Drinks Co., Ltd. and its affiliated companies. Therefore, there is no possibility that the use of the advertising language by JDB Drinks Co., Ltd. would cause the public to misunderstand the product. Thirdly, the increase in popularity and goodwill of the WLK trademark is to a large extent due to the extensive and continuous advertising and use of the WLK trademark by JDB Drinks Co., Ltd. and its affiliated companies during the period of trademark licensing, and therefore the use of the advertising language by JDB Drinks Co., Ltd. has a certain degree of reasonableness. After GPHL withdrew the WLK trademark, it began to authorize Wanglaoji Health Industry Company to produce the red canned WLK herbal tea and this use itself has already gained the great goodwill of the WLK trademark. In June 2012, Wanglaoji Health Industry Company began to produce the red canned WLK herbal tea, so consumers who see the advertising language would objectively, not mistakenly believe that the WLK trademark has ceased to be used or is no longer in use and the goodwill that has been built up on the red canned WLK herbal tea is naturally enjoyed by Wanglaoji Health Industry Company after it produces the red canned WLK herbal tea. Wanglaoji Health Industry Company did not produce the red canned WLK herbal tea before the trademark license contract was found invalidated by the Arbitration Commission, so the advertising language

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does not make its production of the red canned WLK herbal tea virtually lose its original popularity and goodwill. In the said case, JDB Drinks Co. Ltd, after the trademark license contract terminates, changed the name of “WLK” red canned herbal tea to “Jiaduobao” in order to retain the rights and interests it enjoyed during the trademark license period for its contribution to the enhancement of the goodwill of “WLK” red canned herbal tea. The Company cannot be found to have subjectively committed any impropriety by informing the consumers of the basic facts of “Jiaoduobao”. In objective terms, based on the brevity and conciseness of the advertising language, the licensed use of “WLK” trademark, the contribution of JDB Drinks Co. Ltd, and its affiliates to the promotion of the goodwill of the trademark “Wanglaoji”, the consumers’ knowledge of the actual business entity of “Wanglaoji” red canned herbal tea, the attention paid by the consumers, the fact of misunderstanding and the actual situation of the advertising addressee, the advertising language by JDB Drinks Co. Ltd, has not produced a misleading effect and has not jeopardized the fair competition market order and harmed the legitimate rights and interests of the consumers, thus, no false advertising can be discerned. Even if some consumers may find out by the advertising language that the trademark “WLK” trademark has been renamed “Jiaduobao”, or the original “WLK” trademark has ceased its use or is no longer in use, this does not necessarily produce the effect of “misleading” under the anti-unfair competition law. In addition, although the advertising language does not fully express the relevant background of the renaming for its own sake, the use of the advertising language by JDB Drinks Co., Ltd. has a certain degree of reasonableness at the time when the licensing relationship between the two parties has just been terminated. However, after some publicity, consumers have had certain knowledge of the conflict and entanglement between the two companies, coupled with the two parties’ respective promotions of the products, the continuous use of the advertising language by JDB Drinks Co., Ltd. is no longer factually justified, thus, JDB Drinks Co., Ltd. should not continue to use the advertising language. In summary, the Supreme People’s Court renders a decision, revoking the decisions of first and second instance, and dismissing the claims submitted by Wanglaoji Health Industry Company.

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6 Comment on Rule The issue in the said case is how a people’s court makes a determination of false advertising. The legal basis for the false advertising can be cited in Article 9(1) of the Anti-Unfair Competition Law (1993)1 and Article 8 of the Judicial Interpretation of Several Issues in the Trial of Civil Cases Involving Unfair Competition.2 In this case, the key to determining whether the advertising language constitutes false advertising is whether the advertising language is susceptible to ambiguity and misunderstanding. To determine whether the advertising language constitutes false advertising, the following factors should be taken into account: First, whether the content of the advertising language is true and consistent with objective facts has to be analyzed from the historical source of the two companies and the trademark licensing relationship. In this case, according to the fact-finding, after Hongdao Group obtained the exclusive license to use the WLK trademark in 1995, JDB Drinks Co., Ltd. and its affiliated companies produced and sold the red canned WLK herbal tea until May 9, 2012 when China International Economic and Trade Arbitration Commission (CIETAC) made an arbitration award that Hongdao Group ceased to use the WLK trademark. For more than a decade, JDB Drinks Co., Ltd. and its affiliated companies, the licensee of WLK trademark, have made the red canned WLK herbal tea highly famous in the herbal tea market through years of advertising and continuous use. During the period when the WLK trademark was used under license, GPHL did not produce and sell the red canned WLK herbal tea. Therefore, the description of the first part of the advertising language “The red canned herbal tea leading national sales” is consistent with the statistical findings and is not false, and is clearly directed to the red canned WLK herbal tea produced and sold by JDB Drinks Co., Ltd. and its affiliated companies. On May 9, 2012, after the WLK trademark license agreement was invalidated by the Arbitration Commission, JDB Drinks Co., Ltd. began to produce the red canned JDB herbal tea and thus the latter part of the advertising language, which states that the company has “changed its name to Jiaduobao”, is also a description of objective facts. 1 Article 9(1) of the Anti-Unfair Competition Law (1993) provides that, “(a)n operator shall not use advertisements or other means to give false and misleading promotion on the quality, ingredient, performance, purposes, manufacturer, useful life, and origin of goods.” 2 Article 8 of the Judiciall Interpretation of Several Issues in the Trial of Civil Cases Involving Unfair Competition provides that, “Where a business operator commits any of the following acts that are sufficient to cause misunderstanding for the relevant public, it may be deemed as misleading false publicity as specified in Article 9(1) of the Anti-Unfair Competition Law: (1) making one-sided publicity or comparisons in respect of the commodity; (2) using inconclusive views or phenomena, etc., of science as conclusive facts in the publicity of the commodity; or (3) using ambiguous language or other misleading ways in the publicity of the commodity. Where the publicity of a commodity is conducted in such an obviously exaggerated way that it is insufficient to cause misunderstanding in the relevant public, it shall not be deemed as misleading false publicity. In determining whether it is misleading false publicity, the people’s court shall use as the basis such factors as daily life experiences, the general attention of the relevant public, the facts causing misunderstanding and the actual circumstances of the subject of the publicity, etc.”

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Second, it should be analyzed whether JDB Drinks Co. Ltd. has exercised the duty to inform consumers in an appropriate manner by the advertising language, and whether false advertising came about under the Anti-Unfair Competition Law if this duty is not sufficiently appropriate or reasonable. The analysis of the above issues can be carried out from the following levels: The first level is the analysis of the purpose of the Anti-Unfair Competition Law in regulating false advertising. The Anti-Unfair Competition Law is enacted with a purpose of maintaining a fair competition market order by preventing false advertising of goods or services. The focus to be regulated by anti-unfair competition law lies in the misleading false advertising. If the advertising on the goods or services will not mislead the public, false advertising regulated by the anti-unfair competition law will not stand. In the said case, during the period of trademark licensing, JDB Drinks Co., Ltd. and its affiliated companies, through years of continuous and largescale publicity and use, have not only significantly increased the popularity of the red canned WLK herbal tea, but also have conveyed the message to the consumers that the actual business entity of the red canned WLK herbal tea was JDB Drinks Co., Ltd. and its affiliated companies. The use of the advertising language by JDB Drinks Co., Ltd. is in fact an exercise of the duty to inform the public that the former red canned WLK herbal tea is now trademarked as “Jiaduobao” after JDB Drinks Co., Ltd. and its associated companies no longer produce the red canned WLK herbal tea. Otherwise, the public would have mistakenly believed that the red canned WLK herbal tea produced by Wanglaoji Health Industry Company was the original red canned WLK herbal tea produced by JDB Drinks Co., Ltd. and its affiliated companies. Therefore, there is no possibility that the use of the advertising language by JDB Drinks Co., Ltd. would cause the public to misunderstand and purchase the product. The second level of analysis concerns the subjective intention of JDB Drinks Co., Ltd. and the possible consequence. Although the use of the advertising language by JDB Drinks Co., Ltd. cannot fully reveal the facts of why the company used, terminated and changed the trademark during and after the termination of the trademark license contract, there was no obvious impropriety from its subjective point of view. After all, a long-standing trademark licensing relationship was there between the two parties. In objective terms, based on the brevity and conciseness of the advertising language, the licensed use of “WLK” trademark, the contribution of JDB Drinks Co. Ltd. and its affiliates to the promotion of the goodwill of the “WLK” trademark, the consumers’ knowledge of the actual business entity of “Wanglaoji” red canned herbal tea, the attention paid by the consumers, the fact of misunderstanding and the actual situation of the advertising addressee, the advertising language by JDB Drinks Co. Ltd, has not produced a misleading effect and has not jeopardized the fair competition market order and harmed the legitimate rights and interests of the consumers. In sum, the use of the advertising language by JDB Drinks Co., Ltd. does not constitute false advertising. Even if some consumers who see the advertising language may have the impression that the WLK trademark has been changed to the “JiaDuoBao” trademark and that the original WLK trademark has ceased to be used or is no longer in use, it is also a reasonable consequence that the market may

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generate confusion after the separation of the trademark owner and the actual user in the trademark licensing relationship, especially after the termination of the trademark licensing relationship. However, this confusion does not necessarily produce the misleading effect under the Anti-Unfair Competition Law. The Supreme People’s Court, taking into account the specific facts of the case, daily experience and the attention paid by the public, has analyzed whether the advertising language is one-sided, ambiguous, susceptible to mislead the public; clearly identified the point of departure and standard for ascertaining the false advertising. Meanwhile, coupled with the actual situation of the goods and trademarks being advertised in the specific case, the Supreme People’s Court has also commented on the issue of whether the advertising language in question would improperly take advantage of the goodwill of others. On this basis, the Supreme People’s Court has made an assessment of the extent of reasonableness and duration of use, which is in line with the market reality and the adjudicated case is conducive to further maintaining and purifying the competitive environment in the market while protecting the legitimate rights and interests of competitors.

Shandong Bittel Intelligent Technology Co., Ltd. v. Jiangsu Zhongxun Digital Electronics Co., Ltd. (Dispute Over Liability for Damages Out of Party’s Bad Faith or Malice in Intellectual Property Litigation: Criteria for Judging the Subjective Fault in Disputes over Damages out of Party’s Bad Faith or Malice in Intellectual Property Litigation) Shu Tong

1 Rule In disputes over damages out of the party’s bad faith or malice in intellectual property litigation, whether parties to the litigation harbor any actual malice or bad faith to launch an action for damages in intellectual property litigation is to be adjudged from such factors as the party’s basis of rights and its ability to recognize such basis of rights, as well as the party’s purpose in bringing the infringement action.

Collegial Bench: Shu Tong, Lihua Mao and Rong Wu Edited by Wenyan Ding; Translated by Daxuan Zheng and Ruofei Gao S. Tong (B) The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_22

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2 Case Information 1. Parties Appellant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Shandong Bittel Intelligent Technology Co., Ltd. (hereinafter referred to as Bittel Intelligent Technology Company) Appellee (Plaintiff in the First Instance, Appellee in the Second Instance): Jiangsu Zhongxun Digital Electronics Co., Ltd. (hereinafter referred to as Zhongxun Digital Electronics Company) 2. Procedural History First Instance: No. 71 [2016] Trial, Civ. Division, the Intermediate People’s Court of Wuxi City, Jiangsu Province (dated Jul. 26 of 2017) Second Instance: No. 1847 [2018] Final, Civ. Division, the Higher People’s Court of Jiangsu Province (dated Sep. 28 of 2018) Reopening: No. 366 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated Dec. 12 of 2019) 3. Cause of Action Dispute over liability for damages out of party’s bad faith or malice in intellectual property litigation

3 Essential Facts In 1999, TELEMATRIX (the third party in the enforcement proceeding) has its trademark “TELEMATRIX” registered in the European Union in Class 9 for telephone sets, and later TELEMATRIX was merged into Scitec (Saide) Company. Since 1998, Scitec company has started to commission Bittel Intelligent Technology Company to process hotel-specific telephone. Since 2006, Scitec company has started to entrust the processing of TELEMATRIX brand hotel phones with Zhongxun Digital Electronics Company. Later, Scitec company changed its corporate name to Cetis Company. On November 12, 2004, the predecessor of Bittel Intelligent Technology Company, Yankuang Bittel Intelligent Technology Company, filed an application for registration of the trademark “TELEMATRIX” (the disputed trademark) in Class 9 for telephone sets, which was approved on May 28, 2007. From 2008 onwards, Bittel Intelligent Technology Company has filed trademark infringement lawsuits against the agents of Scitec Company’s TELEMATRIX brand telephones, including Zhongxun Digital Electronics Company. In 2008, Bittel Intelligent Technology Company filed a case numbered No. 57 [2009] Trial, IP Division, the Intermediate People’s Court of Wuxi City, Jiangsu Province (hereinafter referred to as No. 57 Lawsuit) against Zhongxun Digital Electronics Company, requesting Zhongxun

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Digital Electronics Company to make a compensation of economic losses at CNY 6.12 million. Later, according to the application of Bittel Technology Company, the court of first instance ruled to allow the said company to withdraw the lawsuit from the court. The evidence on file showed that as a result of the filing of No. 57 Lawsuit, Zhongxun Digital Electronics Company incurred litigation expenses including attorney fees, and lost trading opportunities, resulting in losses in materials and labor because the said company has to stop manufacturing and selling TELEMATRIX brand products. On September 6, 2010, Beijing Cetis Company, an affiliate of Cetis Company, filed a cancellation application against the disputed trademark. On July 22, 2013, the Trademark Review and Adjudication Board of the former State Administration for Industry and Commerce (hereinafter referred to as the Trademark Review and Adjudication Board) ruled that the “TELEMATRX” brand telephone sets were introduced into the Chinese market in 2002 and has been well known since then. Since 1998, Bittel Intelligent Technology Company has been cooperating with the predecessor of Cetis Company and processing and producing hotel telephones. As an operator in the same business, Bittel Intelligent Technology Company applied for registration of the disputed trademark on the same kind of goods, which is identical to the prior trademark of Cetis Company, constituting “pre-registration of a trademark by improper means that has been used by others and has achieved certain influence”, thus, the disputed trademark was cancelled. Subsequent judicial review proceedings at three levels of people’s courts have affirmed the judgment. On April 26, 2016, Zhongxun Digital Electronics Company filed the present lawsuit with the Intermediate People’s Court of Wuxi City, Jiangsu Province, arguing that the trademark infringement lawsuit filed by Bittel Intelligent Technology Company constituted a legal action initiated out of bad faith or malice. The Intermediate People’s Court of Wuxi City, Jiangsu Province rendered a judgment, numbered No. 71 [2016] Trial, Civ. Division, the Intermediate People’s Court of Wuxi City, Jiangsu Province, dated July 26 of 2017), ruling that the conduct of Bittel Intelligent Technology Company constituted a legal action initiated out of bad faith or malice, and requested Bittel Intelligent Technology Company to make a compensation of CNY 1 million for eradicating adverse effects and economic loss sustained by Zhongxun Digital Electronics Company. Upon receiving the court’s pronouncement of the judgment, Bittel Intelligent Technology Company filed an appeal. On September 28, 2018, the court of second instance rendered a judgment, (numbered No. 1847 [2017] Final, Civ. Division, the Higher People’s Court of Jiangsu Province, dated September 28 of 2018), dismissing the appeal and affirmed the original judgment. Unsatisfied with the decision of second instance, Bittel Intelligent Company applied to the Supreme People’s Court for reopening.

4 Issue Whether Bittel Intelligent Technology Company harbors any actual malice in filing the trademark infringement lawsuit.

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5 Holding Upon review, the Supreme People’s Court holds, in deciding whether Bittel Intelligent Technology Company harbors any actual malice in filing the trademark infringement lawsuit, the following factors should be considered: First, the basis of rights enjoyed by Bittel Intelligent Technology Company and their ability to recognize the basis of such rights. The Trademark Review and Adjudication Board and three levels of people’s courts have ruled that the registration of the disputed trademark by Bittel Intelligent Technology Company was “pre-empting the prior use of others and has achieved certain influence on the trademark”, and thus the disputed trademark should be revoked. Accordingly, the disputed trademark was ab initio unjustified, and even in the commencement of acquiring the right, Bittel Intelligent Technology Company should have possessed the corresponding knowledge of the legitimacy of its right basis. Second, the purpose of the trademark infringement lawsuit filed by Bittel Intelligent Technology Company against Zhongxun Digital Electronics Company. Court investigation finds that Bittel Intelligent Technology Company and Zhongxun Digital Electronics Company have successively accepted the commission of Scitec Company to process hotel telephone products, and they are operators in the same industry with competitive relations. Combined with the fact that the disputed trademark of Bittel Intelligent Technology Company is “pre-empting the prior use of others and has achieved certain influence on the trademark”, the use and advertisement of Bittel Intelligent Technology Company, as well as trademark infringement lawsuits against Cetis Company and its OEMs (Original Equipment Manufacturer) producers successively, thus, it is hard to reach the conclusion that Bittel Intelligent Technology Company acted for the purpose of defending its rights in accordance with the law, or exercising the legitimate right of legal action. The rulings by the courts of first and second instance that the infringement lawsuit filed by Bittel Intelligent Technology Company against Zhongxun Digital Electronics out of party’s bad faith or malice in intellectual property litigation were justified by law.

6 Comment on Rule The case at hand involves a dispute over liability for damages out of party’s bad faith or malice in intellectual property litigation, which is essentially a specific type of tort liability dispute. That Bittel Intelligent Technology Company should assume the liability over damages is premised upon the fact that Bittel Intelligent Technology Company’s conduct of filing the No. 57 lawsuit is defined as a legal action out of party’s bad faith or malice in intellectual property litigation. The determination of the legal action out of Bittel Intelligent Technology Company’s bad faith or malice in intellectual property litigation has been reviewed from such factors as infringement, damage, causation as well as the subjective fault of the perpetrator.

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The evidence on file can prove that there occurred infringement, damage, and proximate causation, so the key to the court’s decision is to make sure whether Bittel Intelligent Technology Company harbors any malice or bad faith in filing the No. 57 Lawsuit. Civil litigation enables the IPR owners to have access to protect their rights and interests, and the people’s courts should ensure that IPR owners receive adequate and strict protection within the scope of legitimate their rights and entitlements. However, the principles of good faith and inhibition of abuse of rights must be followed in carrying out a civil transaction and in initiating the civil law action. The following factors should be taken into consideration in determining whether Bittel Intelligent Technology Company harbors any actual malice in filing the No. 57 lawsuit: First of all, the basis of rights entitling Bittel Intelligent Technology Company to launch the No. 57 lawsuit and its ability to recognize the basis of such rights. Court investigation finds that Bittel Intelligent Technology Company initiated the No. 57 lawsuit in 2008. On July 22, 2013, the Trademark Review and Adjudication Board (2013) issued No. 23303 TRAB Decision on Disputed Trademark No. 4359350 (hereinafter referred to as No. 23303 Decision) on the ground that Bittel Intelligent Technology Company is “pre-empting the prior use of others and has achieved certain influence on the trademark” which is a violation of Article 31 of the Trademark Law (2001), thus, the TELEMATRIX trademark No. 4359350 (the disputed trademark), which was the basis of the rights in No. 57 lawsuit, was revoked. After the judicial review procedures of different levels of courts, an administrative ruling was made by the Supreme People’s Court (numbered No. 93 [2014] Ruling, Adm. Division, the Supreme People’s Court, dated December 15 of 2014), rejecting Bittel Intelligent Technology Company’s application to reopen the case. Therefore, the disputed trademark possesses no legal effect, and the relevant judgments also held as the TELEMATRIX trademark of Cetis Company has enjoyed certain degree of popularity before the application date of the disputed trademark, the conduct of Bittel Intelligent Technology Company to apply for the registration of the disputed trademark could not be described as bona fide. Thus, based on the effective judgments, the disputed trademark right was illegitimately founded ab initio, and even at the beginning of acquiring the right, Bittel Intelligent Technology Company should have recognized the legitimacy of its right basis. Second, the purpose of the No. 57 Lawsuit filed by Bittel Intelligent Technology Company. According to the ascertained facts by the trial court, Bittel Intelligent Technology Company and Zhongxun Digital Electronics Company have successively accepted the commission of Scitec Company to process hotel telephone products (or OEMs producers), and they were operators in the same industry with competitive relations. In conjunction with the facts confirmed by the effective judgments, i.e., the disputed trademark, forming the right basis of the No. 57 Lawsuit, was registered by Bittel Intelligent Technology Company “by improper means to pre-empt the prior use of others and has achieved certain influence”, the fact that Bittel Intelligent Technology Company promoted its products on its website by the advertising language “as one of the three major international telephone brands with Deloitte

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and TELEMATRIX, Bittel Intelligent Technology Company has always pursued the leading products and service providers” before initiating No. 57 Lawsuit, and the fact that Bittel Intelligent Technology Company has lodged infringement lawsuits against Cetis Company and the OEMs producers, it is hard for the people’s court to find that Bittel Intelligent Technology Company is justified in exercising its right of legal action for the purpose of defending its rights in accordance with law. To sum up, the conclusion from the judgments made by the courts of first and second instance that Bittel Intelligent Technology Company has initiated No. 57 Lawsuit out of bad faith or malice in intellectual property rights litigation was justified by law.

LACOSTE v. Cartelo Crocodile Pte. Ltd. and Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China (Dispute Over Trademark Administration: The Impact of Offshore Trademark Co-existence Agreements on the Determination of Trademark Similarity) Guimei Lang and Zeyu Chen

1 Rule The disputed trademark shall be registered in accordance with the provisions of the Trademark Law (Rev. 2019) and the judicial interpretation. Anyone who claimed that the disputed trademark shall not be registered on the basis of graphic marks registered in other countries and regions, settlement agreements or other relevant evidence, lacks legal standing.

Collegial Bench: Junli Xia, Guimei Lang and Xiurong Ma Edited by Wenyan Ding; Translated by Daxuan Zheng and Ruofei Gao G. Lang (B) · Z. Chen The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_23

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2 Case Information 1. Parties Applicant in the Reopening (Third Party in the First Instance, Appellant in the Second Instance): LACOSTE (hereinafter referred to as LACOSTE) Respondent in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Cartelo Crocodile Pte. Ltd. (the assignee of the rights and obligations of Crocodile International Pte. Ltd., hereinafter referred to as Cartelo Crocodile Company) Appellee in the Reopening (Defendant in the First Instance): Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China [hereinafter referred to as Trademark Review and Adjudication Board (TRAB)] 2. Procedural History First Instance: No. 4497 [2014] Trial, Adm. Division, the First Intermediate People’s Court of Beijing Municipality (date Dec. 10 of 2014) Second Instance: No. 3019 [2015] Final, Adm. Division, the Higher People’s Court of Beijing Municipality (date Dec. 18 of 2015) Application for Reopening: No. 2317 [2016] Appeal, Adm. Division, the Supreme People’s Court (dated May 28 of 2018) Reopening: No. 134 [2018] Reopening, Adm. Division, the Supreme People’s Court (date Nov. 29 of 2018) 3. Cause of Action Dispute over trademark administration

3 Essential Facts The international registered figurative trademark No. 638122 (hereinafter referred to as the disputed trademark, see Fig. 1) was a trademark obtained by LACOSTE on October 19, 1994, with the country of basic registration being Republic of France (or the French Republic). LACOSTE applied to the Trademark Office of the State Administration for Industry and Commerce of the People’s Republic of China (hereinafter referred to as the Trademark Office)1 for territorial extension of protection, to be approved for use in Class 25 on the clothes. 1

According to China’s State Council Institution Reform Plan in 2018, the relevant responsibilities of the Trademark Office, and Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China have been merged and exercised by China National Intellectual Property Administration.

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Fig. 1 The disputed trademark and the reference mark in the case

Disrupted Trademark

Reference Mark The trademark No. 1331001 “CARTELO Ji Tu” (CARTELO 及图) (hereinafter referred to as reference mark, see Fig. 1) was filed with the Trademark Office on 24 December 1993 by Crocodile International Pte. Ltd. (hereinafter referred to as Crocodile International), to be approved for use in Class 25 on the clothes. Crocodile International applied for the cancellation of the disputed trademark with the Trademark Review and Adjudication Board on June 13, 2012 on the grounds that the disputed trademark constitutes a malicious imitation of the trademark No. 1331001 “CARTELO Ji Tu” (CARTELO 及图) (hereinafter referred to as the reference mark) owned by Crocodile International, in violation of Articles 28, 29 and 41 of the Trademark Law (2001). On December 2, 2013, the Trademark Review and Adjudication Board (TRAB) issued a decision titled “No. 124819 TRAB Decision on Settling the Dispute Involving No. 638122 International Registered Figurative Trademark” (hereinafter referred to as No. 124819 TRAB Decision), which opines that there are clear distinctions between the disputed trademark and reference mark in terms of compositional elements and visual effects, which can be distinguished by the public with ordinary attention. The disputed trademark and the reference mark do not constitute similar trademarks used for the same or similar goods as provided in Article 29 of the Trademark Law (2001), as the co-existence of the two trademarks in the market is not likely to cause confusion to the public. Cartelo Crocodile Company refused to accept No. 124819 TRAB Decision and filed an administrative lawsuit with the First Intermediate People’s Court of Beijing Municipality (hereinafter referred to as the court of first instance) and requested for annulment of the decision. In the first instance, Cartelo Crocodile Company submitted several judgments by the people’s courts, including judgment numbered No. 3 [2009] Final, Civ. Division, the Supreme People’s Court, in which the registration, the use, any dispute and settlement of the Crocodile trademark between Cartelo Crocodile Company and Lacoste company were elaborated. The court of first instance held that the co-existence of the disputed trademark and the reference mark in the market may resulted in confusion, therefore, the disputed trademark was registered in violation of Article 29 of the Trademark Law (2001). The court of first instance made a judgment, “the ruling made by the Trademark

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Review and Adjudication Board shall be revoked, and the Trademark Review and Adjudication Board is ordered to make a ruling anew over the disputed trademark.” LACOSTE refused to take the judgment of the first instance and filed an appeal with the Higher People’s Court of Beijing Municipality (hereinafter referred to as the court of second instance). After the trial of second instance, the court of second instance dismissed the appeal and affirmed the original judgment. After the second instance decision came into effect, LACOSTE filed an application to the Supreme People’s Court to reopen the case on the following grounds: (1) the disputed trademark is a continuous registration of the basic registration series of Crocodile trademarks that LACOSTE applied for in China in 1979, which is not an imitation of other trademarks, and LACOSTE’s Crocodile brand has gained a high degree of popularity. (2) The application for registration of the disputed trademark constitutes no violation of Article 29 of the Trademark Law (2001). Decisions by the courts of first and second instance that the disputed trademark was similar to the reference mark conflicts with the prior administrative decision in force that the reference mark was not similar to the basic registered trademark by LACOSTE, and it also runs contrary to the decision of the Supreme People’s Court, numbered No. 3 [2009] Final, Civ. Division, the Supreme People’s Court. (3) The 1983 Settlement Agreement is not binding in this case for the countries or territories to which the agreement is applicable are confined to Chinese Taiwan region, Singapore, Indonesia, Malaysia, Brunei, but not Chinese Mainland. (4) Cartelo Crocodile is not entitled to the trademark rights over the head-to-left crocodile mark. The decision of the Supreme People’s Court made in No. 3 [2009] Final, Civ. Division, the Supreme People’s Court has not ascertained that Crocodile International could use the headto-left crocodile mark alone under any circumstances, let alone cross over to the administrative law to confirm the trademark authorization. Cartelo Crocodile made a defense that: (1) the disputed trademark is clearly an imitation and registration of reference marks out of malice; (2) the decisions by the courts of first and second instance that the disputed trademark was similar to the reference mark do not conflict with the prior administrative decision in force; (3) LACOSTE and Cartelo Crocodile have applied for the registration and the use of the crocodile trademark in actual commercial operations around the world, including in China, and have developed a strict distinction between LACOSTE’s trademark with its crocodile head facing right and Cartelo Crocodile’s trademark with its crocodile head facing left. The 1983 Settlement Agreement further clarified the aforementioned distinctive features of both parties’ trademarks, which was also confirmed in the decision of the Supreme People’s Court (No. 3 [2009], Final, Civ. Division, the Supreme People’s Court). In all, in deciding whether the disputed trademark and the reference mark constitute similarity, the historical background of both parties, the registration, the use and the popularity of their trademark, the stable market pattern and the orderlines of the market developed by each party over a long period of actual use and publicity of their trademark, have to be taken into account. The Trademark Review and Adjudication Board (TRAB) submitted the following opinions: (1) the French Supreme Court (Cour de cassation) has not explicitly made a ruling on whether the basic registered trademark of LACOSTE was legally registered;

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(2) prior decisions by the Trademark Review and Adjudication Board (TRAB) has not touched on whether the disputed trademark was similar to the reference mark; and (3) other cases are not in the same situation as this case, and cannot become the basis of whether the disputed trademark should be upheld. Factually, the Supreme People’s Court finds that: 1. LACOSTE’s application for registration of the disputed trademark in France and application for territorial extension protection in China On October 19, 1994, LACOSTE simultaneously applied for three graphic trademarks of a crocodile with its head to the left in France. In 2005, Crocodile International filed a lawsuit against the said trademark with the Tribunal De Grande Instance, which ruled that the registration of No. 94541291 trademarks was not illegal, and the French Supreme Court (Cour de cassation) affirmed the above-mentioned judgment on May 20, 2014. On March 23, 1995, LACOSTE applied for territorial extension protection in China for the above-mentioned No. 94541291 trademark under No. 638122 International Registration, which is the disputed trademark in this case. 2. Prior administrative decision in force Prior administrative decisions in force submitted by LACOSTE concern the trademark opposition procedures and subsequent procedures in respect of the reference mark (hereinafter referred to as prior cases). On December 24, 1993, Crocodile International applied to the Trademark Office for No. 1331001 mark (the reference mark in this case) in Class 25 on such goods clothing and shoes. The Trademark Office rejected the reference mark on the ground that the reference mark is similar to No. 141103 mark LACOSTE (see Table 1) applied for use on similar goods, but the Trademark Review and Adjudication Board granted a preliminary approval, had the reference mark bulletined and handed it over to the Trademark Office for registration. After examination and publication of the reference trademark, LACOSTE filed an opposition on November 5, 1999, the Trademark Office and the Trademark Review and Adjudication Board successively ruled to approve the registration. On December 20, 2007, the Higher People’s Court of Beijing Municipality made a judgment, numbered No. 178 [2007] Final, Adm. Division, the Higher People’s Court of Beijing Municipality, sustained the decision of the Trademark Review and Adjudication Board. The judgment holds, the opposed trademark in this case (No. 1331001 reference mark) is a combination of word and graphic design whose colors are designated, in which the word “CARTELO” is a meaningless concoction with strong distinctiveness and originality, which is the main element of trademark identification, while the graphic design is a real-life crocodile figure interspersed with the word. The reference marks I and II (No. 141103 and No. 213412) are simple pictorial marks, also real-life crocodile. The opposed trademarks are similar to the reference marks I and II, but their main parts and the overall structure of the combined elements are not identical or similar. Considering the distinctiveness and popularity of reference marks I and II, the public with common sense attention, when observing reference marks I and II and the opposed trademarks, may produce certain associations, but no confusion and mistake. Therefore, reference marks I and II do not

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constitute similar marks as compared with the opposed trademark, and their use on the same or similar goods will not cause confusion and mistake among the consumers. LACOSTE refused to accept the judgment and applied to the Supreme People’s Court to reopen the case, but the Supreme People’s Court ruled to dismiss the application of LACOSTE. The trademark No. 141103 was applied for by LACOSTE on May 12, 1979 and registered on October 30, 1980, and is also the basic registered trademark claimed by LACOSTE. 3. Prior civil judgment of the Supreme People’s Court LACOSTE has once brought trademark infringement lawsuits against Crocodile International and Beijing Branch of Shanghai Oriental Crocodile Garment Co., Ltd. (Defendants), claiming that the defendants’ use of the alleged trademarks I to IV (see Fig. 3) has infringed upon the exclusive right of LACOSTE to be used in its registered trademarks in Class 25 on clothes, belts, ties and shoes, and Class 18 on leather and leather bags (see Fig. 2). On December 29, 2010, the Supreme People’s Court made a judgment, No. 3 [2009] Final, Civ. Division, the Supreme People’s Court. On the question of whether the alleged trademark was confusingly similar to the registered trademark that LACOSTE sought to protect, the said court made the following decision: “This Court also asserted that the alleged trademarks I and II are not so confusingly similar to the registered trademarks for which LACOSTE seeks protection as to infringe upon the exclusive right of the registered trademark of LACOSTE, nor do the disputed trademarks I and II cause damage to LACOSTE’s registered trademark… Of course, in view of the fact that this Court made a judgment on the similarity of the trademarks on the basis of a comprehensive consideration of the differences in the composition of the trademarks in the case, especially on the basis of the history of use and current co-existence. However, in consideration of the fact that the disputed trademarks I and II are similar to the registered trademark of LACOSTE in terms of composition, Crocodile International shall use the disputed trademarks I and II in a context or way clearly distinguishable from LACOSTE’s registered trademark, so as to avoid LACOSTE’s registered trademark as far as possible.” “The disputed trademarks III and IV are distinctively different from the registered trademark for which LACOSTE seeks protection and cannot be considered similar in the sense of infringing upon the exclusive right of the registered trademark.” 4. 1983 Settlement Agreement In 1969, the predecessor of Crocodile International, Lishengmin Co., filed a civil suit with the Osaka High Court of Japan against the retailers of LACOSTE for infringement upon its trademark rights, which was later settled in the Osaka High Court of Japan in 1973. On June 17, 1983, Lishengmin Co. and LACOSTE entered into a settlement agreement (hereinafter referred to as 1983 Settlement Agreement). The 1983 Settlement Agreement provides: (1) both parties wish to cooperate in the countries or regions listed in Article 1 of this agreement (Chinese Taiwan region, Singapore, Indonesia, Malaysia, Brunei); (2) LACOSTE is willing to compensate Lishengmin Co. for the past payments for the protection and defense of the crocodile

May 12, 1979

Application Date

Trademark

LACOSTE

No. 141103

Reference mark in the case

–

Applicant

Opposed trademark in previous cases

Reference mark in prior cases I

Trademark No

Trademarks in the case

Table 1 The trademarks involved in prior cases and the present case

December 24, 1993

No. 1331001

Crocodile International

Disputed trademark in the case

–

LACOSTE October 19, 1994

No. 638122

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Fig. 2 Registered trademarks for which LACOSTE sought protection in prior civil judgment

No.141103 No. 879258

No. 1318589

No. 940231 trademark; (3) both parties agree that their respective trademarks shown in Series A and Series B (see Fig. 4) can co-exist in the markets without confusion. Arbitration between LACOSTE and Crocodile International over the 1983 Settlement Agreement at the Singapore International Arbitration Center was held. On August 15, 2011, the arbitral award rendered by the arbitral tribunal held that the 1983 Settlement Agreement did not require either party to consent to the registration of the other party’s trademark outside the said countries or regions, and that the 1983 Settlement Agreement did not constitute such consent. 5. Application for registration of the Crocodile word trademark in China by Cartelo Crocodile On October 4, 1993, the Trademark Office issued Trademark Certified Rejection Notice, No. 3963 [1993]: the application of Crocodile International for registration of the mark “Crocodile” in Class 25 for shoes and other goods was rejected on the grounds that it had the same word as the trademark “Crocodile”, No. 552436, registered by LACOSTE for similar goods. 6. The use of the reference mark and the Crocodile trademark by Cartelo Crocodile

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Fig. 3 Disputed trademarks used by Crocodile International in prior civil judgment

Disputed Trademark No.1

Disputed Trademark No.2

Disputed Trademark No.3

Disputed Trademark No.4 Fig. 4 Trademarks of Lishengmin Co. and LACOSTE respectively in the 1983 Settlement Agreement

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According to the notarial certificate No. 15431 [2016] Beijing Dongfang Notarial Public Office, a large number of T-shirt pictures marked with the reference mark in its upper left corner can be found by searching “Cartelo Crocodile polo shirts” on Jingdong Mall. And, the T-shirt boasts a trademark of a word, namely CARTELO, with a crocodile graphic, of which the word is the same color as the T-shirt and the crocodile graphic is highlighted in green. According to the notarial certificate No. 17270 [2017] Beijing Haicheng Notarial Public Office, a trademark with the word, CARTELO, plus a single graphic crocodile with its head facing left, that is the reference mark, can be found in the CARTELO shop on the website https:// fr.aliexpress.com (AliExpress, a global trade platform of Alibaba). According to the notarial certificate, No. 7171 [2018] Beijing Haicheng Notarial Public Office, a shop with a signboard displaying the word “CARTELO” and a crocodile graphic with its head facing left side will be found not far from the crocodile famous brand shop of LACOSTE, on the 1st floor of the Kaiyuan Mediterranean Business Square in Songjiang District, Shanghai Municipality. The shop is decorated with tennis rackets and tennis balls, in which a flat model of a green crocodile and a flat model of a crocodile in blue, white and red, with the same color scheme as the French flag (blue, white and red arranged vertically from left to right) are arranged on the counter of the shop. The green crocodile trademark was applied to T-shirts, women’s bags and other products in the shop, including a men’s short-sleeved T-shirt with a price tag of CNY 785. LACOSTE asserted that the founder of LACOSTE, the French crocodile brand, was a famous French tennis player in the 1920s. LACOSTE submitted the abovementioned evidence to prove that Cartelo Crocodile violated the principle of good faith in the registration procedure of the reference mark, its actual use and the application for cancellation of the disputed trademark, that Cartelo Crocodile has misled consumers into thinking that its products came from France by using a tennis ball as decoration, and a single crocodile graphic mark and a flat model of a crocodile in blue, white and red, with the same colour scheme as the French flag, and that the prices of its products were already close to those of LACOSTE’s. Cartelo Crocodile confirmed the authenticity of the above evidence, but asserted that it owns several trademarks and may use a graphic trademark of single crocodile. Cartelo Crocodile claimed that it did not imitate LACOSTE’s crocodile trademark, but did not give a reasonable explanation as to why it used tennis ball as decoration and the flat model of a blue, white and red crocodile arranged in the same colours as the French flag.

4 Issues 1. Whether the disputed trademark constituted a similar trademark to the reference mark and whether the application for registration of the disrupted trademark violated Article 29 of the Trademark Law (2001); 2. The effect of offshore co-existence agreements on the determination of trademark similarity.

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5 Holding As to whether the application for registration of the disputed trademark violated Article 29 of the Trademark Law (2001), the Supreme People’s Court holds that: In the case, the disputed trademark is a real-life crocodile figure, and the reference mark is a combination of a word and a figure with designated colours, in which the word “CARTELO” is a meaningless concoction with a crocodile figure embedded in the middle of the word, the length of the crocodile occupies approximately three letters of the word and the height of the crocodile occupies approximately two-thirds of the word. From the overall perspective, the disputed trademark differs greatly from the reference mark; from the perspective of the main part(s) for distinction, the disputed trademark is a real-life crocodile figure, while the reference mark also has a crocodile figure embedded in the middle of the word, but the figure takes up less than 1/3 of the word, “CARTELO”, so the word is more likely to attract the attention of the public, therefore, “CARTELO” is the main part(s) for distinction with regard to the reference mark. Although the disputed trademark and the reference mark are similar in the graphic part, the main part(s) for distinction and the overall structure of the combined elements are not identical or similar. The public would not be confused or misunderstood between the disputed trademark and the reference mark if they were to observe them in isolation with general attention. Therefore, the disputed trademark was not similar to the reference mark, and the application for registration of the disputed trademark did not violate Article 29 of the Trademark Law (2001). In determining the similarity of the trademarks in this case, the judgment of the court of second instance only compared the crocodile figures between the disputed trademark and the reference mark, which was in violation of making an overall determination of the similarity of the trademarks by comparing the whole and the main parts for distinction written in the judicial interpretation. In addition, the court of the second instance did not consider the fact that the Higher People’s Court of Beijing Municipality, in judgment No. 178 [2007] Final, Adm. Division, the Higher People’s Court of Beijing Municipality, ruled that the successful registration of the reference mark was mainly on the grounds that the word “CARTELO” was deemed to be the main element in the identification of the reference mark and the overall structure of the reference mark, therefore, the court of second instance made a decision on the basis of an inappropriate method. With regard to the 1983 Settlement Agreement, the Supreme People’s Court holds that, on the one hand, whether the disputed trademark should be registered shall be decided in accordance with the Trademark Law (Rev. 2019) and the judicial interpretation. Therefore, what Cartelo Crocodile has claimed that the disputed trademark shall not be registered on the basis of such evidence that the graphic trademark, namely the crocodile, has been registered in other countries and regions, and that the 1983 Settlement Agreement, is want of legal standing. On the other hand, trademark rights are territorial in nature. In the 1983 Settlement Agreement, both parties came to a meeting of the minds that they would cooperate in five countries or regions, namely Chinese Taiwan region, Singapore, Indonesia, Malaysia and Brunei, and that

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LACOSTE would make a compensation for the predecessor of Crocodile International, Lishengmin Co. LACOSTE applied for registration of the crocodile trademark in Chinese Mainland in 1979, fourteen years ahead of the act of Cartelo Crocodile, which is the reason why LACOSTE argued that the 1983 Settlement Agreement did not expressly agree to apply to the Chinese mainland. Therefore, the 1983 Settlement Agreement is not the basis for determining whether the disputed trademark is similar to the reference mark and whether the disputed trademark shall be registered. In addition, in the judgment numbered No. 3 [2009] Final, Civ. Division, the Supreme People’s Court, the Supreme People’s Court makes some requirements for the use of the disputed trademarks I and II on the grounds that the disputed trademarks I and II had a certain degree of similarity in composition with the head-to-right crocodile graphic trademark that LACOSTE sought to protect, and holds that Cartelo Crocodile’s claim that the decision of the Supreme People’s Court, No. 3 [2009] Final, Civ. Division, the Supreme People’s Court, confirmed that the distinction between its head-facing-left trademark crocodile and LACOSTE’s head-facing-right crocodile trademark could not stand. It should be noted that, in the course of using the reference mark (the former opposed trademark), Crocodile International and its recipients of rights and obligations, Cartelo Crocodile, ignored the scope of application of the 1983 Settlement Agreement and the use requirements in the judgment of the Supreme People’s Court, No. 3 [2009] Final, Civ. Division, the Supreme People’s Court. Crocodile International and its recipients of rights and obligations, Cartelo Crocodile, boasted a clear intention to confuse their crocodile-branded goods with LACOSTE’s crocodilebranded goods in business practices in that they used prominently the trademark of a single crocodile, as well as the flat model of a blue, white and red crocodile arranged in the same colors as the French flag, which could easily lead to confusion and misunderstanding or suggesting a specific link between the two trademarks when consumers purchase products. In hearing cases arising out of the registration and use of the crocodile trademark between the two parties, people’s court shall, on the basis of facts and law, request the crocodile trademark owners to make sure of the source so that the products sold by them can be distinguished. Cartelo Crocodile shall also properly use the approved registered trademark in accordance with the law to avoid confusion and misidentification by the public. Thus, the Supreme People’s Court holds, the decisions of first and second instance shall be revoked; the decision titled No. 124819 made by the Trademark Review and Adjudication Board (TRAB) shall be sustained.

6 Comment on Rule A number of administrative or civil disputes have arisen between LACOSTE and Cartelo Crocodile over the registration and use of the trademark “Crocodile” in China and other countries and regions, such as Japan. The dispute in this case is further complicated by the fact that the two companies have filed many lawsuits

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over the Crocodile trademark, which have taken place over a long period of time, so that a number of like cases have turned up, and that both companies have supported their claims in this case with prior judgments in force or the relevant content of the 1983 Settlement Agreement. The Supreme People’s Court, on the basis of the correct understanding and application of the Trademark Law and the judicial interpretation on the determination of similarity of trademarks, held that the disputed trademarks were not similar to the reference mark by comparing the disputed trademark with the reference mark as a whole and the main parts and therefore would not cause confusion and misunderstanding among the public, and that the prior use of the unregistered trademark by Cartelo Crocodile did not have a certain influence and the disputed trademark did not constitute an improper pre-registration of the unregistered trademark of Cartelo Crocodile. More importantly, the Supreme People’s Court in the decision sorted out and reviewed the prior administrative judgments, the prior civil judgments and the 1983 Settlement Agreement, reaffirmed the validity of the key findings of the prior judgments and explained the reasons why the 1983 Settlement Agreement only applied to Chinese Taiwan region, Singapore, Indonesia, Malaysia and Brunei, but not to the Chinese Mainland, and its impact on the determination of trademark similarity, concluding that the disputed trademark shall be approved for registration, which not only upheld the authority of the effective judgment, but also respected the market practices resulting from the lawful competition between the two companies, and even protected the prior registered trademark and honest operation. The decision also points out, on the basis of facts, to wit, that Cartelo Crocodile had a clear subjective intent to confuse its crocodile-branded goods with LACOSTE’s crocodile-branded goods in business practices. Therefore, the court requested Cartelo Crocodile to use the approved registered trademark in accordance with the law and in a proper manner so as to avoid confusion and misunderstanding among the public, which is also in line with the requirement of the Trademark Law that the use of a trademark shall comply with the principle of good faith. The decision in this case took into account the development process of both parties’ trademarks and protected the prior registered trademarks and honest business practices in accordance with the law, achieving a good legal and social effect. A contentious issue involved in this case was the effect of an offshore trademark co-existence agreement on the determination of trademark similarity. Before addressing this issue, it is necessary to take into account the impact of domestic co-existence agreements on the determination of similarity of trademarks. In recent years, when a trademark applicant applies for a disputed trademark that has been rejected or not registered because it is subject to the situation under Article 30 or Article 31 of the existing Trademark Law (corresponding to Articles 28 and 29 of the Trademark Law as amended in 2001), he requests the granting of the trademark registration by submitting a trademark co-existence agreement issued by the owner of the reference mark to the trademark examination authority or the people’s court. This leads to the question of the effect of trademark co-existence agreements on the determination of trademark similarity. In this regard, there are two views, one is that trademark right is a private right, so the issuance of the trademark co-existence agreement is the disposal of the private right of the reference mark right holder.

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In such case, the reference mark is no longer an obstacle to the registration of the disputed trademark. Naturally, it is no longer necessary to determine whether the disputed trademark and the reference mark constitute identical or similar trademarks for the same or similar goods, and the registration of the reference mark shall be granted. The other view is that a co-existence agreement could be the basis for a preliminary exclusion of confusion, but could not exclude the application of Article 30 of the existing Trademark Law. In this regard, we agree with the second view for the following reasons: First, the application for registration of trademark shall be subject to examination and approval by the trademark administration in accordance with the Trademark Law. Where the application does not conform to the provisions of Article 30 and Article 31 of the existing Trademark Law, the application shall be rejected. Although coexistence of trademarks is a form of private right disposal, the requirements for the examination and approval of registered trademarks provided in the Trademark Law shall not be denied. Second, a trademark is basically used to identify the source of goods and to avoid confusion and misidentification. Where a trademark co-existence agreement is allowed, it means that the disputed trademark is allowed to be registered, which will inevitably lead to the existence of multiple identical or similar trademarks on the same or similar goods, resulting in confusion and misunderstanding among consumers and undermining the realization of the basic function of the trademark, which is contrary to the legislative intent of the Trademark Law.2 Third, Article 42 of the existing Trademark Law strictly provides for the transfer of trademarks, requiring that similar trademarks on identical goods, or identical or similar trademarks on similar goods shall be transferred together, and such transfers that are likely to cause confusion and misunderstanding or have other undesirable effects shall not be approved. The above provisions of the Trademark Law reflect the legislative efforts to avoid similar trademarks on identical or similar goods belonging to different rights holders through the implementation of the relevant statutory provisions. It would clearly be contrary to the legislative intent of the Trademark Law if a trademark co-existence agreement is accepted outright, thereby allowing the disputed trademark to be registered. Fourth, where the disputed trademark is similar to the reference mark, it would be more accurate for the owner of the reference mark, as the de facto relevant public, to conclude that there is no confusion between the two trademarks. If no other sufficient evidence is presented to prove that the co-existence of the disputed trademark and the reference mark would cause confusion among the public as to the source of the goods, it can be concluded that the disputed trademark and the reference mark do not constitute similar trademarks.

2

At present, only a few countries such as the United Kingdom recognize the absolute validity of trademark co-existence agreements, and it is not appropriate to accept the British approach in its entirety as China’s national conditions, legal and cultural concepts and trademark legal traditions do not coincide with those of the United Kingdom.

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Fifth, this opinion does not affect the private disposition of right of the reference mark by its owner. The reference mark and the disputed trademark may be de facto co-existent, either through the permission of the owner of the reference mark or by no claim of infringement against the applicant of the disputed trademark for using such trademark. The trademark co-existence agreement overseas is even less a fact and basis for determining whether the disputed trademark is similar to the reference mark and whether it shall be registered due to the territorial nature of trademark rights.

Xiamen Meiyou Co., Ltd. v. Beijing Kangzhilesi Network Technology Co., Ltd. and China National Intellectual Property Administration (NIPA) (Administrative Dispute Over Request for Declaration of Invalidity of Trademark Rights: Whether the Trademark at Issue is a Mark that “Cannot be Used as a Trademark” is Within the Scope of the Review by the People’s Court’s on the Administrative Act of Trademark Authorization and Confirmation) Zhihong Zhang

1 Rule 1. The marks listed in Article 10(1) of the Trademark Law shall not be used as trademarks. When the people’s court examines and decides whether the trademark in dispute constitutes the mark listed in Article 10(1) of the Trademark Law in the administrative case of trademark authorization and confirmation, it constitutes no violation of the provisions of the Trademark Law. 2. The meaning of “harmful to socialist morality or (having) other undesirable effects” as provided for in Article 10(1)(8) of the Trademark Law has evolved over time and has different connotations in different historical periods. The people’s court shall take into account social, political and historical backgrounds, cultural traditions, ethnic customs, religious policies and other factors, and shall consider Collegial Bench: Zhihong Zhang, Gang Cao and Jianzhong Jiang Edited by Wenyan Ding; Translated by Daxuan Zheng and Xueru Li Z. Zhang (B) The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_24

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the composition of the trademark and the goods or services designated for use to make a decision.

2 Case Information 1. Parties Applicant in the Reopening (Third Party in the First Instance, Appellant in the Second Instance): Xiamen Meiyou Co., Ltd. (hereinafter referred to as Meiyou Company) Respondent in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Beijing Kangzhilesi Network Technology Co., Ltd. (hereinafter referred to as Kangzhilesi Network Technology Company) Appellant in the Second Instance (Defendant in the First Instance): China National Intellectual Property Administration [formerly the Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People’s Republic of China, hereinafter referred to as the Trademark Review and Adjudication Board (TRAB)] 2. Procedural History First Instance: No. 7868 [2017] Trial. Adm. Division, Beijing Intellectual Property Court (Beijing 73) (dated Mar. 8 of 2018) Second Instance: No. 3808 [2018] Final, Adm. Division, the Higher People’s Court of Beijing Municipality (dated Oct. 8 of 2018) Reopening: No. 240 [2019] Reopening, Adm. Division, the Supreme People’s Court (dated Dec. 27 of 2019) 3. Cause of Action Administrative dispute over request for declaration of invalidity of trademark rights

3 Essential Facts Meiyou Company filed an application to the Trademark Review and Adjudication Board (TRAB) to declare invalid the “Dayima” mark and the figure mark (hereinafter referred to as the disputed trademark) registered by Kangzhilesi Network Technology Company. The Trademark Review and Adjudication Board held that the disputed trademark was void of distinctive features and declared such trademark invalid. Kangzhilesi Network Technology Company refused to accept it and filed an administrative lawsuit. The Beijing Intellectual Property Court and the Higher People’s Court of Beijing Municipality both held that the disputed trademark was distinctive, and ruled that the invalidation ruling shall be revoked and a new ruling shall be made by the Trademark Review and Adjudication Board. After the judgments came into effect, Meiyou Company applied to the Supreme People’s Court to

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reopen the case, requesting the revocation of the administrative decisions of first and second instance and the original ruling of invalidation of the disputed trademark, and supplying additional unasserted ground that there is a potentiality of adverse effects caused by “Dayima” mark and the figure mark.

4 Issues 1. In the reopening process, the parties claimed that the disputed trademark has adverse effects, which had not been raised in the previous judicial procedures or involved in the accused administrative rulings. Under this condition, whether the claim should be reviewed and examined by the people’s court if it was not raised in the first or second-instance judgments; 2. Whether the trademark in dispute is harmful to socialist morality or there is any indication of other adverse effects.

5 Holding The Supreme People’s Court held that the focus of reopening the case was whether the disputed trademark should be declared invalid. In the reopening process, Meiyou Company asserted that the disputed trademark has met with the circumstances specified in Article 10(1)(8) of the Trademark Law, which has adverse effects. In this regard, though Meiyou Company has not raised this issue during the trademark invalidation review stage, and the previous Trademark Review and Adjudication Board has not conducted any hearing of the said issue, the courts of first and second instance have not conducted any trial of this issue, either, But in accordance with the principles of comprehensive review of administrative acts being sued in Article 87 of the Administrative Procedure Law, the provisions in Article 120 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 that the people’s courts shall focus on the request and the legality of the administrative act being sued when rehearing a reopening case, and Article 2 of the Rules of the Supreme People’s Court on Several Issues Concerning the Trial of Administrative Cases for the Authorization and Confirmation of Trademarks: “The scope of the review of the administrative act of trademark authorization by the people’s court shall generally be determined according to the plaintiff’s claims and reasons. If the plaintiff fails to claim in the lawsuit, but the relevant determination of the Trademark Review and Adjudication Board is obviously improper, the people’s court may review the relevant matters and make a decision after the parties have presented their opinions.” As to whether the trademark in dispute produces the adverse effect provided for in Article 10(1)(8) of the Trademark Law, the review conducted in the reopening process does not violate the above-mentioned laws and judicial interpretations. Moreover, Article 10(1)(8) of

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the Trademark Law is an absolute clause for trademark registration. If the registration of a trademark violates this provision, it shall be prohibited. The trademark in dispute in this case is composed of Chinese characters of “Dayima” and its figure mark, with the word “Dayima” being the distinctive feature. The original meaning of “Dayima” refers to the mother’s elder sister. Recently, as the common name for menstruation, it is confined to mean women’s menstruation. The present litigation, involving the registration of the word “Dayima” mark to be used in Class 38 on services such as teleconferencing services, electronic bulletin board services (communication services), computer-assisted information and image transmission, video conferencing services, digital file transmission, Internet chat rooms, on-line forums, mobile phone communications, etc., which is inconsistent with our country’s cultural traditions, therefore jeopardized the public sentiment and female dignity, is, thus, in violation of public order and good customs. This trademark, which is detrimental to socialist morality and causes other adverse effects, shall be declared invalid. The invalidity ruling made by the original Trademark Review and Adjudication Board was correct, but the Board has not found that the trademark was in a situation with adverse effects as provided for in Article 10(1)(8) of the Trademark Law, which was improper. As for the issue of whether the disputed trademark is distinctive, the trademark cannot be registered as a trademark even if it does not directly indicate the quality, raw materials, function, use, weight, quantity and other characteristics of the goods under the circumstances provide for in Article 10(1)(8) of the Trademark Law. Moreover, the meaning of the trademark itself is not easy to be recognized by consumers as a trademark, and cannot play a role in identifying the source of the goods or services. Therefore, the court of original jurisdiction revoked the ruling made by the Trademark Review and Adjudication Board and ordered new rulings on the grounds that the trademark was distinctive, which was improper and shall be corrected in accordance with the law.

6 Comment on Rule 1. Whether the court can take the initiative to examine whether the disputed trademark has adverse effects Article 10 of the Trademark Law is part of the general rules of the law. This article is about the management of signs that cannot be used as trademarks and the use of geographical names as trademarks, and it belongs to an absolute rejection of registration as generally stated in the academic community. A trademark is a mark used to distinguish goods or services provided by different producers and operators. Whether a mark can be used and registered as a trademark in our country needs to comply with relevant laws and regulations. Items 1 to 8 of the Paragraph 1 of the said Article list the signs that shall not be used as trademarks, and the Paragraph 2 of this Article is the regulations governing the use of geographical names as trademarks. The

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signs listed in Paragraph 1 of this Article can neither be registered as trademarks, nor be used as trademarks. If a registered trademark constitutes the circumstances listed in Article 10(1) of the Trademark Law, it shall not be registered as a trademark for use. In the trial of administrative cases of trademark authorization and confirmation, the people’s court examines whether the trademark in dispute constitutes a mark listed in Article 10(1) of the Trademark Law and makes a judgment, which does not violate the provisions of the Trademark Law. It needs to be further pointed out that Article 10 of the Trademark Law applies to both registered trademarks and non-registered trademarks. For signs that violate the provisions of this article and are applying for registration, the application shall be rejected in accordance with the law. If it has been registered, it shall be declared invalid; if it has been used but has not been registered, it shall be investigated and punished. 2. Regarding whether the “Dayima” mark has adverse effects The meaning of “being harmful to socialist morality or having other adverse effects” provide for in Article 10(1)(8) of the Trademark Law should be developed to keep up with the times. Its connotation differs in different historical periods. The people’s court, in making a decision, shall comprehensively take into account social, political, historical and cultural traditions, religious policies and other factors as well as the composition of the trademark and the goods or services designated to be used in accordance with the circumstances of the case. In this case, “Yima” originally means the mother’s sister, and “Dayima” originally means the mother’s elder sister. It has recently and gradually become a nickname for women’s menstruation. Registering and using the word “Dayima” as a trademark shall be considered at this stage as inconsistent with Chinese cultural traditions, detrimental to public sentiment and female dignity, and is contrary to public policy and morality. This trademark, which is harmful to socialist morality and causes other adverse effects and violates Article 10 of the Trademark Law, shall be declared invalid in accordance with the law.

Xiao X v. Shenzhen Seno Light (HK) Limited (Dispute Over the Infringement on Patent for Invention: The Effect of the Specification of the Technical Effect in Patent Claims on the Interpretation of the Claims and the Application of the Doctrine of Equivalence) Rong Wu and Ruijuan Zhou

1 Rule The determination of the scope of protection in patent infringement litigation shall commence with the patent claims, systematically and comprehensively cognize the technical solutions protected by the patent, and make an accurate determination of the technical features recorded or specified in the patents claims, irrespective of whether the wording of patent claims is ex facie clear, as opposed to be determined by the meaning solely on the basis of claims per se. For the technical effects of the specific technical features of the patent claims, it is necessary to consider whether the technical effects are indeed brought about by the technical features, as well as the salience of the technical effects and other factors to determine whether the technical features of the claims should be limited by the technical effects recorded in the specification. In the application of the doctrine of equivalents, the technical effects clearly depicted in the specification and technical effects hereof capable of being determined by the technical personnel in the field thereof, shall be taken into account.

Collegial Bench: Weike Du, Rong Wu and Rong Li Edited by Wenyan Ding; Translated by Daxuan Zheng and Kaiyan Hu R. Wu (B) · R. Zhou The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_25

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2 Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Xiao X Respondent in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Shenzhen Seno Light (HK) Limited (hereinafter referred to as Seno Light Company) 2. Procedural History First Instance: No. 936 [2017] Trial, Civ. Division, the Intermediate People’s Court of Shenzhen City, Guangdong Province (Guangdong 03) (dated Jan. 24 of 2018) Second Instance: No. 1142 [2018] Final, Civ. Division, the Higher People’s Court of Guangdong Province (dated Sep. 21 of 2018) Reopening: No. 365 [2019] Appeal, Civ. Division, the Supreme People’s Court (dated Jun. 10 of 2019) 3. Cause of Action Dispute over the infringement on patent for invention

3 Essential Facts The patent herein is an invention named “a kind of LED light”, the patentee hereof being Xiao X. The patent claims thereof recorded 5 (five) items, and Xiao X requested protection for the patent claim 1, the content of which is: a kind of LED light, with characteristics as follows: including a lamp holder (7), which is electrically hooked up to an external power supply; Multiple LED strips (2), driven by circuitry set above, are equipped with multiple LED beards (21). The said LED strips (2) are assembled together to form a cylindrical light body. The LED beads (21) thereof all face out and one end of the cylindrical light body is fixedly and electrically connected to the above-mentioned light head (7); A wick holder (3) fixing the aforesaid cylindrical light body, has a mounting bracket designed to fix both ends of the LED light strip (2), a body bracket (35) designed to support the mounting bracket, and an annular slot that electrically connected with the LED light strip (2). The patent specification has been depicted as follows: “At least one end of the LED strip is convexly equipped with a connection terminal, which is electrically connected to the annular slot”; “The aforesaid light head is equipped with the first mounting bracket, onto which one end of the said body bracket is attached, and the other end is connected with the second mounting bracket; The first mounting bracket has the first annular slot, to which one end of the aforesaid light strip is hooked up with plug-in electricity,

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and the other end of the light strip thereof is fixedly connected with the second mounting bracket; There is the first annular slot fixed in the light head, so that each and every LED light can be inserted into corresponding slot, which design makes maintenance easier and lessens running cost”; “Such novel LED light, compared with extant technologies, possesses the following superiority…the adoption of plugin connection between light strip and slot make maintenance and replacement handy. A simple removal of light strip where light beard or beards are damaged makes the maintenance or replacement of beard(s) possible, without affecting other strips’ working, whereby maintenance and replacement costs are thus minimized.” Xiao X submitted infringing products which are notarized and preserved to the court of first instance and alleged that, the disputed technical solution has comprised all the technical characteristics of the patent claim 1, thus disputed technical solution falling within the scope of patent protection. Seno Light Company has infringed on the patent rights of Xiao X by manufacturing, selling and promising to sell the products without obtaining Xiao X’s permission. Xiao X thereby requested that the court order Seno Light Company: (1) to immediately stop the infringement, including the manufacture, sale and promise to sell the infringing products, delete relevant web page where the said products are sold, destroy the infringing products, special molds and advertising materials; (2) to make compensation for economic losses and other reasonable expenditures incurred by this action for safeguarding its own rights and interests, totaling CNY 200,000; and (3) to bear all the litigation costs of this case. The court of first instance deemed that infringing products had the technical features of Xiao X’s patent, to wit, “the annular slot connected with LED light strip through plug-in electricity”, and that more technical features were added by welding and reinforcement on the basis of plug-in electricity thereof, which meant the infringing products fell within the scope of the patent protection. Hence the court of first instance entered a judgment that Seno Light Company shall forthwith terminate the patent infringement and pay damages to Xiao X and other reasonable expenditures totaling CNY 100,000. The Seno Light Company, refusing to accept the judgment hereof, appealed. The Court of second instance held that the technical features of Xiao X’s patent, “the annular slot connected with LED light strip through plug-in electricity”, confine the connection between light strip and the annular slot to plug-in electricity, which was depicted in the specification that it was designed to be easy to plug or unplug the light strip and the annular slot in working for the purpose of handy replacement and maintenance. Nevertheless, it is not easy to withdraw the light strip of the infringing products form the annular slot without supporting tools, for the strip was soldered onto the annular slot. Hence, the purpose thereof was frustrated. The technical characteristics of infringing products are not the same as or commensurate with that of the Xiao X’s patent, to wit, “the annular slot connected with LED light strip through plug-in electricity”. That means infringing products do not fall within the scope of Xiao’s patent protection. Thereby, the court of second instance reversed the firstinstance judgment and dismissed all the claims raised by Xiao X. Unsatisfied with

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the judgment of second instance, Xiao X applies to the Supreme People’s Court to reopen the case.

4 Issue Whether the infringing technical solution falls within the scope of patent protection in question.

5 Holding Upon review, the Supreme People’s Court holds that both parties dispute over the determination of the technical features in the patent claim 1, “the annular slot connected with LED light strip through plug-in electricity”. In interpreting the disputed technical solutions, records of technical effects of the patent specification shall be taken into consideration. The technical features of infringing products are not the same as or commensurate with that of Xiao X’s patent, to wit, “the annular slot connected with LED light strip through plug-in electricity”. That means the infringing technical solution does not fall within the scope of patent protection. Therefore, The Supreme People’s Court rejected Xiao X’s application to reopen the case.

6 Comment on Rule In patent infringement, it has been a difficult problem in judicial practice to interpret patent claims with specification and its drawings and figures attached whereby technical solutions defined by patent claims are accurately comprehended without prejudice to the scope of patent protection. This case provides guidance on the necessity of patent claims interpretation and the timing of introducing the specification and attached drawings and figures, and gives clear rules for the interpretation of technical features in specification and the impact on the application of the doctrine of equivalents, which is of great importance for the judiciary. In patent infringement disputes, the determination of the extent of protection of patent rights is the premise of infringement determination. Article 59(1) of the Patent Law provides that the extent of protection of the patent right for invention or utility model shall be determined by the contents of the claims. The description and the drawings or figure attached may be used to interpret the claims. That is, patent claims are the basis for determining the extent of patent protection, but the relevant content of the specification and attached drawings or figures has an explanatory role for claims. Xiao X believed that the meaning of the disputed technical features was clear, and the

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court of second instance made an error in applying the law by introducing the records of the technical effect of the specification and made an interpretation thereof. In this regard, the Supreme People’s Court deems that, Article 2 of Judicial Interpretation on Several Issues in Hearing Patent Infringement Cases provides that the people’s courts shall, on the basis of the depiction of patent claims, determine the content of patent claims provided in Article 59(1) of the Patent Law by combining ordinary technical personnel’s understanding of patent claims following reading specification and drawings or figures attached. Firstly, the need for interpreting the claims. Patent claims describe the technical solution of the patent in the form of textual and numerical records of technical features. Owing to the multiplicity and limitations of language and words, it is difficult to accurately define the technical solution expressed in the claims without any interpretation of the specific context. Therefore, in the process of determining the extent of protection of patent rights, regardless of whether the language of the claims is clear on the surface, the meaning of the claims should not be determined solely on the basis of the claims per se. Secondly, the timing for introducing the specification and attached drawings or figure attached for interpreting the patent claims. Article 26 of the Patent Law provides that the specification should be a clear and complete description of the invention or utility model, to the extent that technical personnel in the field of the said technology can accomplish; patent claims should be based on the specification hereof, distinctly and compendiously limiting the extent of the required patent protection. It can be observed that the content of the patent claims is the abstraction and generalization of the specification, and the content of which further explains or describes the patent claims, that is, the specification constitutes the specific context of the applicable patent claims. Therefore, in the process of interpreting the patent claims, we need to commence with the patent claims, then systematically and comprehensively understand the technical solutions protected by the patent, and make an accurate determination of the technical features recorded or specified in the patents claims. Finally, how does technical effect in the specification affect the interpretation of technical solutions and the application of the doctrine of equivalents? Generally speaking, what is recorded in patent claims is technical scheme or solution defined by technical features, viz, the composition of invention, while the purpose of invention and pertained technical effects are recorded in the specification. What the technical effects of the specification usually represent is beneficial effect which means progress vis-à-vis extant technologies. Due to patentee’s limited knowledge of extant technologies and the inability of the patent examination or review agencies to search extant technologies, the technical effects recorded in the specification can play a little more than reference role in interpreting claims. For the technical effects of the specific technical features of the patent claims, it is necessary to consider whether the technical effects are indeed brought about by the technical features, as well as the salience of the technical effects and other factors to determine whether the technical features of the claims should be limited by the technical effects recorded in the specification. In the application of the doctrine of equivalents, the technical effects clearly

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depicted in the specification and technical effects hereof capable of being determined by the technical personnel in the field thereof, shall be taken into account. In respect of the disputed technical features or characteristics in this case at hand, the patent claims purely provides that the connection between light strip and annular slot is electrically plug-in, notwithstanding not concretely regulating how plug-in electricity is connected. However, the patent specification clearly depicts in the part concerning technical effects that, such LED light, compared with extant technologies, possesses the following superiority…the adoption of plug-in connection between light strip and annular slot makes maintenance and replacement handy. A simple removal of light strip where light bead or beads are damaged make the maintenance or replacement of bead(s) possible, without affecting other strips’ working, whereby maintenance and replacement costs are thus minimized. The “plug-in connection” does achieve the effects thereof as technical personnel in the field thereof understand. Hence the interpretation of disputed technical features or characteristics shall take into consideration the aforesaid technical effects. The technical features or characteristics of the disputed technical solutions are that the LED light strip and the annular slot do not come into contact with each other in the process of plugging and unplugging, but are electrically connected and fixed by soldering. The resultant technical effects are that the replacement and maintenance of light strip are premised on the destruction of the weld structure as light strip breaks down. Therefore, the technical features or characteristics of the disputed technical solutions, to wit, the light strip and the annular slot fixed by soldering, are not the same or commensurate with the technical features or characteristics of Xiao X’s patent, which means the technical features or characteristics of the disputed patent do not fall within the scope of patent protection.

Md-care (Tianjin) Technology Co., Ltd. v. Sunshine New Technology (Tianjin) Co., Ltd. and Wang X, Zhang X et al. (Defendants in the First Instance) (Dispute Over Infringement of Trade Secrets Cases: How to Screen Whether a Client List Constitutes a Trade Secret) Yanfang Wang

1 Rule 1. The client list under the protection of trade secrets, shall, in addition to the information about the clients’ names, addresses and contact details, as well as the usual trading habits, intentions, details of transactions and other information, shall comprise specific client information that is different from the relevant public information, not all client lists can constitute trade secrets. 2. In handling trade secrets cases, the people’s court shall not only strengthen the protection of trade secrets in accordance with law, effectively stop the infringement of trade secrets, and create a safe and reliable legal environment for the innovation and investment of enterprises, but also properly handle the protection of trade secrets and the coordinated relationship between free choice of employment, covenants not to compete, and the reasonable flow of talents, safeguard the legitimate employment of workers, the legitimate rights and interests of entrepreneurship, and promote the labor force in accordance with law. Knowledge, experience and skills acquired and accumulated by employees in the course Collegial Bench: Yanfang Wang, Weike Du and Lihua Mao Edited by Wenyan Ding; Translated by Daxuan Zheng, Xiaohua Zhou and Yi Zheng Y. Wang (B) The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_26

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of their work, except in the case of trade secrets belonging to the institution or organization, constitute an integral part of their personality, and the basis of their viability and labor capacity, as well as their freedom of independent use after leaving the workplace. 3. In the absence of covenant not to compete, nor the existence of trade secrets, the prohibition of former employees from competing with another market player just because the company has had multiple transactions or stable transactions, is essentially the same as limiting the market player’s opportunity to choose other parties to the business transactions, which not only prohibits the trading activities of both sides of the transaction, limiting the market competition, but also does not help to protect the legitimate employment and entrepreneurial rights and interests of workers, which runs contrary to the legislative intent of the anti-unfair competition law to maintain the healthy development of the socialist market economy, to encourage and protect fair competition, stop unfair competition, and protect the legitimate rights and interests of operators and consumers.

2 Case Information 1. Parties Applicant in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Md-care (Tianjin) Technology Co., Ltd. (hereinafter referred to as Md-care Technology Company) Respondent in the Reopening (Plaintiff in the First Instance; Appellant in the Second Instance): Sunshine New Technology (Tianjin) Co., Ltd. (hereinafter referred to as Sunshine New Technology Company) Defendant in the First Instance: Wang X Defendant in the First Instance: Zhang X Defendant in the First Instance: Liu X 2. Procedural History First Instance: No. 50 [2017] Trial, Civ. Division, the First Intermediate People’s Court of Tianjin Municipality (Tianjin 01) (dated Dec. 12 of 2017) Second Instance: No. 143 [2018] Final, Civ. Division, the Higher People’s Court of Tianjin Municipality (dated Jun. 14 of 2018) Reopening: No. 268 [2019] Reopening, Civ. Division, the Supreme People’s Court (dated Dec. 16 of 2019) 3. Cause of Action Dispute over infringement of trade secrets

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3 Essential Facts In the case of dispute over trade secret infringement between the Plaintiff, Sunshine New Technology (Tianjin) Co., Ltd., and the Defendants, Md-care (Tianjin) Technology Co., Ltd., Wang X, Zhang X and Liu X, the Plaintiff is an enterprise engaged in the research and development, production and sales of industrial cleaning and product maintenance, whose products mainly include industrial chemicals like cleaning agents, lubricants and sealants. Established on October 30, 2015, the Defendant, Md-care (Tianjin) Technology Co., Ltd., is engaged in the production and sales of cleaning agents. Wang X joined Sunshine New Technology Company in 1996 and served as director, sales deputy general manager, general manager and vice president in the company. He was the legal representative of Sunshine New Technology Co., Ltd. from 2012 to 2016 and founded Md-care (Tianjin) Technology Co., Ltd. at the end of October in 2015. Now, Wang X is the legal representative and general manager of Md-care Technology Company. Zhang X joined Sunshine New Technology Co., Ltd. in 2001 and served as manager of the technical department and manager of the technical service department in the company. In January 2016, he joined Md-care (Tianjin) Technology Co., Ltd. and served as manager of the technical department. Liu X joined Sunshine New Technology Co., Ltd. in 2010 and served as manager of the sales service department in the company. At the end of October in 2015, he joined Md-care (Tianjin) Technology Co., Ltd., was placed in charge of personnel administration. Sunshine New Technology Company signed confidentiality agreements with Zhang X and Liu X regarding trade secrets like information related to the customer business, products and services. However, Sunshine New Technology Company did not enter into any non-compete contracts or similar agreements with Wang X, Liu X and Zhang X. Sunshine New Technology Company uses an ERP system to manage customer information. In its ERP system, the customer information stored includes the clients’ name, product name, product specification, sales order quantity, unit price, contact person, telephone number, address, etc. Sunshine New Technology Co., Ltd. have some of the customer information notarized in the ERP system and submitted the corresponding invoices. Sunshine New Technology Co., Ltd. filed a lawsuit with the First Intermediate People’s Court of Tianjin Municipality, selecting the client list containing 43 customer information as the infringed trade secrets. The specific list was: × ×× Kitchen & Bath Appliance Factory (omitted). The secret points claimed by Sunshine New Technology Co., Ltd. in this lawsuit were the clients’ name, product name, product specification, sales order quantity, unit price, contact person, telephone number and address obtained in transactions with the above 43 customers. The First Intermediate People’s Court of Tianjin Municipality made the civil judgment (No. 50 [2017] Trial, Civ. Division) (Tianjin 01), ordering that: “(1) Defendant

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Md-care (Tianjin) Technology Co., Ltd., Wang X, Zhang X and Liu X shall immediately stop the infringement of trade secrets of the client list in question belonging to the Plaintiff Sunshine New Technology Co., Ltd., i.e. during the period when the trade secrets in question are not known to the public, they shall not disclose, use or allow others to use the trade secrets; (2) the Defendant, Md-care (Tianjin) Technology Co., Ltd. shall compensate the plaintiff Sunshine New Technology Co., Ltd. for CNY 600,000 within 10 days from the effective date of the judgment; (3) the Defendants, Wang X, Zhang X and Liu X shall assume joint and several liability for the content of the aforementioned second judgment; and (4) other claims from the Plaintiff, Sunshine New Technology Co., Ltd. shall be dismissed.” Dissatisfied with the aforementioned judgment, Md-care (Tianjin) Technology Co., Ltd. lodged an appeal to the Higher People’s Court of Tianjin Municipality. On June 14, 2018, the Higher People’s Court of Tianjin Municipality made the civil judgment (No. 143 [2018] Final, Civ. Division), dismissing the appeal and affirming the original judgment. Md-care (Tianjin) Technology Co., Ltd. still refused to accept the decision of second instance and appealed to the Supreme People’s Court for reopening the case for new trial.

4 Issues Whether the customer information including the clients’ name, product name, product specification, sales order quantity, unit price, contact person, telephone number and address obtained in transactions between Sunshine New Technology Co., Ltd. and the above 43 customers involved in the case constitutes trade secrets as provided for in Article 10 of the Anti-Unfair Competition Law. If so, whether Md-care (Tianjin) Technology Co., Ltd. has made use of the trade secrets in question.

5 Holding Upon review, the Supreme People’s Court holds that the ground for the application of Md-care (Tianjin) Technology Co., Ltd. is established and decides to issue a writ of certiorari to hear the case. After hearing the case, the Supreme People’s Court holds that, in the trial of trade secret cases, the people’s court must strengthen its trade secret protection and effectively stop the infringement of trade secrets in accordance with the law, so as to create a safe and reliable legal environment for the innovation and investment of enterprises. In addition, the court should properly handle the relationship between trade secret protection and freedom of job choice, competition restrictions and reasonable flow of talents, safeguard the legitimate rights and interests of laborers’ rightful employment and entrepreneurship, and promote the reasonable flow of labor and independent choice of employment according to law. The knowledge, experience

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and skills acquired and accumulated by employees at work, except in the case of trade secrets belonging to the employer or organization, constitute an integral part of their personality and form the basis of their ability to survive and work. Therefore, employees have the freedom to use them independently after leaving their jobs. Article 13 of the Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the Applicable Laws to Unfair Competition Cases provides that “(t)he client list under the protection of trade secrets, shall, in addition to the information about the clients’ names, addresses and contact details, as well as the usual trading habits, intentions, details of transactions and other information, shall comprise specific client information that is different from the relevant public information, which does not refer to the protection of all client lists. According to the notarial certificate provided by Md-care Technology Co., Ltd., the aforesaid information of the 43 customers can be obtained through Internet. According to the infringement list of 43 customers (2012–2015) provided by Sunshine New Technology Co., Ltd., the table indicates the transaction records and contacts between Sunshine New Technology Co., Ltd. and certain customers within a specific period of time. The Supreme People’s Court holds that, in the first place, the information of relevant purchasers is easily available in the current network environment and acquired by practitioners in the relevant industry with great facility based on their labour skills; secondly, the information, including date for making orders, order number, product name, product specification, sales order quantity, unit price and un-taxed local currency, is generally listed and does not reflect certain clients’ usual trading practices, intentions and details of transactions different from general transaction records. In the absence of in-depth information covering the specific transaction practices and intention of relevant customers, it is difficult to find that the demand-side information is a trade secret protected by the Anti-Unfair Competition Law. Having taken into account the fact that Sunshine New Technology Co., Ltd. has not entered into non-compete agreements with Wang X, Zhang X and Liu X, Mdcare Technology Co., Ltd. does not assume any relevant non-compete obligations. Therefore, it is difficult to find that Md-care Technology Co., Ltd., Wang X et al. constitute an infringement to trade secrets of Sunshine New Technology Co., Ltd. since Wang X, Zhang X and Liu X do not have non-compete obligations; the relevant client list does not constitute trade secrets; and relevant contact persons and contact numbers are largely different. In the case that non-compete obligations should not be undertaken and trade secrets of Sunshine New Technology Co., Ltd. are not infringed upon, Wang X, Zhang X and Liu X, using their knowledge, experience and skills acquired in the original workplace, are allowed to develop the market and compete with other market players in the same industry, including the original employer, whether they acquire the relevant market information from market channels or know or judge the demand of some market players for relevant products and services on the basis of their working experience. Although it does not necessarily conform to high standards of personal integrity to compete with the original employer, it is not prohibited by law for one to engage in business in the same industry as a participant in the market transaction, provided that he or she does not

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violate legal prohibitions and has no contractual obligations. If, in the absence of non-compete obligations and trade secrets, former employees are prohibited from competing with another market player simply because the original employer has had multiple transactions or maintains stable business ties with the latter, it is essentially the same as restricting the market player’s opportunity to choose other transaction players. This practice not only prohibits the transaction activities of both parties and restricts market competition, but is also detrimental to safeguarding the legitimate employment and entrepreneurship of laborers. It is inconsistent with the legislative intent of the Anti-Unfair Competition Law to safeguard the healthy development of the socialist market economy, to encourage and protect fair competition, to stop unfair competition, and to protect the legitimate rights and interests of operators and consumers. For above reasons, the Supreme People’s Court renders a judgment, reversing the judgments of the first and second instances and dismissing the claims of Sunshine New Technology Co., Ltd.

6 Comment on Rule Whether the client list constitutes trade secrets is a difficult and complicated issue in the judicial practice. On the one hand, this issue is related to the protection of trade secrets of enterprises and has a bearing on the integrity of business management, which prevents trade secrets accumulated by enterprises from being used improperly. On the other hand, it involves the knowledge and skills formed by employees based on their own knowledge and experience. The division between the two is connected with the question whether employees’ freedom to choose a job should be restricted. Too broad protection will unduly restrict free competition in the market. Hence, it is particularly important to grasp the appropriate “scale”. Grasping the scale is essentially the reflection of the conflicting values and trade-offs between worldly fairness and business ethics. In other words, this case, on the face of it, a conflict of whether it constitutes trade secrets, is, in essence, about conflicts and choices between the values of worldly fairness and business ethics. Trade-offs between two conflicting values are clearly reflected in the original trial and reopening of the case. During the reopening, the Supreme People’s Court, after sorting out and comparing the evidence, orients itself toward the basic values of the Anti-Unfair Competition Law, and at the same time, takes full account of the protection of employees’ basic rights to freedom of labor, intends to maintain the fair competition order and provides clear value guidance and adjudication ideas for handling the client list-type trade secret cases. 1. Fairness and efficiency regarding competition The value orientation of the law is not only the reflection and manifestation but also the realization of its values. The value orientation of the Anti-Unfair Competition Law reflects and embodies the concept of competition. As for the concept

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of competition, traditional research holds that the Anti-Unfair Competition Law is insulated from the principle of efficiency. The principle of efficient competition or free competition is generally reflected in the theoretical research and formulation of the Anti-Monopoly Law. A great many scholars have emphasized the function of the Anti-Unfair Competition Law to maintain “fair competition”. For example, in the formulation of competition principles, the wording of scholars’ research focuses on the principles of voluntariness, fairness, equality, good faith, and compliance with business ethics, emphasizing that the principle of fairness is one of the core principles and does not concern the formulation of the efficiency attributes of competitive behavior.1 In the application of the Anti-Unfair Competition Law, the judgment standard is limited to the measurement of whether or not the competitive act is “fair”. For example, Professor Jiong Wu et al. argue that the Anti-Unfair Competition Law does not allow any discriminatory conditions to exclude competition.2 This approach is similar to the fact that some scholars believe the traditional anti-unfair competition laws of European countries only maintain the competition order, irrespective of the quality of competition efficiency.3 In other words, the concept of fair competition holds that the formulation of the Anti-Unfair Competition Law is to pursue fairness in the general social sense while the concept of efficient competition believes that the fair competition under the Anti-Unfair Competition Law is fairness based on efficiency. Professor Xiangjun Kong systematically demonstrates the efficiency attribute of the Anti-Unfair Competition Law from the nature of competitive act in many of his treatises.4 That is, what the law protects is fairness based on efficiency while absolute fairness is not the goal it pursues.5 He points out that the Anti-Unfair Competition Law does not pursue fairness in the general social sense, but fairness in the comprehensive sense that takes into account the existence of efficiency.6 2. Differences between the court of first instance and the court of reopening in the determination of specified client information Article 10 of the Anti-Unfair Competition Law (1993) provides that, “(t)rade secrets in this Article refers to technical information or business information which is unknown to the public, can bring about economic benefits to the obligee with practicability, is of practical use and with regard to which the obligee has adopted secretkeeping measures.” Pursuant to the aforesaid provisions, there are three constituent elements of trade secrets: they are unknown to the public; they can bring about economic benefits to the obligee with practicability; and the obligee has adopted 参见倪振峰、汤玉枢主编:《经济法学》 , 复旦大学出版社2014年版, 第 124–125 页; 倪振峰: 《理解适用与修改完善》 , 复旦大学出版社 2013 年版, 第 18–19 页; 王名 湖主编:《反不正当竞争法概论》 , 中国检察出版社 1994 年版, 第 106–142 页。 2 参见吴炯主编:《反不正当竞争法答问》 , 中国经济出版社 1994 年版, 第 20 页。 3 参见[比]保罗·纽尔:《竞争与法律——权力机构、企业和消费者所处的地位》 , 刘利译, 法律 出版社 2004 年版, 第 4–5 页。 4 参见孔祥俊:《论反不正当竞争的基本范式》 ,载 《法学家》2018 年第 1 期。 5 参见孔祥俊:《论反不正当竞争法的现代化》 ,载 《比较法研究》2017 年第 3 期。 6 参见孔祥俊:《论反不正当竞争法的竞争法取向》 ,载 《法学评论》2017 年第 5 期。 1

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secret-keeping measures. In this case, the main difference between the court of first instance and the court reopening the case for new trial on whether the client list in dispute constitutes trade secrets is whether the client list is known to the public. How to determine whether the client list is known to the public is limited in Article 13 of the aforesaid law, that is, “the client list in the context of trade secrets generally refers to specific client information such as the clients’ names, addresses and contact details, and the usual practice, intentions and details of business transactions, which comprise specific client information that is different from the relevant public information. Such information includes a directory of numerous clients, and specific clients with long-term and stable business relationships.” In the Internet era where the clients’ names, addresses and other information are available through open channels, whether the client list contains specific client information such as the usual trading practice and intention of business transactions is the key to determine whether or not the relevant business information is different from publicly available information. The first and second instance courts both agree that the client list has constituent elements that are not known to the public. In this case, the points claimed to be trade secret by Sunshine New Technology Co., Ltd. in this lawsuit consist of the clients’ names, product name, product specification, sales order quantity, unit price, contact person, telephone number and address in the transaction with its 43 customers. The court of first instance holds that the aforesaid list includes clients’ names, addresses, and contact information, as well as in-depth information such as transaction products, transaction prices, and transaction quantities. Although names, telephone numbers, addresses and other information of some customers could be obtained through public inquiry, the information collection combined with in-depth information such as clients’ names, telephone numbers, addresses and transaction details is not generally known and easily accessible to relevant personnel in their fields, distinguishing from the relevant public information. On the basis of the judgment of the court of first instance, the court of second instance adds that the list of 43 customers conforms to the characteristics of numerous clients and the customers in dispute have formed long-term and stable business relationships with Sunshine New Technology Co., Ltd. Therefore, it affirms the judgment made by the court of first instance that the list of 43 customers constitutes trade secrets. Neither the court of first instance nor the court of second instance conducts any further analysis of the aforesaid information, the two courts directly identify the aforesaid information as in-depth information since the list includes clients’ names, telephone numbers, addresses and transaction details; and then identify the difference between the aforesaid information and the relevant public information. In determining whether or not the aforesaid information belongs to specific client information, the court reopening the case does not draw a general conclusion, but conducts a detailed analysis of whether the client list in dispute belongs to specific client information in conjunction with the evidence at hand in this case. The main contents of the client list in dispute are dates for making orders, order number, product name, product specification, unit (barrel or piece), sales order quantity, unit price, un-taxed local currency, contact person, telephone number and address. Sunshine New Technology Co., Ltd. claimed that the transaction information of the list of its

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43 customers could reflect the special product needs and usual transaction practice of different customers. Considering the characteristics of the cleaning industry in dispute and the fact that there are manufacturing corporations like ××× Kitchen & Bath Appliance Factory as well as companies engaged in stationery and gifts like Ningbo ××× Co., Ltd. among 43 customers, it is difficult to prove with current evidence that the products sold reflect the special needs of customers as for stationery and gift enterprises. To further analyze the customers who purchased the products in dispute, Suclean-I product was cited as an example. 30 of the 43 customers listed by Sunshine New Technology Co., Ltd. purchased this product, accounting for 69.76%. However, it is still difficult to prove that the sales of its products reflect the customer’s special product needs, to say nothing of the claim that it reflects the customer’s special transaction practice. On the basis of analyzing this evidence, the court reopening the case holds that the information, including order date, order number, product name, product specification, sales order quantity, unit price and un-taxed local currency, is generally listed and does not reflect certain clients’ usual practice, intentions and details of business transactions different from general transaction records. Thus, it is difficult to determine that the aforesaid client list constitutes trade secrets protected by the Anti-Unfair Competition Law. 3. Two concepts of competition in the first instance and the reopening The difference between the court of first instance and the court reopening the case for new trial on the criteria for identifying the elements that are not known to the public is, on the surface level, the difference in the judgment standard, the difference in the concepts of competition on the deeper level. The court of first instance holds that as long as information contains the clients’ name, phone number, address and transaction details, the aforesaid information should be identified as in-depth information different from the relevant public information. This judgment standard is more inclined to believe that “the principles of fairness and good faith” provided for in Article 2 of the Anti-Unfair Competition Law (1993) are violated when former employees resign and then conduct transactions with the relevant customers of the original employer. The court reopening the case holds that the aforesaid information cannot be generally listed, but must reflect specific client information like the customer’s usual transaction practice. Otherwise, the determination that the relevant client list constitutes trade secrets would be too broad, which would in fact restrain the market competition and be detrimental to the legislative intent of the Anti-Unfair Competition Law (1993), namely, “ensuring the healthy development of the socialist market economy, encouraging and protecting fair competition, preventing acts of unfair competition, and safeguarding the legitimate rights and interests of operators and consumers”. The values behind the judgment standard of the court of first instance are similar to the fairness standards in the social and secular (worldly) senses, such as “sophistication” and “social morality” pointed out by the Supreme People’s Court in Ma X v. Shandong Foodstuffs Import and Export Corporation, that is, the traditional

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values of fairness.7 In that case, the Supreme People’s Court pointed out that Ma X’s behavior—changing jobs and engaging in competitive business—may be regarded as “ungrateful” or “unrighteous” judging from the traditional sense of social morality and worldly wisdom like gratitude and loyalty. In this case, Wang X, after resigning from Sunshine New Technology Co., Ltd., immediately establishes Md-care Technology Co., Ltd. and conducts transactions with customers who have maintained business relationships with Sunshine New Technology Co., Ltd. for many years. In the worldly sense, his behavior can be accused of being “not faithful enough” or “not righteous enough”. However, the court reopening the case holds that good faith in the market economy is different from that of the civil society. In the AntiUnfair Competition Law that regulates market competition, the principle of good faith and integrity is, to a larger extent, reflected in the form of recognized business ethics. Business ethics should be judged in compliance with the ethical standards of market transaction participants (that is, economic man) in specific business fields. It is different from personal morality, nor can it be equated with general social morality since what it embodies is a kind of business ethics. Regarding the characteristics of human beings, economists have summarized two points—rationality and selfinterest. Rationality means that people can think and are able to think. Self-interest does not mean selfishness, but refers to do what is beneficial to oneself. Interests include material and spiritual interests, and may also include the interests of others.8 Professor Xiong provides a vivid example that rationality can be divided into high and low types—the thinking of competing with competitors in business is no doubt different from rivalry with friends at the wine table.9 Although this example is not particularly appropriate here, it also roughly demonstrates the difference between morality and business ethics in daily civil life. Free competition is the basic value orientation of the Anti-Unfair Competition Law as well as the foundation of market efficiency and fair competition. The Anti-Unfair Competition Law is enacted to properly restrict free competition, which is a direct restriction on freedom of competition. However, its restrictions on free competition are still limited. The benchmark for limiting unfair competition is none other than freedom of competition. That is, it is not allowed to incorporate too many competition acts into unfair competition in the name of fairness, taking into consideration the need to maintain free competition to the greatest extent. Suppose the acts of Mdcare Technology Co., Ltd. did not constitute trade secrets, former employees are prohibited from competing with another market player simply because the original employer has had multiple transactions or maintains stable business ties with the latter. It is essentially the same as restricting the market player’s opportunity to choose other transaction players. This practice not only prohibits the transaction activities of both parties and restricts market competition, but also runs counter to

7

See No. 1065 [2009] Appeal, Civ. Division, the Supreme People’s Court of the People’s Republic of China. 8 参见熊秉元:《法的经济解释》 , 东方出版社 2017 年版, 第 5–6 页。 9 参见熊秉元:《法的经济解释》 , 东方出版社 2017 年版, 第 5–6 页。

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the fundamental essence of maintaining the order of free competition under the Anti-Unfair Competition Law. In addition to safeguarding the right of market players to free competition, the balance between the protection of rights and interests of employees and those of their employers is also a key factor considered by the court reopening the case. Employees have the freedom to choose their own employment, and any restrictions on the choice of employment without agreed or statutory restrictions are actually an infringement of the right to freedom of labor. In sum, having taken into account the above analysis and the fact that Sunshine New Technology Co., Ltd. had not entered into not-to-compete (non-compete) agreements with Wang X, Zhang X and Liu X, Md-care Technology Co., Ltd. is not to assume the relevant non-compete obligations. Therefore, the conduct by Md-care Technology Co., Ltd., Wang X et al. does not constitute infringement of trade secrets of Sunshine New Technology Co., Ltd. since Wang X, Zhang X and Liu X do not have non-compete obligations; the relevant client list does not constitute trade secrets; and relevant contact persons and contact numbers are largely different. In the case that non-compete obligations should not be undertaken and trade secrets of Sunshine New Technology Co., Ltd. are not infringed upon, Wang X, Zhang X and Liu X, using their knowledge, experience and skills learned in the workplace, are allowed to develop the market and compete with other market players in the same industry, including the original employer, whether they acquire the relevant market information from market channels or know or judge the demand of some market players for relevant products and services on the basis of their working experience. Although it does not necessarily conform to high standards of personal integrity to compete with the original employer, it is not prohibited by law for one to engage in business in the same industry as a participant in the market transaction, provided that he or she does not violate legal prohibitions and has no contractual obligations. Based on a lot of sorting and comparison of evidence involved, the judgment of this case focuses on the basic value orientation of trade secret protection, and at the same time takes full account of the protection of employees’ basic rights and interests. In the trial of trade secret cases, the Supreme People’s Court clearly points out that the people’s court should not only focus on the protection of a certain market entity, but also consider the balance between the interests of its counterparty and those of employees. As well, the court must strengthen the trade secret protection and effectively stop the infringement of trade secrets in accordance with the law, so as to create a safe and reliable legal environment for the innovation and investment of enterprises. What’s more, the people’s court should properly handle the relationship between trade secret protection and the rights of freedom of job choice, competition restrictions and reasonable flow of talents, safeguard the legitimate rights and interests of employees’ rightful employment and entrepreneurship, and promote the reasonable flow of labor and self-directed career choices according to law. Only on this basis can the judgment be consistent with the legislative intent of the AntiUnfair Competition Law to safeguard the healthy development of the socialist market economy, to encourage and protect fair competition, to stop unfair competition, and to protect the legitimate rights and interests of businesses and consumers.

Ningbo Beworth Textile Machinery Co., Ltd. v. Ningbo Cixing Co., Ltd. (Dispute Over Licensing Contract for Trade Secrets: Handling of Interlocking Criminal and Civil Cases Involving Trade Secrets) Zhuo Deng

1 Rule Pursuant to Rules of the Supreme People’s Court on Several Issues Concerning Suspected Economic Crimes in the Trial of Economic Dispute Cases, dispute over licensing contract for trade secrets in breach of confidentiality obligations and the related criminal cases are not based on the legal relationship generated by the facts containing the same legal elements, so the people’s court may continue to hear the dispute over licensing contract for trade secrets while transferring the clues of the suspected crimes for further investigation.

2 Case Information 1. Parties Appellant (Defendant in the First Instance): Ningbo Beworth Textile Machinery Co., Ltd. (hereinafter referred to as Beworth Textile Machinery Company) Appellee (Plaintiff in the First Instance): Ningbo Cixing Co., Ltd. (hereinafter referred to as Cixing Company) Collegial Bench for the Second Instance: Xiaojun Liu, Zhuo Deng and Xue Gao Edited by Wenyan Ding; Translated by Daxuan Zheng, Yao Xu and Yi Zheng Z. Deng (B) Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_27

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2. Procedural History First Instance: No. 2329 [2018] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province (Zhejiang 02) (dated Jun. 6 of 2019) Second Instance: No. 333 [2019] Final, IP Division, the Supreme People’s Court (dated Nov. 4 of 2019) 3. Cause of Action Dispute over licensing contract for trade secrets

3 Essential Facts Cixing Company claimed that in March 2016, Cixing Company and Beworth Textile Machinery Company entered into a purchase agreement and a confidentiality agreement, stating that Beworth Textile Machinery Company can only produce and process flat knitting machine parts for Cixing Company based on the technical drawings provided by Cixing Company, and the drawings provided by Cixing Company to Beworth Textile Machinery Company could not be used by Beworth Textile Machinery Company for other purposes without prior written consent of Cixing Company. In 2017, Cixing Company discovered that the flat knitting machine equipment and parts produced and sold by Beworth Textile Machinery Company were identical in appearance and technical specifications to the flat knitting machine equipment parts independently developed and produced by Cixing Company, which were the flat knitting machine parts in the purchase agreement previously signed between Cixing Company and Beworth Textile Machinery Company. Therefore, Cixing Company believed that Beworth Textile Machinery Company has made use of Cixing Company’s technical drawings to produce its own flat knitting machine parts without Cixing Company’s permission, which was a violation of the terms of the confidentiality agreement that Beworth Textile Machinery Company shall not use Cixing Company’s trade secrets. The use by Beworth Textile Machinery Company of the technical drawings that Cixing requested to keep confidential to produce illegally the flat knitting machines has incurred significant losses to Cixing Company, so Cixing Company initiated the present legal action, requesting: (1) Beworth Textile Machinery Company continue to perform its obligations arising out of omission under the purchase agreement, and immediately cease any violation of the purchase agreement and its attached confidentiality agreement, immediately stop the production of and the offer for sale of the machine parts described in the technical drawings and the machines equipped with the said machine parts; (2) Beworth Textile Machinery Company shall pay a default fee of CNY 1,000,000 (one million) for its breach of contract; (3) Beworth Textile Machinery Company shall return illegally obtained proceeds and gains to Cixing Company, and proceeds and gains shall be calculated at CNY 50 million on a temporary basis; and (4) Beworth Textile

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Machinery Company shall bear the lawyer’s fees of CNY 300,000 incurred by Cixing Company because of the lawsuit. Beworth Textile Machinery Company argued that the cause of action in this case is a dispute over licensing contract for trade secrets, involving whether Beworth Textile Machinery breached the confidentiality obligation and used the “licensed trade secrets” in addition to the items agreed in the contract during the performance of the commissioned processing contract, and therefore needs to bear the corresponding liability for breach of contract. The legal relationship between Beworth Textile Machinery Company and Cixing Company should be confined to contract legal relationship rather than a legal relationship resulting from an infringement of trade secrets investigated and conducted by Ningbo Public Security Bureau. It is ascertained by the court of first instance that, the dispute in the present case arose between Beworth Textile Machinery Company and Cixing Company due to the performance of the purchase agreement and its annexed confidentiality agreement; and Cixing Company filed this lawsuit on the ground that Beworth Textile Machinery Company has violated its confidentiality obligation by using the “licensed trade secrets” for matters other than those agreed upon in the contract. In the meantime, Beworth Textile Machinery Company and other outsiders were suspected of infringing the trade secrets of Cixing Company (including the technical secrets in the contract), which was investigated by the Ningbo Public Security Bureau of Zhejiang Province. Ningbo Public Security Bureau believes that Beworth Textile Machinery Company was suspected of infringing trade secrets, thus, on May 13, 2019, the Public Security Bureau filed a case for investigation, and notified the trial court (the Intermediate People’s Court of Ningbo City, Zhejiang Province) of the reasons for filing the case together with an official letter. The trial court received an official letter numbered No. 31 [2019] Official Letter and Attachments from Ningbo Public Security Bureau to place on file for investigation “the Case Concerning Infringement of Trade Secrets of Ningbo Cixing Company” in May 30, 2019. On June 6, 2019, the court of first instance rendered a ruling [No. 2329 Ruling [2018] Trial, Civ. Division, the Intermediate People’s Court of Ningbo City, Zhejiang Province (Zhejiang 02)], in which, (1) the plaintiff Cixing Company’s claims were dismissed, and (2) the case is to be transferred to the Public Security Bureau for further investigation. Upon receiving the court’s pronouncement of the judgment, Beworth Textile Machinery Company appealed to the Supreme People’s Court.

4 Issue Principles for handling the interlocking criminal and civil cases involving trade secrets.

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5 Holding On November 4, 2019, the Supreme People’s Court rendered a civil ruling (No. 333 Ruling [2019] Final, IP Division, the Supreme People’s Court), stating, “(1) No. 2329 [2018] Trial, Civ. Division) made by the Intermediate People’s Court of Ningbo City of Zhejiang Province shall be revoked; and (2) this case shall continue to be heard by the Intermediate People’s Court of Ningbo City, Zhejiang Province. The Supreme People’s Court holds that, pursuant to Articles 10 of Rules of the Supreme People’s Court on Several Issues Concerning Suspected Economic Crimes in the Trial of Economic Dispute Cases, in the course of hearing the economic dispute cases, if the people’s courts finds out clues and materials suspected of economic crimes, which has certain relationship with the case at hand but not in the same legal relationship, the clues and materials suspected of economic crimes shall be transferred to the relevant public security administration or prosecution authorities for further investigation, but the hearing continues. In the case at hand, Beworth Textile Machinery Company believed that this said case is related to the legal relationship of a licensing contract for trade secrets, while the legal action for infringement of trade secrets investigated by the Ningbo Public Security Bureau is a different legal relationship, and the two cases do not fall into the same legal relationship. Pursuant to Article 10 of Rules of the Supreme People’s Court on Several Issues Concerning Suspected Economic Crimes in the Trial of Economic Dispute Cases, the present lawsuit over licensing contract for trade secrets shall continue to be heard. It follows that the crux of the dispute in the second instance is to judge whether the legal relationship in the case at hand and the suspected infringement of trade secrets by Beworth Textile Machinery Company are based on the same juristic facts. According to the facts ascertained by the people’s court in this case, the dispute arose between Beworth Textile Machinery Company and Cixing Company due to the performance of the purchase agreement and its annexed confidentiality agreement, and Cixing Company filed this lawsuit on the ground that Beworth Textile Machinery Company had breached its confidentiality obligations by using its “licensed technical secrets” for matters other than those agreed upon in the contract. Meanwhile, Beworth Textile Machinery Company, together with outsiders of the present case, was placed on file for investigation and prosecution by Ningbo Public Security Bureau for suspected infringement of trade secrets (including technical secrets in the contract) of Cixing Company. The legal relationships are different and are not based on the same juristic facts, involving economic disputes and suspected infringement of trade secrets respectively, but the facts of the cases overlap. The case at hand is a dispute over licensing contract for trade secrets and falls into the type of economic dispute case. Although there are overlaps between the facts of this case and trade secrets infringement investigated by Ningbo Public Security Bureau of Zhejiang province, the civil legal relationship between Beworth Textile Machinery Company and Cixing Company will not be affected.

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The court of first instance (the Intermediate People’s Court of Ningbo City, Zhejiang Province) shall transfer the clues and materials relating to the suspected infringement that are implicated in this case but not in the same legal relationship to Ningbo Public Security Bureau of Zhejiang province and shall continue to hear the case concerning dispute over licensing contract for trade secrets. Therefore, the court of first instance rendered the wrong ruling in dismissing Cixing Company’s lawsuit and transferring this case to the public security administration on the ground that “Beworth Textile Machinery Company commits a suspected crime of infringing trade secrets and shall be transferred to the public security administration”, which is to be rectified by the Supreme People’s Court. However, the ground for appeal submitted by Beworth Textile Machinery Company that procedural violation constitutes as the court of first instance transferred this case to the public security administration without clarifying the trade secrets in the pleading proceedings, and the ground that the case at hand is an economic dispute caused by family conflict which is unsuitable to be transferred to the public security administration, cannot stand and is legally unjustified, and there is no prerequisite for the case to be transferred to the public security administration. Therefore, the Supreme People’s Court holds these reasons or grounds inadmissible.

6 Comment on Rule This case clarified the principles for handling interlocking criminal and civil cases concerning trade secrets. The handling of interlocking criminal and civil cases in practice is always a hot and difficult issue which contains many challenges and disputed problems. But in sum, two fundamental questions can be concluded: one is how to handle the sequence of criminal and civil procedures and whether they can go hand in hand; the other one is about the res judicata after criminal judgment or civil judgment is made, that is, the effects of the criminal or civil judgment made in advance on the civil part or the criminal part. The case at hand concerns the first fundamental question. The question of which comes first in the interlocking criminal or civil cases is not only a simple procedural sequential issue, but also involves an in-depth consideration of judicial philosophy. At present, in order to thoroughly implement the central government policy on the protection of property rights and the rights and interests of entrepreneurs, the build-up of a good business environment for the rule of law, a further clarification of the rules of adjudication for the interlocking criminal and civil cases, can not only ensure the fair and timely handling of civil cases, but can also prevent some civil litigants from maliciously making use of criminal litigation to interfere with the normal conduct of civil proceedings; it can not only avert intervening in economic disputes on the grounds of suspected crime, but also refrain from failing to file a criminal case on the grounds of economic disputes.

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1. Handling of civil cases under the “criminal first, civil second” mechanism The judicial practice of “criminal first, civil second” has been in existence long time ago and has become a routine for handling the interlocking criminal and civil cases since the early 1980s. For example, the practice of “criminal first, civil second” has found its expression in such documents as Notice of the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security on the Timely Investigation and Handling of Economic Crimes Found in Cases of Economic Disputes Cases1 (announced in 1985) and Notice of the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security on the Prompt Referral of Economic Crimes Found in the Trial of Economic Dispute Cases2 (announced in 1987). In subsequent judicial documents, except for a few documents that “except for a few circumstances where civil and criminal procedures go hand in hand in light of the actual needs”, a vast majority has emphasized the practice of “criminal first, civil second”. It is to be noted that reasoning in related judicial documents is not consistent regarding the handling of civil cases under the “criminal first, civil second” mechanism. The solution offered in Rules on Several Issues Concerning the Suspected Economic Crimes in the Trial of Economic Dispute Cases (1998), Opinions on Several Issues of Applicable Law in Handling Criminal Cases of Illegal Fund Raising (2014), and Judicial Interpretation of Private Lending (2015) is “dismissal of legal action or keeping off the docket”. However, “Rules Concerning the Trial of Deposit Receipts Disputes” (1997) provides “the trial should be suspended”. The following different methods can be summarized in the present judicial practice: (1) civil procedure shall be ended before criminal procedure, which means civil case will be dismissed or rejected, and the relevant materials or documents will be transferred to the public security authorities for investigation or to the prosecutorial authorities for prosecution; (2) civil procedure and criminal procedure shall be performed simultaneously, which means civil cases continue to be heard, and the suspected criminal clues and materials, though related to the civil cases, but arising not out of the same legal relationship with the civil cases, will be transferred to the public security authorities for investigation or to the prosecutorial authorities for prosecution; and (3) “criminal first, civil second”, which means that civil cases shall be suspended and the suspected criminal clues and materials or documents that are implicated in civil cases shall be transferred to the public security authorities for investigation or to the prosecutorial authorities for prosecution. 2. Judgment standard for the interlocking criminal and civil cases As mentioned earlier, the root cause why there are different solutions to the interlocking criminal and civil cases lies in the differences in the judgment standard. The standard based on “the identical juristic fact” and “the same legal relationship” was 1 2

This Notice is no longer applicable as of January 18, 2013. This Notice is no longer applicable as of January 18, 2013.

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recognized in Rules on Several Issues Concerning the Suspected Economic Crimes in the Trial of Economic Dispute Cases. The standard based on “the same fact” was provided in Opinions on Several Issues of Applicable Law in Handling Criminal Cases of Illegal Fund Raising (2014), and Judicial Interpretation of Private Lending (2015). In addition to the above-mentioned seemingly identical standards based upon “the identical juristic fact”, “the same legal relationship” and “the same fact”, another standard of “whether civil cases shall be premised on the trial of criminal cases” was put forward in “Rules Concerning the Trial of Deposit Receipts Disputes” (1997) to handle the interlocking criminal and civil cases. However, in the current judicial practice, the popularly accepted view is to adopt the standard of “the same fact”, that is, so long as “the same fact” is involved in the criminal and civil cases, that might be called interlocking criminal and civil cases, which, in principle, should be handled altogether through the criminal proceedings. Regarding how to make a judgment of “the same fact”, the mainstream judicial practices hold that the so-called “the same fact” refers to a situation where the parties or persons involved in an act, the addressee or the object of the said act, and manifestations of the said act are the same; if one of them changes, “different fact” might result and shall be separately handled as a criminal case or a civil case. Specifically, from the perspective of the parties or person(s) involved in an act, “the same fact” refers to the act conducted by the same parties or person(s), act conducted by different partis or person(s) does not fall into the category of “same fact”; from the perspective of legal relationship, if the victim in a criminal case is also the counterparty of the civil legal relationship, then it can be recognized as the “the same fact”; from the point of view of essential facts, only if the facts in dispute in a civil case are also the essential facts of a criminal offence, they are the “same facts”. The above judgment criteria are relatively clear and easy for handling the cases. But in the meanwhile, we should also see in the actual situation(s), the occurrence of “overlapping facts” between criminal cases and civil cases may not be the only one situation. When the facts partly overlap, or any affiliation, subordination is also observed in the criminal and civil legal relationships, it becomes imperative to take into account the need for coordinated advancement of criminal and civil proceedings as a whole. Strictly speaking, in handling the interlocking criminal and civil cases, the essence is to be placed on how to accurately differentiate the boundaries of economic crime, the focus is on the practical implementation of the principle of prudence advocated in criminal law, on careful discernment of the elements implicating in the economic crime and standards of culpability, as well as on the rigorous handling of the corresponding rules of evidence. Only in this way can the criminal and civil procedures have their own priorities, their respective positions, and their respective responsibilities in tackling the interlocking criminal and civil cases. 3. New perspectives on handling the interlocking criminal and civil cases The adoption of “criminal first, civil second” approach in handling the interlocking criminal and civil cases possesses some advantages of simplicity and ease of operation in the judicial practices. The reason is that in the case of criminal priority, the

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powerful fact-finding ability of the state public authorities can be utilized to make up for some deficiencies in burden of proof by the parties’ private prosecution so as to better investigate the facts of the case and promote the objective and fair treatment of the case. However, we should also recognize that the “criminal first, civil second” approach is only a principled rule, which cannot be understood mechanically and absolutely, otherwise problems will certainly arise. As a matter of fact, the procedural convenience of the “criminal first, civil second” approach is not absolute, in some cases, “criminal first, civil second” approach may also generate certain procedural inconvenience and injustice. The principle of “criminal first, civil second” approach may even be maliciously resorted to turn into a pretext or a “shield” for interfering in civil cases or seeking illegal personal interests. For example, the adoption of “criminal first, civil second” approach to suspend the ongoing civil or economic cases, or to dismiss the legal action or refuse to initiate the legal action has become a tool for some civil litigants to maliciously use criminal litigation to interfere with the process of civil proceedings, and even become an excuse for the local protectionists to intervene in economic disputes. Even under “the same fact” category, it is inappropriate to adopt a one-sizefits-all approach to deal with interlocking criminal and civil cases. In dealing with interlocking criminal and civil cases, we must clarify a basic position, that is, we must choose ideas and mechanisms that are more conducive to protecting the legal rights of the parties and solving the problems more justly and effectively. The people’s court should be better to protect the interests of the parties and handle interlocking criminal and civil cases in accordance with the principle of seeking truth from facts than being entangled in the judgment of “the same fact” or being hesitant to decide whether to apply the mechanism of “criminal first, civil second”. Specifically, in interlocking criminal and civil cases, the acceptance to be filed in the court and hearing to be handled with either criminal procedures or civil procedures are to be observed in accordance with provisions of Article 150(1)(5) of the Civil Procedure Law of the People’s Republic of China (Rev. 2017) on time sequence and interdependency relations between the criminal litigation and civil litigation: (1) when no conflict or contradiction is produced by either civil procedure or criminal procedure in handling the interlocking criminal and civil cases, and no interdependence relations arise between two proceedings, the civil proceedings and criminal proceedings can go hand in hand, each can be tried separately or jointed; (2) when conflicts arises, and civil proceedings shall be premised upon the result of the criminal litigation, the approach of “criminal first, civil second” shall be adopted; and (3) when the criminal procedure triggered by the interlocking criminal and civil cases needs to be premised on the result of the civil litigation, the approach of “civil first, criminal second” shall be adopted. 4. Deliberations on trade secrets cases Specifically in handling the case at hand, no definite settled conclusions can be made as to whether all the interlocking criminal and civil cases involving trade secrets should be transferred to the public security authority for investigation or whether

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they should be treated differently in accordance with the aforementioned provisions, to wit, which method is more appropriate cannot be settled. By handling this case, we are to observe that custom of “criminal first, civil second” approach was turning loose, more importance is attached to the procedural significance of the “civil and criminal cases going hand in hand”. In dealing with interlocking criminal and civil cases involving trade secrets, judgment standard shall be directed toward whether civil cases and criminal cases involving trade secrets are based on the same juristic facts and at protecting the interests of the parties, and at proceeding in accordance with the principle of seeking truth from facts, so as not to turn the simple civil disputes into criminal cases. This case is a contract dispute filed by Cixing Company on the ground that Beworth Textile Machinery had breached the contract, and it is the legal relationship of the technical secret license contract. Beworth Textile Machinery was investigated by Ningbo Public Security Bureau of Zhejiang Province for suspected infringement on trade secrets, and it is the infringement to the legal relationship. It can be seen that Beworth Textile Machinery and Cixing Company are involved in different legal relationships, and the two different legal relationships are not based on the same juristic fact, which involves respective economic disputes and suspected economic crimes. Although there are overlaps between the facts of this case and trade secrets infringements investigated by Ningbo Public Security Bureau of Zhejiang province, the civil legal relationship between Beworth Textile Machinery and Cixing Company will not be affected. The fact-finding of the essential facts in this case is not based on the result of the criminal litigation. Therefore, the court of first instance (the Intermediate People’s Court of Ningbo City, Zhejiang Province) shall transfer the suspected crime clues and materials or documents that are related in the case but not in the same legal relationship to Ningbo Public Security Bureau of Zhejiang Province and shall continue to hear the dispute over licensing contract for trade secrets.

VMI Holland B.V. and Cooper (Kunshan) Tire Co., Ltd. v. Safe-Run Huachen Machinery (Suzhou) Co., Ltd. (Dispute Over Declaration of Non-infringement of Patent Rights: Prerequisites for Declaring Patent Non-infringement Suit) Zhuobin Xu

1 Rule When a patentee only files a request to the patent administrative agency to handle a patent infringement dispute against users of the alleged infringing products, which may make uncertain the businesses of the producers or the sellers of these products and disable the producers or the sellers to participate in administrative proceedings to safeguard their rights and interests, it is in the interests of all the parties and is also conducive to saving administrative and judicial resources to make a determination as soon as possible of whether the alleged infringing products fall within the protection of the relevant patent rights. Such request to handle patent infringement disputes can be deemed warnings of patent infringement issued by the patentee(s), and the party failing to participate in the administrative proceedings shall have the right to file a lawsuit for declaration of non-infringement of patent rights.

Collegial Bench for the Second Instance: Zhuobin Xu, Xue Gao and Zhuo Deng Edited by Wenyan Ding; Translated by Daxuan Zheng, Xueru Li and Yi Zheng Z. Xu (B) Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China , Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_28

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2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): VMI Holland B.V. (hereinafter referred to as VMI) Appellant (Plaintiff in the First Instance): Cooper (Kunshan) Tire Co., Ltd. (hereinafter referred to as Cooper Tire Company) Appellee (Defendant in the First Instance): Safe-run Huachen Machinery (Suzhou) Co., Ltd. (hereinafter referred to as Safe-run Huachen Machinery) 2. Procedural History First Instance: No. 1453 [2018] Trial, Civ. Division, the Intermediate People’s Court of Suzhou City, Jiangsu Province (Jiangsu 05) (dated Feb. 11 of 2009) Second Instance: No. 5 [2019] Final, Civ. Division, the Supreme People’s Court (dated Jun. 12 of 2019) 3. Cause of Action Dispute over declaration of non-infringement of patent rights

3 Essential Facts On May 24, 2018, Suzhou Intellectual Property Office accepted the request from Safe-run Huachen Machinery to handle the dispute of patent infringement committed by Cooper Tire Company. On June 12 of the same year, Suzhou Intellectual Property Office transferred the administrative complaint to the Jiangsu Provincial Intellectual Property Bureau on the basis of jurisdiction. On July 5, 2018, the Jiangsu Provincial Intellectual Property Bureau accepted the request of Safe-run Huachen Machinery to handle the dispute of patent infringement by Cooper Tire Company. On August 15 the same year, the Jiangsu Provincial Intellectual Property Bureau issued a notice of suspension, stating that because the request for invalidation of the patent right proposed by Cooper Tire Company was accepted by the Patent Re-examination Board of the State Intellectual Property Office (hereinafter referred to as the Patent Re-examination Board), which requested the Jiangsu Provincial Intellectual Property Bureau to suspend the case. Therefore, the Jiangsu Provincial Intellectual Property Bureau decided to suspend the case. On September 24, VMI mailed a reminder letter to Safe-run Huachen Machinery, which stated that Safe-run Huachen Machinery had filed an administrative complaint of patent infringement with the Suzhou Intellectual Property Office, claiming that VMI’s MAXX model tire—secondary molding machine used by Cooper Tire Company—had allegedly infringed a total of six patent rights of Safe-run Huachen Machinery, including the patent in question, and the administrative complaint initiated by Safe-run Huachen

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Machinery had put the production and operation of VMI and its Chinese customers in an extremely uncertain state, and therefore requested Safe-run Huachen Machinery to withdraw its administrative complaint or file an infringement lawsuit in accordance with the law. On September 26, Safe-run Huachen Machinery accepted the letter. On September 30, Safe-run Huachen Machinery replied to VMI. In the reply, Safe-run Huachen Machinery stated that it would not hesitate to file a lawsuit or bring an administrative complaint against any infringers, including Cooper Tire Company and VMI, and that Safe-run Huachen Machinery had already done so. On October 19 of the same year, the court of first instance received the patent infringement lawsuit documents from Safe-run Huachen Machinery against VMI and Cooper Tire Company for infringement of its patent rights in the case. Safe-run Huachen Machinery requested that VMI and Cooper Tire Company be ordered to immediately stop the infringement, and jointly and severally compensate Safe-run Huachen Machinery for economic losses at CNY 1,000,000 and bear the litigation costs. On October 26, 2018, Saferun Huachen Machinery remitted the litigation cost to the bank account of the first instance court. On November 7, 2018, the court of first instance began to hear the patent infringement lawsuit with a docket number No. 1459 [2018] Trial, Civ. Division, the Intermediate People’s Court of Suzhou City, Jiangsu Province (dated Feb. 11 of 2009). On October 29 of the same year, VMI and Cooper Tire Company submitted the litigation documents to the trial court to make a declaration of patent non-infringement, which was filed on November 7, 2018, with the case number No. 1453 [2018] Trial, Civ. Division. VMI and Cooper Tire Company requested the court of first instance to hold: (1) that the manufacture, promise to sell, sale, import of MAXX model of the single stage semi-steel radial tire building machines by VMI and the use of the single stage semisteel radial tire building machines and related products by Cooper Tire Company have not infringed on the patent right of utility model products stated in Safe-run Huachen Machinery’s patent numbered No. ZL201420660550.1, and (2) litigation costs are borne by Safe-run Huachen Machinery. On February 11, 2019, the court of first instance issued a ruling numbered No. 1453 Ruling [2018] Trial, Civ. Division, the Intermediate People’s Court of Suzhou City, Jiangsu Province (Jinagsu 05), dismissing the lawsuit filed by VMI and Cooper Tire Company. Unsatisfied with the first instance ruling by the people’s court, VMI appealed to the Supreme People’s Court.

4 Issues 1. Whether the request to handle the patent infringement dispute filed by Saferun Huachen Machinery constitutes an infringement warning in the sense of the Patent Law; 2. How to determine the time that Safe-run Huachen Machinery can initiate the infringement lawsuit;

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3. Whether the request for making a declaration of patent non-infringement filed by Cooper Tire Company exceeds the scope of the request for handling the patent infringement dispute.

5 Holding After hearing, the Supreme People’s Court held that, first of all, in the case at hand, for VMI, the request to handle the patent infringement dispute filed by Safe-run Huachen Machinery shall be considered as infringement warning provided for in Article 18 of the Judicial Interpretation on Several Issues Concerning the Trial of Patent Infringement Cases. The reason appealed on behalf of VMI that the request to handle the patent infringement dispute filed by Safe-run Huachen Machinery shall be considered as infringement warning is justified. As the court of first instance inappropriately applied the law, the Supreme People’s Court is to make corrections. Furthermore, whether the patentee has abused its rights is not a prerequisite for determining whether its conduct constitutes a warning of infringement, and a declaration of non-infringement litigation does not in itself address the question of whether the patentee has abused its rights. As the court of first instance has not made a separate decision on whether Safe-run Huachen Machinery has abused its intellectual property rights, the reasons for appeal raised by VMI and Cooper Tire Company that the court of first instance has erred in having not made a determination that Safe-run Huachen Machinery has abused its intellectual property rights cannot stand. Secondly, the court of first instance received the litigation materials submitted by Safe-run Huachen Machinery on October 19, 2018, and Safe-run Huachen Machinery Company also prepaid the fee to handle the case on the 26th of the same month, so the time when Safe-run Huachen Machinery instituted the infringement lawsuit could be determined as of October 19, 2018, which was still within two months after VMI sent out the reminder letter and within one month after Safe-run Huachen Machinery received the reminder letter. Therefore, in the case at hand, although the request from Safe-run Huachen Machinery for the patent administration agency to deal with the infringement dispute belongs to the infringement warning, and as patentee, has initiated the patent infringement lawsuit within a reasonable period of time, the declaration of non-infringement suit launched by VMI and Cooper Tire Company does not meet the corresponding requirements for the people’s court to take and handle case as provided for in the Judicial Interpretation on Several Issues Concerning the Trial of Patent Infringement Cases. Finally, the parties could not launch an action for declaring patent noninfringement beyond the scope of the infringement warning, so the additional request of VMI should not be handled in the case at hand. If VMI believes that it has received other infringement warnings because of its VMI 245 automatic unistage (full stage) tire building machine, it may seek separate relief.

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To sum up, the ruling awarded by the court of first instance has clearly discerned the facts, and the Supreme People’s Court has rectified the improper application of the law by the court of first instance, the outcome of the original ruling has not been affected. Therefore, the court of second instance is not to sustain the requests of VMI and Cooper Tire Company in the appellate process.

6 Comment on Rule Declaration of non-infringement suit is a type of legal action expressly recognized in the Rules on Cause of Action for Civil Cases by the Supreme People’s Court, which in theory, may cover all debt disputes, but in judicial practice, it is limited to the field of intellectual property rights law. No other types of infringement cases may be initiated by way of declaration of non-infringement suit.1 Since the beginning of the 21st century witnesses the Supreme People’s Court’s reply to hear the cases involving declaration of non-infringement suit in Suzhou Longbao Bioengineering Industrial Co. Ltd. v. Suzhou Langlifu Health Products Co., Ltd., and a period of judicial practice in various fields of intellectual property rights, declaration of noninfringement suit has become a common occurrence at present. Although limited in numbers, declaration of non-infringement suit has become one of the solutions for the management of intellectual property alienation.2 The legal community is no stranger to such cases, but opinions vary on the nature, the jurisdiction, any counterclaims or conditions for admissibility and other problems plaguing the trial practice. 1. Declaration of non-infringement suit or infringement lawsuit The Notice of Designated Jurisdiction in Patent Dispute Cases has been clearly confirmed that the declaration of non-infringement lawsuit falls into the legal disputes involving infringement to be resolved through territorial jurisdiction, but does not deny the nature of declaration of non-infringement lawsuit. The discernment of whether declaration of non-infringement suit falls within action for performance or action for conformation is still pending, however, because of the practical value, there is still a need to explore further. Theoretically, civil legal actions in China are classified into action for confirmation, action for performance (or for payment) and action of formation. Action for confirmation or declaratory action is a legal action in which the plaintiff requests the court to confirm the existence of the legal relationship or of the underlying legal facts; action for performance is a legal action in which the plaintiff requests the court to order the other party to perform certain obligations, or make certain payment; tort action is generally typical of action for performance. However, in launching an action for performance (or for payment), only when the existence of a certain legal relationship between the parties or the existence of specific 1 2

参见刘哲玮:《确认之诉的限缩及其路径》 ,载 《法学研究》2018 年第 1 期。 参见林琳:《透视专利权不侵权确认之诉》 ,载 《电子知识产权》2009 年第 6 期。

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legal facts has been determined can a court make a judgment of whether the defendant should be ordered to perform certain act, therefore, action for performance in general contains the confirmation of the existence of legal relationship or of specific legal facts between the parties, which forms a link between action for confirmation and action for performance (or for payment). In fact, action for confirmation (declaratory action) is generally the basic form of civil litigation. Action for performance (or for payment) and action of formation are special forms of action for confirmation (declaratory action), thus, action for confirmation (declaratory action) forms the basis of any other kinds of civil litigation.3 The key to a patent infringement lawsuit is to determine whether the alleged product or method falls within the scope of protection of the plaintiff’s patent rights, which is same objective as that pursued through action for confirmation/declaration of non-infringement of patent rights. Therefore, action for confirmation/declaration of non-infringement of patent rights converged in this point with tort action as both actions are directed at solving the same problems, thus, ideas for making a judgment and comparison method are basically the same.4 In the field of patent rights, the key issue of tort action and action for confirmation/declaration of non-infringement of patent rights is to determine whether the alleged product or method falls within the scope of protection of the plaintiff’s patent rights. Tort action essentially contains the action for confirmation/declaration of non-infringement of patent rights. Action for confirmation/declaration of noninfringement of patent rights can be considered essentially part of tort action, thus possessing the feature of a tort action, only differing in the reversed position of the plaintiff and the defendant in the legal action. If the confirmation of non-infringement of patent rights is merely considered as a declaratory action, the same issue in the legal action may be tried by different courts, generating conflicting results, which is inconsistent with the principle of economy if viewed from litigation cost. Therefore, it is appropriate for people’s courts to break through the narrow theoretical perspective. In summary, action for confirmation/declaration of non-infringement of patent rights is a declaratory action, and can also be considered as a form of tort action or a specific tort action. The determination of the nature of the confirmation/declaration of non-infringement litigation is directly related to the jurisdictional issues, which is the significance of discussing the nature of the said legal action, harboring an important practical value or significance. 2. What is the infringement warning Article 18 of the Judicial Interpretation on Several Issues Concerning the Trial of Patent Infringement Cases provides that if a right holder issues a warning to others about infringement of patent rights, and the person or the interested party warned is 参见夏璇:《消极确认诉讼之反诉研究——从司法解释与相关判例视野的再审视》 ,载 《学术 界》2016 年第 3 期。 4 参见欧宏伟:《 “知识产权确认不侵权纠纷”若干问题研究》 ,载 《科技与法律》2008 年第 4 期 。 3

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reminded in writing that the right holder shall exercise the right of action, the said right holder will not withdraw the warning or file a lawsuit within one (1) month from the date of receipt of the written reminder or within two (2) months from the date of sending out the written reminder, and if the person or the interested party files a lawsuit with the people’s court to confirm that his or her act does not infringe the patent rights, the people’s court shall accept and handle the lawsuit. This is at present a fuller version of legally viable and functioning provisions on action for confirmation/declaration of non-infringement lawsuit, though many issues need to be explored in the trial practice. For example, what is an infringement warning? Is there any limitation on the party or parties to issue and receive the infringement warnings? What kind of warnings constitute legally appropriate infringement warnings? Warnings shall not be limited to written warning letters. Infringement warnings shall be understood in a broad sense, including not only warning letters, infringement statements and other forms, but also the measures that the right holder has applied for the administrative enforcement of intellectual property rights, and the measures taken by the administrative departments to seize the allegedly infringing products, and relevant pre-litigation interim measures the court has taken, and any other forms, for example, within fifteen (15) days pre-litigation interim measures have been taken, the right holder has not filed a lawsuit of infringement, released advertisement suspected of infringement or advertisement containing the insinuation of the word.5 Another example is that the patent owner sued the defendant for infringement and then withdrew the lawsuit before judgment is made, because the defendant submitted a strong rebuttal evidence, or filed a request for invalidation and provided more sufficient evidence. In order to avoid being sued again, the defendant shall be able to initiate an action for confirmation/declaration of non-infringement of patent rights.6 It becomes very complicated when deciding whether the actual conduct of the right holder constitutes a proper infringement warning. Take the case at hand for example. The court of first instance and the court of second instance have reached basically the same understanding of the purpose achieved by action for confirmation/declaration of non-infringement of patent rights, to wit, to enable the alleged tortfeasor access to judicial remedies in potential patent infringement disputes to eliminate the uncertainties. Such litigation is made to avoid the mere verbal disputes between parties, placing the quibbling and disputes between the parties under the state’s judicial power so as to achieve the effect of settling disputes through adjudication. As no express legal provisions are enacted about action for confirmation/ declaration of non-infringement suit, judicial practices have demonstrated that

参见汤茂仁、管祖彦: 《确认不侵权案的受理条件及相关法律问题研究》 , 载 《苏州大学学 报(哲学社会科学版)》2006 年第 4 期。 6 See Peter Menell et al., Patent Case Management Judicial Guide, third edition, Clause 8 Publishing, 2016, Sect. 2.2.1.2. 5

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contradiction and conflict between the parties and interested parties about the intellectual property rights have intensified.7 By hearing the cases involving action for confirmation/declaration of the non-infringement lawsuits, the judicial authorities can bring into full play the final arbiter effect, which helps to stabilize the legal order and is in conformity with the leading role of judicial protection of intellectual property rights, and is also in line with the international rules for handling patent infringement disputes through the judiciary. The key question in handling the patent infringement dispute is whether the possibility of seeking judicial remedies is necessarily excluded when the patent infringement dispute has entered into the administrative procedure. Different answers are given by the courts of first and second instance. The court of first instance held as the patent infringement dispute had already entered into the administrative procedure, it was unnecessary for the court to hear the case by initiating the action for confirming or declaring non-infringement of patent rights. The court of second instance, on the other hand, deemed that although the infringement dispute had entered into the administrative procedure, and the relevant administrative agency would issue the result of whether it constituted infringement of patent rights, other interested parties could be excluded from the administrative process so that their rights were actually difficult to be protected. Therefore, it is necessary for the court to handle the action for confirming/declaring non-infringement lawsuit filed by the interested parties. This problem is actually caused by the dual-track system of patent infringement disputes in China. In accordance with Article 60 of the Patent Law, in a patent infringement dispute, if a party is unwilling to negotiate or negotiation fails, the patentee or the interested party may file a lawsuit in the people’s court, or request the patent administration authorities to deal with the dispute. If left to patent administration authority to handle the dispute, if the infringement is found to be established, the tortfeasor can be ordered to immediately stop the infringement; If unsatisfied with the result, the party can file a lawsuit with the people’s court in accordance with the Administrative Procedure Law; if the tortfeasor has not filed a lawsuit or not ceased the infringement, the patent administration authorities can apply to the people’s court to enforce the law. The patent administration authorities shall, at the request of the party, mediate the amount of compensation for infringement of patent rights; if mediation fails, the party concerned may bring a lawsuit to the people’s court in accordance with the Civil Procedure Law. The said dual-track system, though characteristic of Chinese judicial practice, may bring about the following problems, to wit, in determining whether the allegedly infringing product or method falls into the scope of protection of the patent rights in question, the patentee may elect to request the administrative agency to handle the dispute or file a lawsuit, but the compensation for the infringement is still under the exclusive jurisdiction of the judiciary. The starting point of which is that it is difficult for the court to adjudge the technical facts (expertise), inviting the patent administrative agency to intervene can not only facilitate the discernment of the

7

参见陈钧:《对确认不侵权之诉有关问题的研究》 ,载 《中国发明与专利》2010 年第 4 期。

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technical facts, but also speed up the dispute resolution. But whether this advantage persists, it is another thing. First of all, with the progress of patent adjudication in the people’s courts, the above-mentioned reasons are actually difficult to be founded. At present, the mechanism of technical fact-finding has been improved, and the quality of judgeship has been significantly improved. Together with adoption of identification, expert personnel, expert consultation and other means of identification, the problem of technical fact-finding has been greatly alleviated. With the growth of judgeship, the time to handle the patent infringement disputes has been significantly reduced, and the efficiency of people’s courts has been among the top in the world. Secondly, even if the administrative decision has been made, if the parties are not satisfied with the decision, they can still file an administrative lawsuit. Therefore, the judgment of whether infringement occurs or not will eventually enter into judicial proceedings, and the problem solved with the administrative lawsuit and the civil lawsuit is exactly the same, to wit, to determine whether the allegedly infringing product or method falls into the scope of protection of the patent right in question. The action for confirmation/declaration of non-infringement of patent rights still centers upon the disputed infringement,8 which can be considered to possess the dual attributes of action for confirmation/declaration and tort action.9 Furthermore, the decision by the administrative agency is not final, which greatly reduce its efficiency in resolving the disputes, and coupled with the fact that administrative procedures cannot once and for all resolve the issue of compensation, the role of administrative handling system for patent infringement disputes is limited. In reality, the administrative handling processes for patent infringement disputes have been accepted in the legislation. Although some believe that administrative procedures and action for confirmation/declaration of non-infringement can be carried out concurrently10 (which are not unreasonable), but on the basis of dualtrack system recognized in the patent law, the advantages of low cost, rapid evidence collection and high efficiency by adopting the administrative handling procedures, despite the non-finality, the judiciary is to show due deference in practice and it is appropriate to divide the work with the administrative authorities. The situation in the case at hand is different, for VMI has not entered into the administrative handling process, and the court of first instance has not recognized that its rights could not be effectively guaranteed if it did not enter into the administrative process. For the interested parties who has not participated in the administrative proceedings, they have an obvious interest in the outcome of the administrative handling.11 Therefore, theinfringement warning shall be understood in a broad

参见何文哲、余晖:《对知识产权确认不侵权之诉的分析》 ,载 《人民司法》2006 年第1期。 参见曹伟:《知识产权确认不侵权诉讼的几个基本问题》 ,载 《知识产权》2014 年第 4 期。 10 参见谢绍静:《知识产权确认不侵权诉讼与行政处理及行政诉讼的关系之厘定》 , 载 《科技 管理研究》2013 年第 5 期。 11 参见高毅龙:《侵权警告的利害关系人提起确认不侵权之诉的条件》 , 载《人民司法》2009 年第 16 期。 8 9

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sense.12 If the parties are not given the right to file a lawsuit to launch a legal action for confirming or declaring the non-infringement of patent rights, it is difficult for them to have any voice in the administrative processes, and certainly no way to seek judicial remedy, which is obviously against the principle of substantive justice. The rules clarified by the court of second instance in this case have captured the essence of patent infringement disputes, which is conducive to the substantive resolution of disputes by channeling the resolution of disputes into the judiciary, and to the full protection of the substantive and procedural rights of all the parties. In essence, the key to so-called “patent infringement warning” is to make the potential defendant in the tort action to feel threatened and uncomfortable. No definite form of warnings can be made to delineate the boundaries of the rights in the technical solutions and to stabilize the expectations of the business activities. The parties warned and interested parties are justified in filing a lawsuit to confirm/declare the non-infringement of patent rights, and their recourse to the law definitely shows the willingness of the parties to solve any problem through proper legal means.

参见汤茂仁:《确认不侵权案的受理条件及相关法律问题研究》 ,载 《法律适用》2006 年第 6 期。

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Alfa Laval Corporate AB v. China National Intellectual Property Administration and SWEP International AB (Third Party in the Original Trial) (Administrative Disputes Over Invalidation of Invention Patent: Determination of Overbreadth of Patent Claims Amendments in an Invalidity Declaration Proceeding) Lei Fu

1 Rule In the invalidity declaration proceeding, the modification, as a means, should be aimed at achieving the legislative purpose of the two legal standards of not exceeding the scope of the original specification and claim, and not expanding the scope of protection of the original patent, while taking into account the efficiency of the administrative examination and the contribution of the fair protection of the patentee, rather than making too strict restrictions on the specific modification, otherwise this would make the restriction on modification a mere penalty for improper claim drafting by the patentee. When the claim is amended by adding all or part of the additional technical features of the dependent claim to the independent claim cited, the scope of protection of the independent claim of the original patent as the object of modification shall be the basis for determining whether the amended independent claim extends the scope of protection of the original patent.

Collegial Bench for the Second Instance: Li Zhu, Lei Fu and Xiaoyang Zhang Edited by Wenyan Ding; Translated by Daxuan Zheng, Ruofei Gao and Yi Zheng L. Fu (B) Intellectual Property Court of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_29

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2 Case Information 1. Parties Appellant (Plaintiff in the First Instance): Alfa Laval Corporate AB (hereinafter referred to as Alfa Laval Company) Appellee (Defendant in the First Instance): China National Intellectual Property Administration Third Party: SWEP International AB 2. Procedural History First Instance: No. 5802 [2016] Trial, Adm. Division, Beijing Intellectual Property Court (Beijing 73) (dated Feb. 25 of 2019) Second Instance: No. 19 [2019] Final, Adm. Division, the Supreme People’s Court (dated Dec. 15 of 2019) 3. Cause of Action Administrative disputes over invalidation of invention patent

3 Essential Facts The plaintiff, Alfa Laval Company, claims that: revoke the decision and order the China National Intellectual Property Administration to issue a new decision on the invalidation request. The main facts and reasons are: (1) The modification of claim 1 in the invalidity declaration proceeding belongs to the deletion of parallel technical solution, which should be accepted. When the authorized claim 20 contains P, Mn, C or Hf, their amounts are not limited to the amounts limited by claim 19 for these four elements. Therefore, the literally additional technical features of claims 18 and 19 may be omitted when the technical solution of the authorized claim 20 is written as an independent claim. (2) The amended claim 1 does not exceed the scope of the original application, nor does it expand the scope of protection of the patent right, and shall be accepted. China National Intellectual Property Administration claims that, claim 1 as amended by Alfa Laval Company in the invalidity declaration proceeding, does not contain the features of the authorized claims 18 and 19 and does not comply with Article 68 of the Implementing Regulations of the Patent Law (2002) and the Guidelines for Patent Examination (2010). SWEP International AB argues that, Alfa Laval Company’s amendment of the claim does not comply with the amendment rules of the Guidelines for Patent Examination (2010) and that Alfa Laval Company’s cause of action is not valid. The court found that:

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Alfa Laval Company is the owner of the No. 200680018368.4 patent entitled “Method of brazing stainless-steel products and stainless-steel brazed products obtained by this method”. The patent application date is May 24, 2006, the priority date is May 26, 2005, and the grant date is June 16, 2010. Claims 1, 2, 18, 19 and 20 of these authorized announcements are as follows: “1. A method for brazing stainless steel products, comprising: (i) applying iron-based brazing filler substance to stainless steel components; (ii) optionally assembling components; (iii) heating the components from step (i) or (ii) at least 1000 °C in a non-oxidizing atmosphere, a reducing atmosphere, a vacuum or a combination thereof, and heating the component at a temperature of at least 1000 °C for at least 15 min; (iv) providing a product with average hardness of less than 600HV1 in the brazing area; and (v) optionally repeating one or more steps of step (i), step (ii) and step (iii). 2. The method of claim 1, wherein: Joints, holes, gaps, cracks or fissures larger than 76 µm are sealed or filled by this method. 18. The method according to claim 1 or 2, wherein the iron-based brazing filler substance contains one or more of Si, B, P, Mn, C or Hf. 19. The method according to claim 18, wherein the iron-based brazing filler substance contains at least one of the following elements: 9–30 wt% Cr, 5–25 wt% Ni, and at least one of 0–25 wt% Si, 0–6 wt% B, 0–15 wt% P, 0–8 wt% Mn, 0–2 wt% C and 0–15 wt% Hf. 20. The method according to claim 19, wherein the iron-based brazing filler substance comprises at least 40 wt% Fe, 14–21 wt% Cr, 5–21 wt% Ni, 6–15 wt% Si and 0.2–1.5 wt% B.” In response to the invalidation request filed by SWEP International AB, Alfa Laval Company filed amended claims on 21 July 2014, in which additional technical features of dependent claims 2 and 20 are added to claim 1, claims 18–22 are deleted, and the citation relationship is adjusted. The amended claim 1 reads: “1. A method for brazing stainless steel products, comprising: (i) applying iron-based brazing filler substance to stainless steel components; wherein the iron-based brazing filler substance comprises at least 40 wt% Fe, 14–21 wt% Cr, 5–21 wt% Ni, 6–15 wt% Si and 0.2–1.5 wt% B.” (ii) optionally assembling components; (iii)heating the components from step (i) or (ii) at least 1000 °C in a non-oxidizing atmosphere, a reducing atmosphere, a vacuum or a combination thereof, and heating the component at a temperature of at least 1000 °C for at least 15 min; (iv) providing a product with average hardness of less than 600HV1 in the brazing area; and (v) optionally repeating one or more steps of step (i), step (ii) and step (iii). Joints, holes, gaps, cracks or fissures larger than 76 µm are sealed or filled by this method. China National Intellectual Property Administration issued the decision under appeal on 3 August 2016. The decision found that: the amendment of the claim

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submitted by Alfa Laval Company on 21 July 2014 does not comply with Article 68 of the Implementing Regulations of the Patent Law (2002) and Section 4.6.2 of Chapter 3 of Part IV of the Guidelines For Patent Examination (2010); The technical solutions of claims 1, 19–22, 24 and 28–32 of the authorized announcements of this patent are not based on the specification, and none of the other claims can overcome the above-mentioned defects, so the specification of this patent does not comply with Article 26(4) of the Patent Law. Accordingly, the patent is hereby declared invalid in its entirety. Alfa Laval Company states in the oral hearing of the invalidation procedure that the realization of the technical problem solved by this patent is related to the content, as well as temperature and time; the point of invention of this patent is not only the replacement of copper by iron. During the original lawsuit, Alfa Laval Company submitted the Decision on invalidation requests No. 24591 issued by China National Intellectual Property Administration to show that China National Intellectual Property Administration had determined that the Guidelines for Patent Examination (2010) does not completely exclude the possibility of other modifications and that modifications which do not comply with the Guidelines for Patent Examination (2010) can be acceptable. The court of first instance holds that: if Alfa Laval Company cites the technical solutions of claim 2 as the content of the amended independent claim by means of the authorized claim 20, the amended independent claim should also include the additional technical features of the authorized claims 18 and 19. Claim 19 limits the iron-based brazing filler substance to contain at least one of Cr, Ni, Si, B, P, Mn, C, Hf and gives a range for the amount of each element, that is when the iron-based brazing filler substance contains more than one of the above elements, the amount of each element shall be limited by the values recorded in claim 19. Although the amended claim 1 limits the iron-based brazing filler substance to contain all five elements Fe, Cr, Ni, Si and B, and the content range of Cr, Ni, Si and B is less than that in its cited claim, the amended claim 1 is written in an open-ended manner and does not exclude that the iron-based brazing filler substance may contain the four elements: P, Mn, C and Hf. When the iron-based brazing filler substance contains these four elements, the amended claim 1 does not limit the specific content range of these four elements, so it actually expands the protection range of the original patent. Accordingly, the court of first instance decided to reject Alfa Laval Company’s claim. Unsatisfied with the judgment of the court of first instance, Alpha Laval Company lodged an appeal to the Supreme People’s Court, claiming: (1) Alfa Laval Company’s modification of claim belongs to the deletion of parallel technical solutions, which should be accepted. ➀ In the administrative proceedings of patent invalidation, the modifications of claim are not limited to the three ways specified in the Guidelines for Patent Examination (2010), which do not completely exclude the possibility of other modifications. The amended claim is a further limitation of the authorized claim 1 and the modifications should be accepted. ➁ The Guidelines For Patent Examination (2017) revises the modifications of claim in the invalidity declaration proceeding. According to the

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guidelines, the modifications of claim include deletion of claims, deletion of technical solutions, further limitation of claims, and correction of obvious errors. In this case, the amended claim 1 can be regarded as adding the technical features of the authorized claims 2 and 20 to claim 1 in order to narrow the scope of protection, which is a further limitation of the claim and should be accepted. (2) Alfa Laval Company’s amendments to claim 1 do not extend the scope of protection of the original patent. ➀ In claim 20, when “0–25% Si” and “0–6 wt% B” are satisfied, that is, the requirement of “at least one” is satisfied. At this time, even if it contains 16 wt% P, the claim is satisfied. ➁ The specification and accompanying drawings can be used to interpret the content of the claim. Paragraph [0047] of the patent specification records the composition and content of the brazing filler that the patentee intends to disclose, which discloses “containing at least 40% by weight of Fe, 14– 21% by weight of Cr, 5–21% by weight of Ni, 6–15% by weight of Si, 0.2–1.5% by weight of B, and a balance of other elements as substitutes”. As can be seen, the specification clearly states that the brazing filler contains a certain amount of Fe, Cr, Ni, Si and B and other elements may or may not be present; when present, the amount is not limited. The above content indicates that the specification does not require the inclusion of P, Mn, C and Hf, and that the content of each element should comply with the stated numerical limits. In the light of the above, the modifications of the patent should be accepted and the amended claim does not expand the scope of protection of the original patent. Alfa Laval Company appealed for (1) revoke the first instance judgment; (2) revoke the China National Intellectual Property Administration’s decision on invalidation request No. 29765, and order the China National Intellectual Property Administration to issue a new decision on invalidation request. China National Intellectual Property Administration claims that: The first-instance judgment on the amendment of this patent claim expands the scope of the original patent protection is correct. Claim 1 as amended by Alfa Laval Company in the invalidity declaration proceeding, does not contain the features of the authorized claims 18 and 19, and amended claim 1 is written in an open-ended manner and does not exclude that the iron-based brazing filler substance may contain the four elements: P, Mn, C and Hf. When the iron-based brazing filler substance contains these four elements, the amended claim 1 does not limit the specific content range of these four elements, so it actually expands the protection range of the original patent. (2) The decision under appeal was made in 2016 and the relevant provisions of the Guidelines for Patent Examination (2017) should not be applied. Moreover, the above amendments shall not be accepted whether the Guidelines for Patent Examination (2017) or the Guidelines for Patent Examination (2010) are applied. SWEP International AB states that: (1) The meaning of “at least one” is well known to those skilled in the art from the contextual interpretation, and in protecting two or more components, the content of the component claimed by “at least one” needs to meet the limits set by the other components in the claim. (2) The scope of protection of the amended claim. Alfa Laval Company does not include all the additional technical features of claims 18 and 19 when it combines the authorized claims 2 and 20, which has a substantial impact on the protection scope of the

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claim. (3) According to the principle of non-retroactivity, the Guidelines for Patent Examination (2017) are not applicable to this case.

4 Issues 1. The modifications of claim; 2. On the comparison benchmark that the amendment of the claim shall not expand the protection scope of the original patent.

5 Holding The Supreme People’s Court holds that: (1) The modifications. Although the Guidelines For Patent Examination (2010), on which the decision is based, provides that the modifications of claim in the invalidity declaration proceeding are generally limited to the deletion, combination of claims, and deletion of technical solutions, the possibility of other modifications is not completely excluded. In particular, the Guidelines for Patent Examination (2017) have expanded the modifications in the invalidity declaration proceeding to include four basic modifications, such as deletion of claims, deletion of technical solutions, further limitation of claims, and correction of obvious errors. Such modifications shall be accepted when they satisfy the two legal standards of not exceeding the scope of the original specification and claims and not expanding the scope of protection of the original patent. In this case, Alfa Laval Company’s modifications further limit the technical features of dependent claims 2 and claim 20 to the authorized claim 1, which is a further limitation of the claim and the modifications should be accepted. (2) The scope of the modifications. After a patent is granted, it has a public notice effect on the public, and the public’s interest in reliance is usually based on the independent claim with the largest scope of protection, and they can predict and evaluate the legality of their actions accordingly. In this case, Alfa Laval Company adds the additional technical features of dependent claim 2 and 20 to authorized claim 1, which is a further limitation of the authorized claim 1, and does not expand the protection scope of the authorized claim 1, which is in line with the provisions of the law. Finally, the Supreme People’s Court renders a judgment to reverse the judgment of first instance and orders China National Intellectual Property Administration to issue a new invalidation decision.

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6 Comment on Rule Whether it is the accuracy of language expression or the cognitive ability of the patentee, there may be limitations. Therefore, the patent law gives the patentee the right to modify the patent document. In practice, it is also common for patentee to amend his claim to overcome defects in the patent. Although the Patent Law and Implementing Regulations of the Patent Law have made specific provisions on the timing, procedural design and substantive requirements for the amendment of the claim, in patent examination and judicial practice, there are still ambiguities and different perceptions as to the width and severity of the modifications of claim and whether the scope of protection of the original patent is expanded. Therefore, it is particularly important to clarify the criteria for amendment of the claim and the benchmark for comparison. This case is a typical case on whether the amendment of the claim in the invalidity declaration proceeding exceeds the scope, which elaborates on the modifications of claim in the invalidity declaration proceeding, the standard of amendment and the benchmark of not expanding the scope of protection of the original patent, and the clear rules of adjudication have important guiding value for the trial of such cases. Moreover, this case is a useful exploration of how to balance the efficiency of administrative examination and the contribution of fair protection of patentee in administrative cases of the patent invalidity declaration, which enhances the behavior expectations of the patentee and the public, and has very important guiding significance. 1. The basic value and requirements of the amendment of the claim In the book The Art of Reading Alone, Schopenhauer makes a subtle exposition about the relationship between thought and verbal expression: thought continues until it is expressed in words, and once it is expressed in words, thought becomes rigid. Schopenhauer’s intention is to emphasize the importance of precise language expression for writing, and to avoid mis-expression and ambiguous expression. In fact, the above discussion also applies to the patent field. Compared with writing, patent documents have stricter requirements on the accuracy of written expressions. Once the patent documents, which are the carrier of the technical solution, are fixed in writing, the technical solutions are also determined, which is the essence of patent protection in exchange for disclosure. However, language itself has limitations, such as multiple meanings and even ambiguities, and it is not easy to express technical solutions through precise language expression. It can be argued that both the accuracy of the language and the cognitive ability of the patentee may have limitations, particularly the cognitive limitations of prior art and inventions. In the patent invalidity declaration proceeding, such limitations usually become the target of the invalidity declaration petitioner. Therefore, based on the above objective situation, the Patent Law gives the patentee the right to modify the patent documents. Article 68(1) of the Implementing Regulations of the Patent Law (2002) provides: “During the examination process of invalidation requests, the patentee of an invention or utility model patent may amend the claim,

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but shall not expand the scope of protection of the original patent.” On the one hand, in order to protect the inventions and technical contributions of the patentee, and further promote the dynamics of innovation of the whole society, the patentee is allowed to make appropriate amendments to the patent documents, instead of taking the invalidation of the patent rights as a punishment for the lack of drafting skills of the patentee. On the other hand, although the patentee is allowed to make appropriate amendments to the patent documents, based on the public’s reliance on the authorized patent documents, it is necessary to prevent the patentee from taking the opportunity of amendments to supplement the unfinished technical content of the patent application to the patent documents. Therefore, in the administrative proceedings of invalidity declaration, the right holder’s amendments of the claim must be subject to certain restrictions, including not changing the subject name of the original claim, not expanding the scope of protection of the original patent, not exceeding the scope of the original specification and description, etc. In particular, whether the amendment of the claim exceeds the scope of protection of the original patent is regarded as an important criterion for the acceptance of the amendment of the patent documents, which is an important system design to achieve a balance between the interests of the patentee and the public interests. Generally speaking, any amendment to the claim will change the scope of patent protection. In determining whether an amendment by the patentee in the administrative proceedings of invalidity declaration should be accepted, the two basic criteria should be based on the fact that not exceeding the scope of the original specification and claim and not expanding the scope of protection of the original patent, and according to the specific circumstances of the case, the content disclosed in the original patent document shall be appropriately and flexibly grasped, and comprehensive consideration shall be given in combination with the characteristics of different modifications. 2. The modifications of claim There are no specific provisions in the Patent Law and the Implementing Regulations of the Patent Law regarding the modifications of claim, only in the Guidelines for Patent Examination. The Guidelines For Patent Examination (2010) stipulates that the modifications of claim in the administrative proceedings of invalidity declaration are generally limited to the deletion, combination of claims, and deletion of technical solutions. The revision of the Guidelines for Patent Examination (2017) is further relaxed, extending the modifications in the administrative proceedings of invalidity declaration to be generally limited to deletion of claims, deletion of technical solutions, further limitation of claims, and correction of obvious errors. Obviously, the Guidelines for Patent Examination has become more and more lenient in the modifications of claim, which is the positive response made by the patent administrative authorities in the context of listening to the needs of the industry and voices of the industry. In this case, the decision under appeal held that when claim 18 cites claim 2, the technical solution of claim 20 should include all the technical features of claims 1, 2, 18, 19 and 20, whereas the current modifications merely add the additional technical features of claim 20 to claim 1 or claim 2, and therefore finds that the

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patentee’s modifications of claim do not comply with Article 68 of the Implementing Regulations of the Patent Law (2002) and the Guidelines For Patent Examination (2010). On the basis of the above logic, the decision under appeal is rejected on the grounds that the amendments of this patent claim do not comply with the three types of modifications in the Guidelines for Patent Examination (2010). In this regard, this case clearly points out that although the Guidelines For Patent Examination (2010), on which the decision was based, stipulates that the modifications of claim in the administrative proceedings of invalidity declaration are generally limited to the deletion, combination of claims, and deletion of technical solutions, and the possibility of other modifications is not completely excluded. As a means, the modifications should be aimed at conforming to the relevant legislative purpose, and should not be overly restrictive in terms of the specific modifications, as this would make the restriction on modifications a penalty for improper claim drafting by the patentee and make the protection of the right holder incompatible with his technical contribution. In particular, the Guidelines for Patent Examination (2017) have been relaxed to expand the modifications in the administrative proceedings of invalidity declaration to include four basic modifications, such as deletion of claims, deletion of technical solutions, further limitation of claims, and correction of obvious errors. This change in the modifications will not only help the patent confirmation procedure focus on the core of invention and creation, but will also not affect the public’s trust and interests in the authorized patent documents. Therefore, it is against the spirit of the legislation to refuse to accept such amendments only on the grounds that the amendments to the claims do not conform to the three modifications in the Guidelines for Patent Examination (2010). In the present case, as Alfa Laval Company’s modifications further limit the technical features of the dependent claims 20 and 2 to the authorized claim 1, it is a further limitation of the claim. Therefore, the modifications should be accepted. 3. On the comparison benchmark that the amendment of the claim shall not expand the protection scope of the original patent Article 68 of the Implementing Regulations of the Patent Law (2002) provides that “the scope of protection of the original patent shall not be extended”. The expression “original patent” in this provision is rather general, and how to determine the benchmark for comparison is a prerequisite and condition that needs to be addressed. In the patent invalidity declaration proceeding, when the claim is amended by adding all or part of the additional technical features of the dependent claim to the independent claim cited, is it appropriate to judge whether the amended claim expands the scope of protection of the independent claim of the original patent by comparing the dependent claim with the small scope of protection or the independent claim with the large scope of protection? This is the key issue in this trial, and also an important point of disagreement between the parties. Where independent claim is used as the basis for comparison, such amendments are further limited and do not normally exceed the scope of protection of the original patent; where dependent claim is used as the basis for comparison, the amendment of claim is subject to extremely strict criteria and may result in the amended claim exceeding the scope of the dependent

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claim. In the present case, for example, Alfa Laval Company amends the claim of the patent during the invalidity declaration proceeding and adds the additional technical features of dependent claims 2 and 20 to authorized claim 1. If the original claim 1 is used as the basis for comparison, this is a further limitation of the authorized claim 1 and does not extend the scope of protection of the authorized claim 1. If the smallest claim 20 is used as the basis for comparison, all technical features of claims 2, 17, 18, 19 and 20 must be limited to claim 1 in order to comply with the modifications. The solution to this problem should return to the value of the amendment of the claim and the behavior expectations of the public. Since the grant of a patent has a public notice effect on the public, the public’s interest in reliance is usually based on the independent claim with the largest scope of protection, and they predict and evaluate the legality of their own behavior accordingly. To add the additional technical features of the dependent claim to the independent claim is a further limitation of the independent claim and does not extend the scope of protection of the original independent claim, but rather reduces the scope of protection of the original independent claim. On this basis, it will not damage the publicity effect of the original patent, nor will it damage the public’s interest in relying on the original patent. Moreover, the moderate relaxation of the standard for the amendment of the claim will not affect the public’s interest in reliance on the granted patent documents, but will also help to protect the interests of inventors and promote the incentive of innovation in society as a whole. On this basis, the case makes it clear that the scope of protection of the independent claim of the original patent as the object of modification should be used as the benchmark. That is, the amended independent claim should be compared to the independent claim of the original patent with the largest scope of protection, rather than to the dependent claim of the original patent with a smaller scope of protection.

Shimano, Inc. v. Guangdong Shunde Sensah Smart Sports Equipment Co., Ltd. (Dispute Over Infringement of Patent Rights for Invention: Determination of the Scope of Protection of Functional Features) Lingling Zhang

1 Rule In determining the scope of protection of a functional feature, where there is only one embodiment of the functional feature in the patent specification, and no other alternatives are stated or implied to make it feasible, the functional description cannot be made to cover other ways of achieving the function, otherwise the scope of protection will not match the technical contribution. Where the components and their relationship to the function disclosed in the embodiment are an organic system that is inextricably interwoven, each of the aforementioned components shall be deemed to be essential to the fulfilment of the function in the absence of evidence or sufficient explanation by the patentee as to which components or the relationship between components are not essential to the fulfilment of the function.

Collegial Bench for Reopening Review: Weike Du, Lingling Zhang and Rong Wu Edited by Wenyan Ding; Translated by Daxuan Zheng, Kaiyan Hu and Yi Zheng L. Zhang (B) The Third Civil Division (Intellectual Property Division) of the Supreme People’s Court of the People’s Republic of China, Beijing, China © Law Press China 2023 China Applied Jurisprudence Institute, Selected Cases from the Supreme People’s Court of the People’s Republic of China, Library of Selected Cases from the Chinese Court, https://doi.org/10.1007/978-981-99-6364-5_30

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2 Case Information 1. Parties Applicant in the Reopening (Plaintiff in the First Instance, Appellee in the Second Instance): Shimano, Inc. (hereinafter referred to as Shimano) Respondent in the Reopening (Defendant in the First Instance, Appellant in the Second Instance): Guangdong Shunde Sensah Smart Sports Equipment Co., Ltd. (formerly Guangdong Shunde Sensah Bicycle Parts Co., Ltd., hereinafter referred to as Sensah Smart Sports Equipment Company) 2. Procedural History First Instance: No. 2245 [2015] Trial, Civ. Division, the Intellectual Property Court of Guangzhou City, Guangdong Province (dated Sep. 29 of 2017) Second Instance: No. 2380 [2017] Final, Civ. Division, the Higher People’s Court of Guangdong Province (dated Apr. 8 of 2019) Reopening: No. 5466 Ruling [2019] Appeal, Civ. Division, the Supreme People’s Court (dated Dec. 30 of 2019) 3. Cause of Action Dispute over infringement of patent rights for invention

3 Essential Facts The Plaintiff, Shimano, asserted that Shimano is in possession of the patent right for the invention “Variable Speed Box for Bicycles”, which is still valid. The Defendant, Guangdong Shunde Sensah Smart Sports Equipment Company manufactured, sold and promised to sell the products falling within the scope of protection of the patent in question without the permission of the patentee, which caused the plaintiff considerable economic loss. The Plaintiff hereby initiates a legal action and requests the People’s Court: (1) to order the defendant to cease forthwith the manufacture, sale and promise to sell of all the products falling under the patent in question, and to cease all other infringements of the said patent; (2) to order the defendant to destroy all stocks of infringing products, as well as tools and moulds used in the manufacture of infringing products, and to remove all information on infringing products from promotional materials (including but not limited to product catalogues); (3) to order the defendant to compensate the plaintiff for the economic loss caused by the infringement of the plaintiff’s patent rights and the reasonable expenses incurred by the plaintiff to stop the infringement in a total amount of CNY 1,000,000 (the said amount shall be paid to the plaintiff in a lump sum); and

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(4) to order the defendant to bear full costs of litigation. The Defendant, Sensah Smart Sports Equipment Company argued that the allegedly infringing technical solutions did not fall into the scope of protection of the patent in question, whereby the Defendant shall assume not any liability for the Plaintiff. Hence the Defendant requested the Court to dismiss all the requests raised by the Plaintiff. It is factually ascertained by the Court that Shimano is the patentee (patent owner) of patent numbered No. ZL200610084877.9 entitled “Variable Speed Box for Bicycles”. The scope of claim protection asserted by Shimano in the first instance was claims 1, 3, 4 (citing parts of claim 1), 11, 12, 14 (citing parts of claim 12), 18–20. Sensah Smart Sports Equipment Company verified that the allegedly infringing products were manufactured and produced by the Plaintiff, to wit, Sensah Smart Sports Equipment Company. By comparison in the court, Shimano argued that the products fell within the scope of protection of the patent in question. Nevertheless, Sensah deemed that the products in question had the relevant technical features relevant to the said claims aside from technical features 1.3, 1.4, 19.3, 19.4, and claim 18. The court of first instance held that the technical features of claim 1.4, which described the structure and movement of the first operating part in relation to the mounting part and the position-holding/releasing mechanism, and the movement of the first operating part in relation to the position-holding/releasing mechanism respectively, were not technical features limited by their function or effect in the creation of the invention and thus, did not belong to functional technical features. Therefore, the product in question possesses the technical features of claim 1.4 in claim 1 and claim 19.5 in claim 19, combined with the statement of Sensah Smart Sports Equipment Company on the technical features of claims 1, 3, 4 (citing patent claim 1), 11, 12, 14 (citing patent claim 12) and 19–20 which are not objected to, the product in question falls within the scope of protection of claims 1, 3, 4 (citing patent claim 1), 11, 12, 14 (citing patent claim 12) and 18–20. The Guangzhou Intellectual Property Court rendered a judgment on September 29, 2017, numbered No. 2245 [2015] Trial, Civ. Division, the Intellectual Property Court of Guangzhou City, and ruled that, (1) Sensah Smart Sports Equipment Company shall stop manufacturing, selling, and offering for selling the products that have infringed on Shimano’s patent; (2) Sensah Smart Sports Equipment Company shall immediately destroy all the products in stock that have infringed on Shimano’s patent; (3) Sensah Smart Sports Equipment Company shall compensate for Shimano’s losses and reasonable expenses, totaling CNY 333,000; and (4) all other requests raised by Shimano are dismissed. Sensah Smart Sports Equipment Company refused to accept the judgment and filed an appeal with the Higher People’s Court of Guangdong Province and requested

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the said court to set aside the judgment of first instance and to reverse or remand the judgment in accordance with the law. The Higher People’s Court of Guangdong Province held that technical feature 1.4 was a functional feature and that technical feature 1.4 in claim 1 of the patent in question was neither identical nor equivalent to the corresponding technical feature of the infringing product, therefore, the technical solution of the patent in question did not fall into the scope of protection of claims 1, 3, 4, 11, 12, 14 and 18–20 claimed by Shimano and did not constitute an infringement of the patent in question. The court of first instance has erred in fact-finding and application of laws. Thus, the Higher People’s Court of Guangdong Province, on 8 April 2019, handed down its judgment, with a docket number being No. 2380 [2017] Final, Civ. Division, the Higher Court of Guangdong Province, holding that the first instance judgment was reversed and all of Shimano’s claims were dismissed. Dissatisfied with the second instance judgment, Shimano filed an application to and requested the Supreme People’s Court to reopen the case.

4 Issue Whether the technical solution of the infringing product has the identical or equivalent technical features as technical feature 1.4 (technical feature 19.3) and technical feature 18.2 of the patent in question, i.e., whether it falls within the scope of protection of claims 1 and 19 and claim 18 of the patents in question.

5 Holding The Supreme People’s Court, after review, held that the infringing product and the mode to implement the patent did not achieve the same function and the same effect by essentially the same means. Accordingly, technical feature 1.4 in claim 1 (technical feature 19.3 in claim 19) of the patent in question is neither identical nor equivalent to the corresponding technical feature of the infringing technical solution. For the same reasons as above, technical feature 18.2 in claim 18 is neither identical nor equivalent to the corresponding technical feature of the infringing technical solution. Therefore, Shimano’s application for reopening the case is dismissed.

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6 Comment on Rule This case at hand quintessentially concerns the determination of the scope of protection of functional features and the determination of infringement on functional features out of equivalence in patent infringement disputes, and was elected one of the 50 typical intellectual property cases in China in 2019. In patent infringement cases, the determination of functional features and the scope of protection has always been a focal point and a difficult issue in judicial practice. The judiciary has explored how to determine functional features and made corresponding judicial interpretations, but the determination of the scope of protection of functional features and the determination of infringement out of equivalence have rarely been involved. In this case, after determining the functional features in the claims, the technical features indispensable for achieving the claimed functions or effects recorded in the specification and the accompanying drawings were identified, which has positive significance for further clarifying the scope of protection of functional features. 1. The origin of functional features The core idea for a patent system is to trade disclosure for protection. Therefore, as a legal document declaring the scope of protection of a patent to the society at large, patent claims must describe all the technical features of the technical solution in a precise and clear manner. In some fields, however, many technical features are difficult to describe in terms of structure, components, methods or steps, so in practice, a new way of writing claims has emerged, namely by describing the function or effect that can be achieved by a specific implementation of a technical feature in order to qualify the technical feature, which is known as a functional limitation, also known as a functional feature. The term “Functional Feature” or “Functional Limitation” or “Means/Step Plus Function” originated in the USA and refers to the way in which a technical feature is described in a patent claim in terms of what its function (effect) is rather than what its physical structure is. The recognition and understanding of functional features in the United States has gone through a period of denial before 1952, a period of divergence between 1952–1994 and a period of harmonization after 1994. Since In re Donaldson Co. case, the US courts and the USPTO (US Patent and Trademark Office) reached a consensus on the identification of functional features. The current U.S. Manual of Patent Examining Procedure (MPEP) provides that the use of a functional structure or step in a claim to define a technical feature is permissible and should be interpreted as a way or and its equivalent to implement the specification and accompanying drawings. If the specification and accompanying drawings limit the meaning of the functional description, the examiner should interpret the functional mechanism or step to have a specific meaning. If the specification and accompanying drawings are not limited, the scope of the functional mechanism or step shall be determined.

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In China, rules or provisions for functional features made the first appearance in the Guidelines for Patent Examination (1993). In Part II of the said Guidelines, Article 3.2.2 “Clarity Element” of Chapter 2 states, “the patent claims for products should generally avoid limiting inventions by functional or effect features. Where some technical feature cannot be limited by structural features or it’s clearer to define technical features by functional or effect features than by structural features, and furthermore, if the functions or effects can be directly and definitely verified by the experiment or operation fully depicted in the specifications, it shall be allowed to limit invention by functional or effect features. Nevertheless, the scope of protection of the claims shall not be allowed to expand by exploiting the functional or effect features, for the purpose of avoiding unclarity of the scope of protection. The article was later partially amended respectively in 2001, 2006 and 2010 when the Guidelines for Patent Examination were revised, but the rule of interpretation has always been to insist on covering all implementations that can achieve the stated function. In judicial practice, courts have actively explored the interpretation and construction of functional features, spanning a process from divergent views to unified norms. The Supreme People’s Court, for the first time, offered a judicial interpretation of the rules of interpretation of functional features in 2010 when implementing the Judicial Interpretation on Several Issues Concerning the Trial of Patent Infringement Cases. Article 4 of the said Judicial Interpretation provides that “for technical features expressed in terms of function or effect in the patent claims, the people’s court shall determine the content of the technical features in conjunction with the specific implementation of the function or effect and its equivalents described in the specification and accompanying drawings”. Therefore, in judicial practice, the interpretation of the scope of protection of functional features is the specific implementation of the function or effect and its equivalents in the specification and accompanying drawings, rather than “all the modalities of implementations that can achieve the said function”. Article 8 of the Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II), which came into force in 2016, states: “functional features are defined as technical features of the structure, components, steps, conditions or the relationship between them, etc., which are limited by their function or effect in the invention, except that a person of ordinary skill in the art can directly and clearly determine the specific implementation of the above function or effect by reading the claims only. Compared with the indispensable technical features whose function or effect can be achieved with specification and the accompanying drawings described in the preceding paragraph, when the corresponding technical features of the infringing technical solutions have used basically the same means to achieve basically the same function and basically the same effect, and the ordinary skilled person in the field can associate with the infringing act without creative work, the people’s court shall find that the corresponding technical features and functional features are identical or equivalent.” The said judicial interpretation clarifies the functional features and the rules for making a judgment of identical or equivalent to functional features.

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2. Judgment standards for functional features Article 8(1) of the Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II) provides that a functional feature is a technical feature that is limited by its function or effect in the creation of an invention, such as structure, components, steps, conditions or the relationship between them, except that a person of ordinary skill in the art can directly and clearly determine the specific implementation of such function or effect by reading the claims only. The technical features defined by functions or effects in the aforesaid provision are frequently referred as “functional features” in judicial practice, which are a kind of technical features of a special nature. The scope of protection of the claims is limited by the function or effect to be achieved by the technical features, rather than the specific technical means to achieve the function or effect, resulting in a broad literal meaning of “functional features”, covering all the specific implementation methods that can achieve the function or effect, regardless of whether the implementation methods are existing before the application date of the patent in question, or newly discovered or invented after the application date, and regardless of whether the patentee is aware of them on the application date, or whether they are disclosed in the specification. In Chapter 2 of Part II in the Guidelines for Patent Examination, although it is allowed to use functional or effect features in the claims to circumscribe the invention, there are also many restrictions on such technical features, which are required to be “avoided as far as possible”. Accordingly, if the scope of protection of “functional features” in patent infringement litigation is interpreted in accordance with the general rules of claim interpretation to include all means of implementation to achieve the function or effect, it will lead to a mismatch between the scope of protection of patent rights and the degree of innovation and disclosure of the patent, which will inevitably place undue restrictions upon the subsequent improvement and innovation, and bring about negative impact on the development of science and technology and economic and social progress. Therefore, Article 4 of the Judicial Interpretation on Several Issues Concerning the Trial of Patent Infringement Cases specifically provides for the interpretation of “functional features”: “… shall determine the content of the technical feature in conjunction with the description of the function or effect described in the specification and accompanying drawings so as to adapt the scope of protection of the patent right to the degree of innovation and the content disclosed in the specification and accompanying drawings, to maintain a balance between the interests of the public and the patentee, and to leave the necessary space for subsequent improvements and innovations. In judicial practice, in determining whether the technical features in dispute are “functional features”, it is necessary to consider not only the meaning of the technical features themselves, but also to integrate the technical features into the overall technical solutions defined by the claims for understanding. For technical features

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containing a specific function or effect, the technical feature is not a “functional feature” if a person of ordinary skill in the art can directly and clearly determine the specific way of implementing the function or effect by simply reading the claims. In the present case, technical feature 1.4 in patent claim 1 of the patent in question reads: “a position holding/release mechanism that selectively holds the above cable clamp in any one of a plurality of holding positions”. This technical feature only describes the function of the position holding/release mechanism to selectively hold the cable clamp in any one of a plurality of holding positions, without further defining the specific structure of the position and the manner in which it achieves this function, and a person skilled in the art would not be able to know the specific structure of the position holding/release mechanism and the manner in which it achieves this function based on the description of claim 1 in question. Therefore, technical feature 1.4 is a functional technical feature as defined in Article 8(1) of the Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II). 3. Determination of the scope of protection of functional features Article 5 of the Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II) provides that when the people’s court determines the scope of protection of a patent right, the preamble of the independent claims, the features, and the technical features recorded in the cited and qualified portions of the dependent claims have a restrictive effect. Claims containing functional features are expressed through the limitation of function or effect, therefore, the determination of the scope of protection of claims containing functional features is to be decided by combining the technical features recorded in the specification and accompanying drawings to achieve the function or effect. In determining the scope of protection of a functional feature, where there is only one way to implement the functional feature in the patent specification and no alternative is stated or implied to be feasible, the functional description must not be such that it covers other ways of achieving the function, otherwise, a mismatch between the scope of protection and technical contribution will be effectuated. Where components of achieving the functions and their relationships thereto are an inseparable organic system as disclosed in the modality of implementation, and if the patentee has no evidence or has not sufficiently explained which components or the relationship between the components are inessential to achieve the function, each of the aforementioned components shall be deemed to be essential to the fulfilment of the function. In the case at hand, the specification gives two main preferable modalities of implementation for technical feature 1.4 and the allegedly infringing product is closer to the second preferable modality of implementation. In accordance with paragraph 7 in page 20 to paragraph 3 in page 21 of the patent specification in question, the movement in the cable release direction of the 2nd preferred implementation is as follows: “If the 1st arm component 170 swings in the direction away from the positioning unit 154, the clamping portion 172 of the action

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step 171a of the 2nd arm component 171 clamps with the clamping projection 156d of the positioning jaw 156, causing the positioning jaw 156 to swing clockwise from the 1st clamping position shown in Fig. 1 around the 2nd swing axis 165 to the 1st level release position shown in Fig. 2. At this point, the action step 171a also comes into contact with the release cam part 157c of the anti-rotation jaw 157, causing the anti-rotation jaw 157 to swing from the second-stage release position shown in Fig. 1 to the second clamping position shown in Fig. 2. As a result, the positioning unit 154, which is subjected to force by the spring unit 150 in the clockwise release direction of Fig. 2 via the winding unit 132, rotates in the direction of cable release, and the next positioning tooth 162b, which is closer to the downstream side of the rotation direction than the positioning tooth 162b positioned by the positioning claw 156, contacts the second claw portion 157a of the anti-rotation claw 157. As a result, the anti-rotation jaw 157 swings freely relative to the positioning jaw 156 within a defined range, so that the anti-rotation jaw 157, which is pushed by the positioning teeth 162c, swings in a counterclockwise direction. As shown in Fig. 3, the release cam portion 157c of the anti-rotation jaw 157 pushes against the clamping release portion 173 of the action step 171a, releasing the clamping of the second arm component 171 with the positioning jaw 156 through the clamping portion 172. As a result, the positioning jaw 156 is moved from the 1st stage release position to the 1st clamping position by the force exerted by the spring component 158 and clamps with the positioning tooth 162d on the release side of the 1st level cable, ending the release action of the 1st variable speed level. This state is shown in Fig. 4. In Fig. 4, the positioning body 154 is rotated by 1(one) variable speed step in the direction of cable release compared to Fig. 1 (which may be referred to here as a 1-stage release step). In this state, if the rod unit 136 is swung further, as shown in Figs. 5 and 6, the action step 171b swings the positioning jaw 156 to the first release position, the positioning body 154 is rotated in the cable release direction, and the positioning tooth 162b pushes against the anti-rotation jaw 157 so that the anti-rotation jaw 157 swings within the established range, releasing the action step 171b and the positioning jaw 156. The release action Section 171b is then clamped to the positioning jaw 156. As a result, as shown in Fig. 7, the positioning unit 154 is rotated a further 1(one) variable speed step in the direction of cable release (which may be referred to here as a 2-stage release) until the positioning jaw 156 contacts the positioning teeth 162e. If the lever member 136 is further operated, the positioning unit 154 is rotated a further 1 variable speed step in the direction of cable release (which may be referred to here as a 3-stage release) by the same action. This release operation may be repeated until the snap closure release portion 173 of the action step 171c is released.” The above-mentioned 1–3 stage release can be understood as a multi-stage release. As there is only one way of implementing the action in the direction of cable release in the second preferred modality of implementing the patent in question and there is no suggestion that other alternatives are also possible, where the claims are described in functional terms, the functional description cannot be made to cover other ways of achieving this function, otherwise the scope of protection would not match the technical contribution. As the components and their relationship to the cable release disclosed in the second modality of implementing the patent in question are an

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Fig. 1 Phase 1 of 1-stage release

Fig. 2 Phase 2 of 1-stage release

organic system, in the absence of evidence as to which components or relationships between components are not essential to achieve the function, the components of the aforementioned organic system should be considered essential to achieve the function of claim 1.4.

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Fig. 3 Phase 3 of 1-stage release

Fig. 4 Schematic diagram of 1-stage release

4. Judgment of infringement for technical features Article 8(2) of the Judicial Interpretation on Certain Issues Regarding the Application of Laws in Hearing Cases Involving Patent Infringement Disputes (II) provides, compared with the indispensable technical features whose function or effect can be achieved with specification and the accompanying drawings described in the

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Fig. 5 Phase 1 of 2-stage release

Fig. 6 Phase 2 of 2-stage release

preceding paragraph, when the corresponding technical features of the infringing technical solutions have used basically the same means to achieve basically the same function and basically the same effect, and the ordinary skilled person in the field can associate with the infringing act without creative work, the people’s court shall find that the corresponding technical features and functional features are identical or equivalent.

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Fig. 7 Schematic diagram of 2-stage release

Therefore, in the infringement comparison of functional features, the function and effect need to be the same, while the means can be the same or essentially the same. In the case at hand, the expression “essentially the same” means a substitute that can be thought of by a person skilled in the art without creative work. As for the case at hand, the difference between the modality of implementation of the allegedly infringing product and the previous modality of implementation of the patent in question, is, firstly, the release and next hold position functions require a separate component, the anti-rotation claw 157, to operate. The limiting part 157b of the anti-rotation jaw 157 cooperates with the positioning jaw limiting protrusions 156b, 156c, and the release cam part 157c of the anti-rotation jaw 157 cooperates with the second arm 171 of the driving component in order to complete the release and move to the next holding position. In the modality of implementation in the allegedly infringing product, the release and entry into the next holding position is done by the upper and lower part of the positioning jaw, i.e., there is no separate part of the “anti-rotation jaw”. Secondly, the second arm 171 of the driving component and the positioning jaw 156 of the patent in question are also essential features to accomplish its function. The driving component and the positioning jaw of the allegedly infringing product are integrated, and there is no clamping and separation of the driving component and the positioning jaw. Thirdly, the claim 1.4 of the patent in question requires the function of selectively holding the cable clip in any one of multiple holding positions, i.e., including a single operation to achieve multi-stage release holding and a single operation to achieve single-stage release holding, while the infringing product does not have the function of being able to achieve multi-stage release holding in a single operation.

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From the function point of view, as for the claim 1.4 of the patent in question, the function of selectively holding the cable clip in any one of the multiple holding positions contains a single operation to achieve the multi-stage release of the holding situation. As the allegedly infringing product does not have this function, that is, the allegedly infringing product and the patent in question have achieved different technical effects, the scope of protection of claim 1.4 is to be excluded. For the function of single-stage release to be possible, the patent in question requires the anti-rotation jaw 157 to have a specific structure that interacts with the rotation jaw 156 and the second arm 171 of the drive component. It is not possible for a person of ordinary skill in the art to conceive, without creative work, that the antirotation jaw 157, or integrating the anti-rotation jaw 157 with the positioning jaw 156, can be replaced by the “two staggered opposing gears + ‘