Introduction
In July 2021, the First Civil Division of the Supreme People's Court published the Q&A on Civil Trial Practice, which specifically answered five common dispute issues in the implementation of the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (Revised Edition in December 2020, hereinafter referred to as the New Rules), providing important guidance for the handling of private lending dispute cases. This article will provide an in-depth analysis of the views put forward by the First Civil Division of the Supreme People's Court on five major controversial issues for practical reference.
01 Lawyers' fees and litigation costs are not subject to the statutory upper limit on the annual interest rate of private lending
In judicial practice, when a creditor of a private lending dispute files a lawsuit with the people's court, in addition to requesting the other party to bear overdue interest, liquidated damages, etc., it often claims that the other party bears the lawyer's fees and litigation costs.
After the promulgation of the New Rules, the upper limit of judicial protection of private lending interest rates is adjusted to four times the one-year loan market quotation rate (LPR) at the time of the formation of the contract (this article is referred to as the "statutory upper limit of the annual interest rate of private lending"). The statutory upper limit on the annual interest rate of private lending includes overdue interest, liquidated damages and other fees. Article 29 of the New Rules states: "If the lender and the borrower agree on both the overdue interest rate and the liquidated damages or other expenses, the lender may choose to claim overdue interest, liquidated damages or other expenses, or may also claim them together, but the total amount exceeds four times the quoted interest rate of the one-year loan market at the time of the formation of the contract, and the people's court will not support it".
Some people believe that the legal fees and litigation costs stipulated in the contract are "other expenses", and the overdue interest, liquidated damages, lawyers' fees, and litigation costs should not exceed the statutory upper limit in total.
In its book, the SPC points out that lawyers' fees and litigation costs are the costs of realizing creditor's rights and should not be subject to the statutory upper limit on the annual interest rate of private lending. Article 29 of the New Rules includes "other fees" in the scope of the upper limit of protection in order to prevent the parties from setting up a clever name and raising the borrowing interest rate in disguise in the name of "handling fee", "service fee", "consulting fee" and "management fee", circumventing legal restrictions. However, lawyers' fees and litigation costs are the expenses incurred by the right holders to protect their legitimate rights and interests, which are completely different from the costs paid by the borrowers to obtain the loans, and do not belong to the expenses that need to be adjusted to balance the rights and interests of the parties, and should not be classified as "other expenses".
The Intermediate People's Court of Hangzhou Municipality, Zhejiang Province, also pointed out in the case of "Anhui Shengyun Environmental Protection (Group) Co., Ltd. and Dong Xiurong Private Lending Dispute ((2019) Zhejiang 01 Min zhong No. 3917)": "Other expenses" should be limited to the costs paid by the borrower to the lender in order to obtain the loan, and should not include the lawyer's representation fee paid by the lender to realize the creditor's rights. According to the fact that the parties in this case clearly agreed in the contract that the scope of the debt includes the lawyer's representation fee, the lender has the right to claim that the borrower bears the lawyer's representation fee.
When there is no express agreement between the parties that the lawyers' fees and litigation costs arising from the loan dispute shall be borne by the borrower, the lender may request the other party to pay the lawyer's fees and litigation costs in accordance with the provisions of the Civil Code on liability for breach of contract.
Since 2017, the SPC has tended to have a consistent view of adjudication in such cases. If the borrower fails to repay the principal and interest of the loan in accordance with the contract, and the lender pays reasonable expenses to hire a lawyer or file a lawsuit to realize the creditor's rights, it may be found that article 584 of the Civil Code (the first paragraph of article 113 of the former Contract Law) "one of the parties does not perform its contractual obligations or the performance of contractual obligations does not conform to the agreement, causing losses to the other party". [1]
In accordance with this provision, the amount of compensation for losses shall be equivalent to the losses caused by the breach of contract, but shall not exceed the losses that may be caused by the breach of the contract foreseen or should have foreseen when the breaching party entered into the contract. Specifically, the legal fees and litigation costs incurred by the borrower due to the borrower's default shall be borne by the borrower, unless the expenses exceed the foreseeable scope of the borrower. (For example, the SPC pointed out in its (2015) Min Yi Zhong Zi No. 78 Judgment that the attorney's fees of up to 3 million yuan are not necessary expenses incurred by the non-compliant party to claim its rights, and the court will not support it if the parties have not specifically agreed on this.) [2]）
Although the local courts have not yet formed a unified adjudication standard for this situation, according to the requirements of "the same case and the same judgment and similar case search" in the Guiding Opinions of the Supreme People's Court on the Application of Uniform Law to Strengthen the Search of Similar Cases (trial implementation) implemented from 2020, the adjudication position of the local court will also be similar to that of the SPC.
In short, when signing a private lending contract, the two parties can clarify the way to bear the litigation costs and lawyers' fees after the dispute occurs, and when the parties have no relevant agreement, the non-breaching party can claim that the other party bears the relevant costs in accordance with the general provisions of the legal provisions on liability for breach of contract. In both cases, both lawyers' fees and litigation costs do not fall within the scope of "other expenses" in Article 29 of the New Rules, and are not subject to the statutory upper limit of the annual interest rate of private lending.
02 Calculation base for overdue interest on private lending
Article 27 of the New Rules only stipulates the conditional protection of the agreement between the borrower and the lender to include interest in the principal, and does not stipulate the treatment method when the contract does not stipulate the calculation of compound interest, and the SPC clearly replies in the book.
(1) If the contract is not agreed, the court cannot take the initiative to include interest in the principal amount of the loan to calculate overdue interest
According to the SPC, although Article 676 of the Civil Code stipulates that "if the borrower fails to return the loan within the agreed time limit, he shall pay the overdue interest in accordance with the agreement or the relevant provisions of the State", this article does not stipulate that when paying overdue interest, the original interest needs to be calculated into the principal to calculate interest.
In fact, if the principal and interest of the loan are used as the basis for calculating the overdue interest, it is tantamount to calculating compound interest for the parties in the case of the parties' agreement, which is contrary to the court's objective and neutral adjudication position. Therefore, when the borrower and the lender have not agreed to include the interest in the principal, the court cannot take the initiative to include the interest in the principal of the loan and calculate the overdue interest, and the calculation basis for the overdue interest is still the principal of the loan.
(2) Where the contract stipulates the calculation of compound interest, the calculation of interest in the previous period and the final principal and interest is subject to double restrictions
If the parties expressly agree that the calculation base of overdue interest includes the sum of principal and interest, the parties' agreement must meet the restrictions stipulated in Article 27 of the New Rules: "After the settlement of the principal and interest of the previous loan, the borrower and the lender shall include the interest in the principal and interest of the previous period loan and re-issue the debt certificate, and if the interest rate in the previous period does not exceed four times the quoted interest rate of the one-year loan market at the time of the formation of the contract, the amount specified in the re-issued debt certificate may be deemed to be the principal of the later loan." Interest in excess shall not be deemed to be the principal amount of the later borrowing. According to the calculation of the preceding paragraph, if the sum of the principal and interest that the borrower should pay after the expiration of the borrowing period exceeds the sum of the interest for the entire borrowing period based on the initial borrowing principal and the initial borrowing principal and four times the quoted interest rate of the one-year loan market at the time the contract is formed, the people's court will not support it", as shown in the following figure:
03 Non-financial units can raise funds from employees in the form of loans for the production and operation of their units
Private lending refers to the act of financial integration between natural persons, legal persons and unincorporated organizations. Those who illegally engage in financial business in the name of "private lending" without obtaining the approval of relevant departments are not only exempt from the legal protection of private lending, but may also violate the criminal law. Therefore, non-financial units should strictly comply with the relevant provisions of the New Rules when carrying out financial integration.
Article 11 of the New Rules stipulates: "Where a legal person or an unincorporated organization raises funds from employees within the unit in the form of loans for the production and operation of the unit, and there is no circumstance in which articles 144, 146, 153, 154 of the Civil Code and Article 13 of these Provisions are provided for, and the parties claim that the private lending contract is valid, the people's court shall support it."
Therefore, the way in which a non-financial unit collects funds from employees within itself and uses it for the production and operation of the unit is a form of private lending. Such financing acts are not prohibited by law, but whether the specific financing acts are effective and protected by law should be examined at two levels in practice: first, the review does not contradict the provisions of the Civil Code; second, the review does not violate the provisions of Article 13 of the Judicial Interpretation on Private Lending.
04 The private lending contract does not stipulate interest, and the borrower who voluntarily pays cannot ask for return
In private lending, there are often cases where borrowers pay interest without written contract agreement, and then claim to the court to recover interest. There are two reasons behind it: one is that the two parties verbally agree on interest out of trust, and the borrower repents after performing the contract. At this time, the payment of interest is the normal performance of the loan contract, but there are insufficient evidence difficulties in the determination of facts; the other is that the two parties have indeed not agreed on interest in writing or orally, and the borrower subsequently voluntarily pays interest for various reasons such as friendship and maintenance of commercial relations.
Previously, in practice, some borrowers believed that the interest paid without agreement was unjust enrichment, and hoped to sue the borrower for the return of the interest paid in accordance with Article 122 of the Civil Code: "Because others have no legal basis and obtain improper benefits, the person who suffered losses has the right to request him to return the improper benefits". In fact, "there is no legal basis for profit" is the key to unjust enrichment, and the borrower's voluntary payment of interest is based on the formation and effective performance of the loan contract, not without legal reasons. The SPC pointed out that in such a case, the borrower's voluntary payment of interest can be regarded as a new offer to revise the loan contract and increase the relevant content of the interest payment for it, and if the lender has no objection and accepts the interest, it is an expression of intention to make a commitment to the offer, and the parties have thus completed the revision of the loan contract, and the new contract has been fulfilled by the borrower for the completion of the payment of interest (and principal), and the borrower's request for the return of interest should not be supported.
This legal analysis logic was also reflected in the implementation period of the Provisions on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (2015 edition, hereinafter referred to as the Old Rules). Article 31 of the Old Regulations stipulates that "if there is no agreed interest but the borrower voluntarily pays, or voluntarily pays interest or liquidated damages in excess of the agreed interest rate, and there is no harm to the interests of the state, the collective or a third party, the borrower shall not demand the return of the lender on the grounds of unjust enrichment, except for the borrower's request for the return of interest in excess of 36% of the annual interest rate".
It is worth noting that although the SPC reiterates in the book that the interest voluntarily paid by the borrower outside the agreement shall not be refunded on the grounds of unjust enrichment, it does not mention how to deal with the voluntary payment of interest if it exceeds the statutory upper limit of the annual interest rate of the new private lending. The author believes that although the New Rules delete the relevant content of Article 31 of the Old Rules, combined with Article 25 of the New Rules and the relevant provisions of the Civil Code, if the borrower voluntarily pays interest, it must not exceed the statutory upper limit of the annual interest rate of private lending.
First of all, paragraph 1 of article 680 of the Civil Code stipulates: "Usurious lending is prohibited, and the interest rate of the loan shall not violate the relevant provisions of the state." That is, interest exceeding the upper limit of legal protection is a debt expressly prohibited by the Civil Code and has no legality. There is no basis for the lender to receive the money. Secondly, if the borrower does not have the right to demand that the lender return the interest paid, the parties to the private lending may use the provisions of the article to privately agree on high interest rates, falsely referred to as "voluntary payments", forming an unspoken rule of "private payment and not being prosecuted", causing confusion in judicial practice and violating the legislative intention of the state to severely crack down on usury and regulate the order of the private lending market through the New Regulations.
05 Where a private loan stipulates that the debt shall be paid in kind, the court will not support the portion of the "property" that exceeds the statutory upper limit of the annual interest rate of the private loan when repaying the loan
In the practice of private lending, there are cases where the lender, in order to ensure the realization of the creditor's rights, agrees to repay with a certain amount of goods when repaying the loan, and when the repayment occurs, due to the increase in the price of the property, the agreed repayment of the property is converted into the amount of money, which actually exceeds the sum of the principal and interest calculated by the statutory upper limit of the annual interest rate of the private loan.
The SPC held that if the parties agree to repay the debt in kind, in essence, the value embodied in the property is used to replace the principal and interest payable by the lender, so the amount of money converted when repaying the loan cannot exceed the statutory upper limit of the annual interest rate of the private loan, and the people's court does not support the lender's request for the excess interest. To correctly understand the SPC's view, it is first necessary to clarify the difference between debt in kind and liquid flow pledge, transfer and guarantee, and subsequent transfer and guarantee.
(1) The distinction between debt in kind and related concepts
"Debt in kind" is an alternative performance of monetary debt, that is, after the expiration of the repayment period of the loan, the debtor is unable or unwilling to repay the loan, the two parties reach an agreement, and the ownership of the subject matter is transferred to pay off the debt, and after the transfer of ownership of the specific property, the creditor-debtor relationship is extinguished. [3]
The essence of "liquid collateral" is a special kind of security, in which the parties secure the claim with specific property (such as mortgage or pledge), and agree before the expiration of the debt performance period that if the debtor does not perform the debt when due, the property shall directly belong to the creditor. Prior to the implementation of the Civil Code, judicial practice generally regarded liquidity and exile clauses as invalid. After the implementation of the Civil Code, according to articles 401 and 428 of the Civil Code, although the "liquid mortgage" clause cannot produce the effect agreed by the parties (that is, the creditor directly acquires the ownership of the collateral), the creditor can receive priority compensation for the collateral property in accordance with the law.
"Assignment and security" means that the claim is secured by a specific object, and at the same time the property is transferred to the creditor, if the debt is paid off in a timely manner, the collateral and its attached rights are returned to the original owner, and if the debtor is unable to pay off the debt, the creditor has the right to be paid in priority for the property. Its essence is to "add another insurance" to the realization of the transfer of property rights into claims, and there is no intention of transferring the subject matter. "Post-assignment guarantee" is a transfer guarantee for the "debt", which has not been publicized.
The premise of the fifth Q&A of the SPC's private lending is to replace the principal and interest payable by the borrower with the value embodied in rem, so only the debt in kind can meet the premise of this provision.
(2) Disposal of "debt-payings" in private lending
In the book, the Supreme Court only mentioned that "the lender's request for interest in excess of the loan will not be supported", but it does not clearly stipulate how to deal with the "debt collection" used to pay off the debt after "not supporting".
The author believes that in order to discuss the disposal method of "debt-in-kind", it is first necessary to deeply understand the debt-in-kind agreement. There are two situations in which the parties reach an agreement in kind after the expiration of the debt settlement period is based on whether it is agreed to extinguish the original debt. One is the renewal of the debt, that is, the parties establish a new debt and eliminate the old debt at the same time, at this time the debt of private lending has been extinguished, at which time the creditor can only request the debtor to perform the agreement in kind.
The other is the repayment of new debts, that is, the establishment of a new debt co-existing with the old debt, the creditor should generally first make the new debt perform the claim (i.e. request the debtor to deliver the property), but in the new debt period is not performed, so that the purpose of the debt in kind agreement can not be achieved, the creditor has the right to request the debtor to resume the performance of the old debt (i.e. repayment of the loan). However, the disposal of "debt-in-kind" in private lending is a situation in which new debts and old debts coexist, so this article only discusses the situation of new debt repayment.
Since the debt-in-kind agreement is an arrangement made between the parties on how to pay off the debt, as long as the intention of the two parties is true, the content of the contract does not violate the mandatory provisions of laws and administrative regulations, and the autonomy of the parties' intentions should be respected to the greatest extent, allowing the agreement in kind to take effect and complete the performance. [4]
Therefore, the author believes that even if the price of the "debt" rises, the lender can still request the borrower to deliver the "debt". The Supreme People's Court also affirmed the right of delivery of the "debt-in-kind" by the Agreement in Retrial of the Contract Dispute between Ruili Baojia Real Estate Development and Operation Co., Ltd. and Yunnan Tianjing Real Estate Development Co., Ltd.[5].
In the case of the settlement of the new debt, if the debtor does not perform the debt in kind, the creditor has the right to request the debtor to resume the performance of the old debt or request the debtor to deliver the "debt". However, since the purpose of a debt-in-kind agreement is to achieve the satisfaction of the debt, rather than allowing the creditor to obtain additional benefits through the agreement, the debtor can resist the creditor's request for delivery of the "debt", on the condition that the old debt be fully discharged.
Therefore, if the debtor requests direct payment of the old debt, requests the court to execute other property to pay off the old debt, and requests the court to directly enforce the "debt" to pay off the old debt when the "debt relief" has not yet been delivered to the creditor, the court shall support it. The part of the "debt bond" that exceeds the statutory upper limit of the annual interest rate of private lending after the realization should belong to the debtor. This will not conflict with the current legal provisions, but also conform to the connotation of paying off debts in kind, and can better balance the interests of creditors and debtors.
Conclusion
For a long time, private lending has brought many conveniences to people's production and life with its flexible forms, simple procedures, and fast financing, which has alleviated the difficulty and expensive financing to a certain extent, and met the diversified financing needs of society. With economic development and increasingly active private lending, the SPC made two major revisions to the Old Rules in August 2020 and December 2020. This time, the First Civil Division of the Supreme People's Court also replied to controversial issues such as the interest rate and form of borrowing after the implementation of the New Regulations, which not only provided an important reference for judicial adjudication, but also provided clearer guidance for direct participants in private lending to adapt to the new legal and market environment.
[1] See: (2019) SPC Min Zhong No. 2025 Civil Judgment, (2018) SPC Min Zhong No. 1214 Civil Judgment, and (2017) SPC Min Zhong No. 311 Civil Judgment
[2] See: (2019) Civil Judgment No. 78 of the Min Yi Zhong Zi
[3] See Zhou Yanghui, "Legal Analysis of "Debt in Kind"," in Legal Expo, No. 29, 2020, pp. 72-73
[4] See: (2016) SPC Civil Judgment No. 484
[5] See: (2021) SPC Civil Judgment No. 1460
This article was first published on August 25, 2021 on the "Wang Lei Legal Research" public account platform: "Comprehensive Interpretation: Five Questions and Five Answers on Private Lending in the SPC's Civil Trial Practice Q&A""
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