Discussion on the Practice of Determining Liquidated Damages in Dispute Cases over "Second-Hand Housing" Sale and Purchase Contracts

Practical Discussion on the Determination of Liquidated Damages in "Second-Hand Housing" Sale and Purchase Contract Dispute Cases: A Case Study of Shanghai Area

Practical Discussion on the Determination of Liquidated Damages in "Second-hand Housing" Sale and Purchase Contract Dispute Cases - Taking shanghai as an example, housing sales involve people's livelihood, and disputes and lawsuits are very easy to occur. For second-hand housing sale and purchase contract dispute cases, especially in Shanghai, under the strict purchase restriction policy, if the contract cannot be continued to be performed due to the rise, fall or other factors of the house price, in addition to the return of the purchase price paid, it will trigger the problem of liquidated damages or compensation for losses. And how the amount of liquidated damages or compensation claims is claimed involves the basic rights and interests of the parties.

　　The author takes the practical cases handled as specimens, and the facts of the case are as follows:

　　Brief Facts of the Case (hereinafter referred to as "the Case")

　　On July 8, 2016, A and B signed the "Contract for the Sale and Purchase of Housing", stipulating that: A purchases a house from B with a total price of 5.7 million yuan, A first pays a down payment of 1.95 million yuan, and the balance is paid from the time of the transfer of the house; B should apply for the property right certificate one week after the big property certificate of the house is issued, and unconditionally handle the transfer of the property after 2 years after the property right certificate expires; during the period, A has the right to request the transfer at any time, B should remove the transfer obstacles and cooperate with the handling, if B defaults, it should pay A 10 times the liquidated damages paid for the purchase price.

　　After A paid 1.95 million yuan to B, the property obtained a large property certificate on November 23, 2017. After being reminded by A, B applied for a house title certificate on June 8, 2018. Due to the fruitlessness of the request for the transfer, A sued B for the first time to the court, and applied for the transfer of the house. Because B's establishment of a third-party mortgage on the property involved in the case could not be transferred, the court dismissed the appeal and explained that the transfer obstacle would be cleared before dealing with it. After several unsuccessful negotiations between the two parties, A sued the court for the second time, requesting that the contract be terminated, the price be returned, and liquidated damages be compensated. After the market inquiry, it can be seen that the price difference of the house involved in the case increased by 4.09 million.

　　In this case, when the author filed a lawsuit on behalf of plaintiff A, he comprehensively considered factors such as the contract agreement, the viewpoint of judicial practice, and the litigation costs of the parties, and finally claimed liquidated damages. The liquidated damages are based on actual losses such as the loss of the price difference between the house, the loss of interest on the occupation of funds, the loss of lawyers' fees, etc., and the rights and interests are claimed in accordance with the original Contract Law and judicial interpretation multiplied by 1.3 times. The court of first instance only upheld the amount of liquidated damages of RMB1.2 million, and its judgment was: "This Court held that liquidated damages should be the main consideration of the amount of liquidated damages to fill in the losses of the defaulting party, and on this basis, the punitive nature of the breach should be considered as appropriate and appropriate." The court comprehensively considered the difference in the price of the house, the proportion of the plaintiff's payment in the total house price, the loss of interest on the part paid by the plaintiff, the loss of lawyers' fees, the defendant's bad faith in breach of contract, and the objective risk of the off-plan status that belonged to the large property certificate at the time the two parties signed the contract, and finally decided on 1.2 million yuan. Later, the author appealed, holding that the amount of liquidated damages determined by the original judgment was much lower than the losses suffered by A, and found that the liquidated damages of 1.2 million yuan violated the provisions of the law on liquidated damages and the adjustment of liquidated damages. The second-instance trial finally changed the judgment to support liquidated damages of 3.8 million yuan. Although the author does not agree with the original first-instance judgment, the judgment basically includes the factors considered by the adjudication organs in the trial of such cases, so the author takes this case as a specimen and combines the views of the Shanghai regional judgment to discuss the determination of liquidated damages in cases of disputes over "second-hand house" sales contracts as follows.

　　1. Choice of liquidated damages and compensation for losses

　　Liquidated damages refer to debts of money or other payments paid to a party in the event of a party's non-performance or incomplete performance of the contract, as agreed or prescribed by law. [1] The two major natures of liquidated damages are compensatory and punitive: compensation is based on the filling of the losses of the defaulting party, and punitive is based on the amount of liquidated damages agreed upon by the parties. According to Article 585 of the Civil Code (Article 114 of the former Contract Law), Article 50 of the Minutes of the National Court Work Conference on Civil and Commercial Trials, which came into effect on November 8, 2019, and its Understanding and Application, the liquidated damages provided for in mainland China law are compensatory liquidated damages, that is, in the absence of the parties expressly agreed to be punitive liquidated damages, in principle, it is presumed to be the total amount of damages, based on filling in the losses of the breaching party.

　　With regard to compensation for losses, according to article 577 of the Civil Code, compensation for losses refers to the liability for breach of contract borne by one of the parties for non-performance of contractual obligations or performance of contractual obligations that is not in accordance with the agreement.

　　In summary, although both are based on damages arising from a breach of contract by one party, compared with liability for breach of contract, compensation for losses requires proof of damages and causality, which is too heavy for the breaching party; and liquidated damages have punitive effects in addition to compensating losses. Therefore, the burden of proof for claiming liability for breach of contract is relatively light for the breaching party, and it can include losses in the comprehensive consideration of liability for breach of contract. In this case, according to the agreement between the two parties, the breaching party shall compensate the breaching party for 10 times the liquidated damages paid for the purchase price. In this case, the amount of the purchase price paid was 1.95 million yuan, and according to the agreement, the amount of compensation for breach of contract was 19.5 million yuan. Obviously, the liquidated damages agreed upon by the two parties have a certain punitive nature. The parties in this case are equal natural person subjects, and the contract involved in the case is a non-standard contract signed by the two parties on the basis of equality and voluntariness, and one party has fulfilled its obligations under the contract, while the other party has seriously breached the contract and failed to perform all the obligations under the contract, resulting in losses on the defaulting party. Therefore, A claims against liquidated damages, in addition to claiming the total amount of damages according to the provisions of the law, can also claim punitive liquidated damages higher than the damages according to the contractual agreement between the two parties, and does not have to bear an excessive burden of proof. On the contrary, if the other party proposes that the liquidated damages are too high, it will bear the corresponding burden of proof.

　　【Reference Case】Shen X and Wang X and other housing sale contract disputes- Shanghai No. 1 Intermediate People's Court, (2019) Hu 01 Min Zhong No. 11179

　　Judgment opinion: Regarding the liquidated damages of 730,000 yuan, Wang x stated that according to the agreement, the amount of liquidated damages was 1.04 million yuan, and Wang x believed that it was too high, so according to the market value of the disputed house, he claimed a premium loss of 730,000 yuan as liquidated damages. Shen X did not agree to the compensation and argued that if the court finally found that Shen needed to pay liquidated damages, it thought it was too high and asked the court to adjust. However, Shen X failed to provide evidence to prove that the standard claimed by Wang X was too high, so the court of first instance upheld the amount of liquidated damages claimed by Wang X.

　　2. Basis for adjustment of liquidated damages

　　The adjustment of liquidated damages must be determined in strict accordance with the provisions of laws and judicial interpretations. At the time of litigation in this case, the original Contract Law and judicial interpretations had not been repealed. According to Article 29 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Contract Law of the People's Republic of China (II) >, Articles 6, 7 and 8 of the Opinions of the Shanghai Higher People's Court on Regulating the Adjustment of Liquidated Damages in Commercial Adjudication [Hugao Fa Min II [2009] No. 13] and article 585 of the current Civil Code, it is possible to determine whether the liquidated damages are excessive and adjust the liquidated damages.

　　(1) Take actual losses as the principle

　　According to article 584 of the Civil Code (article 113 of the former Contract Law), if a breach of contract by one party causes losses to the other party, the amount of compensation for losses shall be equivalent to the losses caused by the breach, that is, the actual losses shall be the principle. It is important to note that the actual loss includes, in addition to the expenses incurred, the benefits that can be obtained after the performance of the contract. In the Minutes of the 13th Meeting of the Second Circuit Court of the Supreme People's Court in 2019, it was clarified that the available benefits belong to the property appreciation benefits that the parties can obtain through the performance of the contract, and the value-added benefits cannot be actually enjoyed by the observant party at the time of the breach. With regard to the determination of the loss of profits available in damages for breach of contract, due to the difficulties in determining the benefits available after the performance of the contract, the court usually uses methods such as the difference method, the analogy method, the estimation method and the comprehensive discretionary method to determine the loss of the profits available to the defaulting party. Therefore, when adjusting the amount of liquidated damages, it is necessary to strictly adjust the adjustment based on the actual losses incurred by the non-compliant party.

　　【Reference Case】 Liu xx and Guo xx housing sale contract dispute case - Shanghai Minhang District People's Court (2019) Hu 0112 Min Chu No. 1359, Shanghai No. 1 Intermediate People's Court (2020) Hu 01 Min Zhong No. 228

　　Judgment point of view: The first instance lowered the contractual liquidated damages of 642,000 yuan claimed by Liu xx to 70,000 yuan, which obviously lacked basis. Considering that in the process of contract performance, Liu XX did not have any breach of contract, and Guo XX's refusal to perform the contract led to the termination of the contract between the two parties, Liu XX claimed liquidated damages of 200,000 yuan in the second instance based on its actual losses, which was based on the law.

　　(b) The impact of the fault factors A and B on liquidated damages

　　In this case, B's bad faith breach caused the contract to be terminated due to the inability to achieve the purpose, so when judging the various reference factors for the claim for liquidated damages and the adjustment of liquidated damages, B's bad faith breach should be considered and reflected in the amount of the final liquidated damages. In this case, B completely ignored the agreement under the contract between the two parties and maliciously violated all the obligations under the contract involved in the case, including but not limited to: malicious delay in applying for the housing property right certificate, refusing to handle the housing transfer formalities by deception, delay, etc., and continuing to implement the use of the house involved in the case for small loan renewal, which has always been unable to remove the obstacles to the transfer. The above-mentioned acts lead to continuous damage to the rights and interests of the non-compliant party, which directly leads to the inability to achieve the purpose of the contract.

　　【Reference Case】 Dispute over housing sale and purchase contract between Zhu xx et al. and Yuan XX et al.-Shanghai Minhang District People's Court (2018) Hu 0112 Min Chu No. 28442, Shanghai No. 1 Intermediate People's Court (2019) Hu 01 Min Zhong No. 9595

　　Judgment point of view: The court of first instance comprehensively considered the degree of fault of Zhu XX and the other three, the time that Yuan XX and the other three people occupied the time that Zhu XX and the other three had paid the house, and the actual losses of the three people including Yuan XX, and decided that Zhu XX and the other three would pay Yuan XX and the other three liquidated damages of 800,000 yuan. This amount is far less than the difference in housing prices of 940,000 yuan, and it is also lower than the 840,000 yuan liquidated damages calculated according to the contract.

　　(3) Regarding whether A should bear the risk liability for the failure of the large property certificate at the time of signing the contract

　　It is worth noting that this case reflects that many house sales are signed at a time when the large property certificate or small property certificate has not yet been issued, which is also known as off-plan housing. The allocation of legal risks under off-plan conditions will also affect the judgment of liquidated damages.

　　According to Article 4 of the Answers of the Shanghai Higher People's Court on Several Questions Concerning the Trial of Cases Involving the Sale and Purchase of "Second-Hand Houses", matters such as "off-plan housing" and "restricted transfer of off-plan housing" have no impact on the validity of the contract. The buyer of the contract for the sale and purchase of the house cannot enjoy the ownership of the house until he has obtained the certificate of ownership of the house, but he can enjoy the claim in the contract of sale. The assignment of creditor's rights is one of the rights conferred on the parties to the contract under the Contract Law, and there is no reason not to allow the parties to assign their contractual rights, so the buyer's re-assignment does not violate the prohibition of the law. That is, the so-called off-plan risk should not be a factor affecting the claim.

　　The author believes that in this case, on November 23, 2017, the house involved in the case had already obtained a large property certificate. B also obtained the registration of the small property certificate of the house involved in the case on 8 June 2018. The house involved in the case no longer has an off-plan status, and there is no risk that the house will not be actually acquired. The contract involved in the case was signed by both parties based on the principle of equality and voluntariness, and when A requires B to perform its contractual obligations, there is no objective risk of the so-called off-plan status of the house itself and in the performance of the contract.

　　(4) Regarding whether the proportion of the purchase price paid affects the amount of liquidated damages

　　Whether liquidated damages should be taken into account is controversial in practice as to the proportion of the purchase price paid. The supporting referee's views are as follows:

　　【Reference Case】Niu x and Lin XX, Fei XX House Sale and Purchase Contract - Shanghai Minhang District People's Court (2018) Hu 0112 Min Chu No. 27201

　　Judgment's point of view: This court comprehensively considers the performance of the contract, the amount of the house paid by The Button x, the appreciation of the house and other factors, and supports the compensation of 300,000 yuan by Lin xx and Fee XX as appropriate.

　　The unsupported referee's views are as follows:

　　【Reference Case】 Weng xx and Yao x housing sale and purchase contract dispute case - Shanghai Xuhui District People's Court (2016) Hu 0104 Min Chu No. 33257, Shanghai No. 1 Intermediate People's Court (2017) Hu 01 Min Zhong No. 14612, Shanghai Higher People's Court (2018) Hu Min Shen No. 1139

　　Judgment point of view: Yao x's failure to pay the full amount of the house is caused by Weng xx's refusal to perform the contract, so the failure to pay the full house price should not be used as a defense to alleviate the liability for breach of contract.

　　The author believes that in this case, the two parties clearly agreed that the balance would be paid from the time of the transfer of the house, so when A had paid a total of 1.95 million yuan to B in full, due to B's malicious breach of contract, the house involved in the case had not been able to handle the transfer procedures for the house transaction, so A did not pay the remaining balance. The consequences of B's bad faith breach should not be borne by A, and therefore, this factor should not be a reason to adjust liquidated damages.

　　3. Determination of actual losses

　　In this case, the contract between the parties was terminated due to B's breach of contract. The amount of liquidated damages is the focus of the dispute in this case, as a non-compliant party, if the contract involved in the case is performed normally, A can obtain the benefit of the increase in the price of the house, and due to B's breach of contract, A not only loses this part of the available benefits, but also suffers from the loss of interest on the occupation of funds generated by the paid purchase price, the loss of lawyers' fees incurred by A for the protection of rights, and the loss of the preservation guarantee fee.

　　(1) About the loss of housing price difference

　　According to Article 6 of the Answers of the Shanghai Higher People's Court on Several Questions Concerning the Trial of "Second-Hand Housing" Sale and Purchase Cases, if one party is unwilling to perform the sale and purchase contract after the contract is signed, "the breaching party shall compensate the other party for the losses caused by the breach, including direct losses and losses of expected benefits." Among them, the determination of the loss of housing rise and fall can be determined by reference to the following methods: first, the two parties negotiate to determine the agreement; second, the two parties can not negotiate to determine: (1) in principle, the market transaction price of the most similar houses (first of all, the same floor and room type; secondly, the same floor and room type of adjacent buildings; and then the same floor and room type of the adjacent buildings; and the same area of the houses) and the difference between the transaction price of the sale and purchase contract to determine the loss of housing rise and fall; (2) if there is no comparison of the most similar houses, the housing rise and fall loss can be determined through the assessment of professional institutions. The time point at which the loss is determined shall be based on the protection of the interests of the non-compliant party, on the basis of the request of the observant party, and on the date of expiration of the performance period agreed in the contract, the date on which the breaching party's breach of contract is determined, and the rise and fall of the house during the trial." Article 20 of the Minutes of Discussion of the Shanghai Higher People's Court on Several Difficult Issues in the Trial of Real Estate Dispute Cases is more explicit, and if the seller repents that the contract cannot be performed, "in addition to judging that the seller refunds the full price, the seller may be ordered to compensate the buyer for the difference between the price to be spent on the purchase of the same type of house and the original purchase price". Therefore, the loss of the house price difference should be claimed as the actual loss of the non-compliant party. In judicial practice, the determination of the loss of the house price difference and the determination of liquidated damages are generally based on the difference in the house price confirmed by the court's inquiry or assessment. The reference cases are as follows:

　　【Reference Case】 Dispute over the Sale and Purchase Contract of Houses between Tao X and Shao XX - Shanghai Songjiang District People's Court (2019) Hu 0117 Min Chu No. 230, Shanghai No. 1 Intermediate People's Court (2019) Hu 01 Min Zhong No. 11606

　　Judge's opinion: On April 12, 2019, Shanghai B Co., Ltd. issued an appraisal report. It states that the valuation result is the market value of the disputed house at the point of value of 25 January 2018, i.e. $12,818,000, while the total price agreed upon by the parties is $9,360,000. The breaching party cannot benefit from its breach of contract, and the above-mentioned loss of available benefits is all the benefits that Tao X can obtain under the normal performance of the contract.

　　【Reference Case】 Wang xx v. Shen xx house sale and purchase contract dispute - Shanghai Fengxian District People's Court (2017) Hu 0120 Min Chu No. 25593, Shanghai No. 1 Intermediate People's Court - (2019) Hu 01 Min Zhong No. 5735

　　The first-instance judgment held that after judicial assessment of the disputed house, the difference between the market price on the date of termination of the contract and the agreed house price between the two parties was 530,000 yuan. According to the difference (appraisal price), as a loss arising from Shen xx's refusal to perform the contract due to Wang xx and Xu xx' refusal to perform the contract, in addition to the compensation agreed in the contract, Wang xx and Xu xx still have to pay shen xx 420,000 yuan difference.

　　Second-instance judgment view: Uphold the original judgment. The court of first instance used the house price on the date of termination of the contract as the basis for calculating the loss of the difference in price, which was objective and reasonable, and there was nothing wrong with it.

　　(2) Loss of interest

　　There are different views in practice as to whether the loss of interest on the purchase price paid should be supported. There are cases in the Supreme People's Court and the Shanghai Court that the buyer's acquisition of the benefits of the appreciation of the house is premised on the payment of the house price, so the interest loss has been included in the loss of the house price difference and is compensated. as follows:

　　Reference cases: Haikou xx investment and development co., Ltd., Sanya xx investment co., LTD. joint venture, cooperative development of real estate contract dispute - Sanya Intermediate People's Court of Hainan Province (2014) Sanya Min Yi Zhong Zi No. 4, Hainan Provincial High People's Court (2018) Qiong Min Zhong No. 379, Supreme People's Court (2018) SPC Minshen No. 5153

　　Judgment opinion: Among the available benefits claimed by Haikou xx Company, the bank interest losses that occupy the funds have been included.

　　Reference case: xx (Shanghai) Investment and Development Co., Ltd. v. Shanghai xx mechanical and electrical equipment co., Ltd. commercial housing pre-sale contract dispute - Shanghai Pudong New Area People's Court (2017) Hu 0115 Min Chu No. 22912, Shanghai No. 1 Intermediate People's Court (2018) Hu 01 Min Zhong No. 2647

　　Judgment view: The judgment on the loss of interest is revoked, because the buyer's acquisition of the interest in the appreciation of the house is premised on the corresponding payment of the house, so while the court of first instance supports the loss of the appellee's house price difference, the interest loss of the appellee's paid house price should have been included in the loss of the house price difference and compensated.

　　Reference Case: Zhu XX, Hu XX, Zhang XX House Sale and Purchase Contract Dispute - Shanghai Songjiang District People's Court (2017) Hu 0117 Min Chu No. 13531

　　Judgment's point of view: There is no support for the loss of interest on the house payment, the compensation equivalent to 1 times paid, etc., which lacks a contractual and legal basis, and this court has fully considered other losses when supporting the above-mentioned house price difference loss, and has been able to make up for the loss caused by the defendant's breach of contract to the plaintiff, so this court no longer supports this claim.

　　However, at the same time, there are also adjudication views in favor of the claim of interest loss, as follows:

　　【Reference Case】Dispute over the Sale and Purchase Contract between Yang X and Huang XX- Shanghai No. 1 Intermediate People's Court (2019) Hu 01 Min Zhong No. 6178

　　Judgment point of view: Huang xx claimed liquidated damages from Yang x and actual losses from Yang x in this case, and after the first instance court explained that Huang xx said that it was handled in accordance with the principle of high, that is, to claim liquidated damages against Yang x... It was determined that Huang xx's liability for breach of contract that could be claimed against Yang X included a liquidated damages of RMB342,000 for termination, a liquidated damages of RMB176,825 for renovation compensation, and a penalty for interest losses to RMB150,000 as appropriate, for a total of RMB668,825.

　　The author believes that when claiming liquidated damages, based on the fact that A was unable to obtain the ownership of the house involved in the case due to B's breach of contract, A incurred interest loss during the period of capital occupation of the house paid by A, so the interest loss should be claimed. In addition, from the perspective of litigation strategy, the inclusion of interest in losses can expand the base of liquidated damages. In the absence of a breach of the contract and the existence of a malicious breach by B, a key statement should be made on the punitive nature of liquidated damages.

　　(3) Losses of rights protection costs

　　There are also different adjudication views on whether rights protection costs can be recognized as losses. It is generally held that if there is a clear agreement in the contract or if one of the parties voluntarily bears it, the court respects the agreement between the two parties and supports the cost as a loss; in the absence of an express agreement between the parties, the court generally does not support it.

　　The author believes that the cost of rights protection is due to the prior-cause behavior of the breaching party, so this part of the cost should be borne by the breaching party. In this case, the two parties did not agree on the assumption of lawyers' fees and letter of guarantee costs, and in the trial of the case, B stated that he was willing to bear A's lawyer's fees in the first lawsuit based on his own breach of contract, but proposed that A only filed the second lawsuit after two years and the house price rose because of his own reasons, so he did not bear the lawyer's fees of the second lawsuit. During the trial, the judge also recognized the fact that B voluntarily incurred the first amount of legal fees and examined the relevant legal fees, payment vouchers and other evidence, although the final judgment did not clarify the specific composition of the liquidated damages due to the use of discretionary liquidated damages, but combined with the facts of the trial, the other party's self-admission to bear the legal fees is still valid. Moreover, as mentioned above, if the litigation strategy of including interest losses is adopted, the cost of rights protection is also a loss actually incurred, and including it in the liquidated damages can expand the base of liquidated damages and help protect the rights and interests of the parties.

　　epilogue

　　The amount of money involved in real estate transactions in Shanghai is large, and the market fluctuations are obvious, which is very easy to disputes once the price of housing rises. For the parties, if the contract is performed normally, the house and its increased income should be enjoyed by them, but after the contract is terminated due to the breach of contract by the other party, the breaching party still enjoys the benefits of the use of the house involved in the case. Therefore, the improper amount of liquidated damages not only cannot be determined to stop the dispute, but also leads to the defaulting party benefiting from the breach of contract, seriously damaging the trust interests and substantive rights and interests of the breaching party, and violating the principles of fairness and good faith. Therefore, whether it is a party, an agent or a judicial organ, it should strictly abide by the spirit of the contract and not tolerate malicious breach of contract, so as to demonstrate fairness and justice.

Cooperative institution: Shanghai Jianwei Law Firm

Author: Ji Ying Huang Qi