Liability is one of the common civil liability situations, which is the part of the liability consequences pointed to by the legal provisions, and belongs to the core content of the legal rules. There are also many provisions related to compensation in the supporting judicial interpretations of the Civil Code. The following content is now sorted out and formed through the table for readers' reference.
| Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Principles of Contracts in the Civil Code of the People's Republic of China | Related Provisions |
| Article 5 [Liability of Third Parties in the Conclusion of Contracts] Where a third party commits an act of fraud or coercion, causing the parties to conclude a contract contrary to their true intentions, and the party who has suffered losses requests that the third party bear the liability for compensation, the people's court shall support it in accordance with law; However, where laws and judicial interpretations have other provisions on the civil liability of parties and third parties, follow those provisions. Interpretation: The third party is not a party, and in the absence of clear provisions, it cannot be required to bear contractual liability, nor should it be directly required to bear contractual negligence liability. For this reason, the interpretation clarifies the way of handling through this article, that is, to bear the corresponding responsibility according to the respective fault. | Article 149 of the Civil Code [Effect of Civil Juristic Acts Committed by a Third Party] Where a third party commits a fraudulent act, causing one party to carry out a civil juristic act contrary to its true intentions, and the other party knows or should know about the fraudulent act, the defrauded party has the right to request the people's court or arbitration institution to revoke it. Article 150 [Effect of Civil Juristic Acts Carried Out by Coercion] Where one party or a third party uses coercion to cause the other party to carry out a civil juristic act contrary to its true intentions, the coerced party has the right to request the people's court or arbitration institution to revoke it. Article 157 [Legal Consequences of Civil Juristic Acts Being Invalid, Revocation, or Determined to Be Ineffective] After a civil juristic act is invalid, revoked, or determined to be ineffective, the property acquired by the actor as a result of the act shall be returned; The party at fault shall compensate the other party for the losses suffered thereby, and if both parties are at fault, they shall each bear the corresponding responsibility. Where the law provides otherwise, follow those provisions. Article 21 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application <中华人民共和国民法典>of the General Provisions of the General Provisions" (hereinafter referred to as the "Interpretation of the General Provisions of the Civil Code") Where a person intentionally informs false information, or a person who has an obligation to inform intentionally conceals the true situation, causing the parties to express their intent based on a misunderstanding, the people's court may find that it is fraud as provided for in articles 148 and 149 of the Civil Code. Article 22: Where natural persons and their close relatives are threatened to cause harm to their personal rights, property rights, or other lawful rights and interests, or to cause harm to the reputation, honor, or property rights and interests of legal persons or unincorporated organizations, to compel them to express their intent based on fear, the people's courts may find it to be coercion as provided for in article 150 of the Civil Code. |
| Article 8 [Liability for Breach of Contract for Breach of Reservation Contract] Where, after the reservation contract takes effect, one of the parties fails to perform its obligation to conclude this contract, and the other party requests compensation for the losses caused thereby, the people's court shall support it in accordance with law. Where there is no agreement, the people's court shall make a decision based on factors such as the completeness of the content of the reservation contract and the degree of fulfillment of the conditions for concluding this contract. Interpretation: As far as the liability for damages under the liability for breach of contract in the reservation contract is concerned, there is an agreement to follow the agreement, but in the absence of an agreement, the maturity of the entire transaction reached by the conclusion and performance of the reservation contract, or the degree of completeness of the content of the reservation contract and the degree of achievement of the conditions for entering into this contract, should be reflected in the calculation of the scope of damages for breach of contract in the reservation contract. On the one hand, the ultimate purpose of the parties is not to pre-empt the performance of the contract, but to conclude and perform the contract. The benefits of the performance of this contract can be used as the upper limit of damages for breach of contract in the advance contract (if the parties reach an agreement on the main content of the entire transaction through negotiation at the appointment stage, it is equivalent to the conclusion of the reservation contract and the performance of the reservation contract to complete the vast majority of the entire transaction, and the performance of the obligations of this contract only occupies a very small weight in the whole transaction link, and the scope of damages for breach of contract in the reservation contract can be very close to or even equal to the scope of damages for breach of contract in this contract). On the other hand, since the stage at which the advance contract is located is actually the stage of the conclusion of the contract, the scope of liability for negligence in contracting can be regarded as the lower limit of the scope of liability for breach of contract in the advance contract. Within the upper and lower limits, a certain amount may be determined in accordance with the provisions of this article, taking into account factors such as the completeness of the content of the reservation contract and the degree of fulfillment of the conditions for entering into this contract. Of course, the liability for the reservation is also subject to the rules of mitigation of damage and the rules of offsetting of profit and loss. Case reference 1: "A real estate development company in Yueyang Economic and Technological Development Zone, Changling Branch of a group asset management co., LTD., and a group asset management co., LTD. joint venture and cooperative development of real estate contract disputes" [Selected Cases of the People's Court, Volume 145 (2020.3)] The gist of the case: For the bidding contract in the construction project, after the winning bidder is determined, the tenderer shall issue a notice of winning the bid to the winning bidder. At this time, the nature of the bidding act is an offer, and the nature of the bid winning notice is a commitment, so far the contract between the two parties has been established. The parties constitute a contractual relationship under this contract, not an appointment contractual relationship, and the parties bear the liability for breach of contract, not the liability for negligence in concluding the contract. Case reference 2: "Changzhou Real Estate Development Co., Ltd. Hotel Branch v. Zhu, A Catering Service Contract Dispute" [Selected Cases of the People's Court, Volume 155 (2021.1)] Gist of the case: The reservation contract is an independent contract for the purpose of concluding this contract, and based on the particularity of the nature of the reservation contract, the loss caused by the breach of the reservation contract is different from the liability for breach of contract and the liability for negligence in entering into the contract, but is an independent liability for breach of contract. | Article 495 of the Civil Code [Reservation Contract] A subscription letter, order book, reservation book, etc., in which the parties agree to conclude a contract within a certain period of time in the future, constitutes an advance contract. If one of the parties fails to perform the obligation to conclude the contract as stipulated in the reservation contract, the other party may request it to bear the liability for breach of the reservation contract. Article 510 [Remedies for which there is no agreement in the contract or the agreement is unclear] After the contract comes into effect, if the parties have not agreed on the quality, price or remuneration, place of performance, etc., or the agreement is not clear, they may supplement it by agreement; Article 511 [Performance in the event of unclear contract agreement] Where the parties are unclear on the content of the relevant contract and cannot be determined in accordance with the provisions of the preceding article, the following provisions shall apply: (1) If the quality requirements are not clear, they shall be performed in accordance with the mandatory national standards; if there are no mandatory national standards, they shall be performed in accordance with the recommended national standards; if there are no recommended national standards, they shall be performed in accordance with the industry standards; if there are no national standards or industry standards, they shall be performed in accordance with the usual standards or specific standards that meet the purpose of the contract. (2) If the price or remuneration is not clear, it shall be performed according to the market price of the place where the contract is performed; (3) Where the place of performance is not clear, the place where the payment of money is made, it shall be performed at the location of the party receiving the currency, the place where the immovable property is delivered, and the place where the other subject matter shall be performed at the place where the party performing the obligation is located. (4) If the time limit for performance is not clear, the debtor may perform at any time, and the creditor may also request performance at any time, but the other party shall be given the necessary time to prepare. (5) Where the method of performance is not clear, it shall be performed in a manner conducive to the realization of the purpose of the contract. (6) Where the burden of performance costs is not clear, the party performing the obligation shall bear the burden, and the creditor shall bear the additional performance costs due to the creditor's reasons. Article 577 [Liability for Breach of Contract] If one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, it shall bear the liability for breach of contract such as continuing to perform, taking remedial measures or compensating for losses. Article 584 [Scope of Damages] If one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, resulting in losses to the other party, the amount of compensation for losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract; Article 585 [Liquidated Damages] The parties may agree that one party shall pay a certain amount of liquidated damages to the other party according to the circumstances of the breach of contract, and may also agree on the method of calculating the amount of compensation for losses arising from the breach. If the agreed liquidated damages are lower than the losses caused, the people's court or arbitration institution may increase them at the request of the parties; If the parties agree on liquidated damages for delayed performance, the breaching party shall also perform the debt after paying the liquidated damages. |
| Article 12 [Application of Law to Approve Effective Contracts] After a contract is established in accordance with law, if the party with the obligation to report for approval fails to perform the obligation to report for approval or the performance of the obligation to report for approval does not conform to the provisions of the contract or the provisions of laws or administrative regulations, and the other party requests that it continue to perform the obligation to report for approval, the people's court shall support it; Where the people's court makes a judgment that one of the parties still fails to perform after it has performed its obligation to report for approval, and the other party claims to terminate the contract and requests that it bear the liability for compensation with reference to the liability for breach of contract for breach of contract, the people's court shall support it. Where, before the contract is approved, one party sues to request the other party to perform the main obligations agreed in the contract, and refuses to modify the litigation claim after interpretation, the people's court shall make a judgment to reject the litigation claim, but this does not affect the fact that it initiates a separate lawsuit. Where a party with an obligation to report for approval has already gone through formalities such as applying for approval or has already performed the obligation to report for approval as determined by the effective judgment, and the approving organ decides not to approve it, and the other party requests that it bear liability for compensation, the people's court will not support it. However, if the contract is not approved due to reasons attributable to the parties such as delay in performance of the obligation to report for approval, and the other party requests compensation for the losses suffered thereby, the people's court shall handle it in accordance with the provisions of Article 157 of the Civil Code. Interpretation: Under normal circumstances, the entry into force of the contract is consistent with the formation of the contract, and the formation of the contract will be effective. However, if the law stipulates otherwise for the effective time of the contract or the parties agree otherwise, the provisions of the law or the agreement of the parties shall apply. Circumstances otherwise provided by law mainly refer to the situation where the formation and effectiveness of the contract are separated. For example, if a contract should be approved in accordance with the law, it will not be effective even if the contract is formed. If the parties agree otherwise, it mainly refers to conditional and time-limited contracts. It should be noted that a contract that has not entered into force is a specific concept and is not void. In the case of a contract that has not entered into force, once the procedural defects have been remedied, the contract can be deemed to be effective. It should also be noted that paragraphs 1 and 2 of this article respectively provide for two types of liability for breach of contract. The former is a situation where the parties directly request the termination of the contract and request the person with the obligation to report for approval to bear the liability for breach of contract for breach of the obligation to report for approval. The latter is that after the court has ruled that the person with the obligation to report for approval continues to perform the obligation to report for approval, if the party still refuses to perform the obligation to report for approval, the party shall file a separate lawsuit to demand the termination of the contract and request it to bear the liability for breach of contract by reference to the breach of contract. The liability for breach of contract for the latter type of breach of contract is not only greater in terms of the scope of compensation than the liability for breach of the obligation to report for approval, but also does not require the contract to be expressly stipulated, and can be borne in accordance with the law when there is no agreement in the contract. Case reference 1: "Dispute over Equity Transfer between Bulk Group Co., Ltd., Zong Xijin and Huaibei Shenghuo Mining Co., Ltd., Huaibei Shenghuo Real Estate Development Co., Ltd., etc." [Gazette of the Supreme People's Court, Issue 6, 2016] Summary of the adjudication: mining rights and equity are two different civil rights, if only the transfer of the company's equity does not lead to the change of the subject of mining rights, it is not a transfer of mining rights, the transfer contract does not need to be approved by the competent department of geology and mineral resources, and the contract should be deemed legal and valid without violating the mandatory provisions of laws and administrative regulations. Where a party delaying the performance of its obligations under an effective contract claims a change in circumstances on the grounds of a change in national policy during the period of delayed performance, it is not supported. Case reference 2: "Chen Yundou v. Kuandian Manchu Autonomous County, Hushan Town, Laobianqiang Villagers' Committee Mining Right Transfer Contract Dispute" [Gazette of the Supreme People's Court, No. 3, 2012] Summary of the Adjudication: 1. The leasing of mining rights is a special way of transferring mining rights, and the contract for the transfer of mining rights is a contract that takes effect only after approval. According to the provisions of Article 10, Paragraph 3 of the Administrative Measures for the Transfer of Prospecting Rights and Mining Rights of the State Council, the leasing of mining rights shall be subject to the examination and approval of the authority with the right to approve the transfer, and if the transfer is approved, the transfer contract shall take effect from the date of approval. 2. In litigation, if the mining right lease contract has not been approved, the people's court shall determine that the contract has not taken effect. Although the mining right contract has not yet taken effect, the approval clause stipulated in the contract is still valid. If one party requests the other party to continue to perform the obligation to submit for approval on this basis, and the people's court finds that the objective conditions permit it, the people's court shall support its request; | Article 502 of the Civil Code [Effective Time of Contract] A contract established in accordance with law shall take effect upon its establishment, unless otherwise provided by law or otherwise agreed by the parties. In accordance with the provisions of laws and administrative regulations, if the contract shall go through formalities such as approval, follow those provisions. If the failure to go through formalities such as approval affects the effectiveness of the contract, it does not affect the validity of the provisions of the contract on the performance of obligations such as reporting for approval and the validity of the relevant clauses. If a party who should go through formalities such as applying for approval fails to perform its obligations, the other party may request that it bear responsibility for violating such obligations. Where, in accordance with the provisions of laws and administrative regulations, the modification, transfer, or termination of a contract shall go through formalities such as approval, the provisions of the preceding paragraph shall apply. 37. [Validity of Unapproved Contracts] Where laws and administrative regulations stipulate that certain types of contracts shall go through approval formalities to take effect, such as the Commercial Banking Law, the Securities Law, the Insurance Law and other laws that stipulate that the purchase of more than 5% of the equity of commercial banks, securities companies and insurance companies must be approved by the relevant competent authorities, according to the provisions of Article 44, Paragraph 2 of the Contract Law, approval is the statutory condition for the contract to take effect, and the unapproved contract does not take effect because it lacks the special effective conditions prescribed by law. A prominent issue in practice is that a contract that has not entered into force is recognized as an invalid contract, or that a contract that has not entered into force is treated as an invalid contract even though it has not taken effect. An invalid contract essentially lacks the elements of validity of the contract, or has a legal reason for the invalidity of the contract, and has no legal effect from the beginning. However, due to the lack of laws, administrative regulations or special effective conditions agreed upon by the parties, the legal effect of requesting the other party to perform the main rights and obligations of the contract cannot be produced before the effective conditions are fulfilled. The Contract Law has been repealed, and the relevant provisions are found in Article 502 of the Civil Code |
| Article 19 [Effect of Contracts Without Authority] Where a contract concluded for the purpose of transferring or creating property rights is concluded and the parties or the real rights holder claim that the contract is invalid solely on the ground that the transferor does not have ownership or the right to dispose of the subject matter at the time of conclusion of the contract, the people's court will not support it; Where the contract provided for in the preceding paragraph is found to be valid, and the transferor has already delivered or transferred the property to the transferee, and the real rights holder requests that the property rights have not been changed or that the property be returned, the people's court shall support it. However, there is an exception where the transferee acquires property rights in good faith in accordance with Article 311 of the Civil Code and other provisions. Interpretation: As far as the validity of a contract concluded without the right to dispose of another person's property is concerned, although Article 597 of the Civil Code does not specify whether the contract entered into by the seller to dispose of another person's property is a valid contract, it can be inferred from the provisions that the contract should be valid. Article 215 of the Civil Code also shows that a contract concluded when the seller has no ownership or right to dispose of the subject matter shall in principle take effect from the time the contract is concluded. In the absence of the right to dispose of the contract, although the contract may be found to be valid, the ownership of the subject matter cannot be transferred because the seller has not acquired ownership or the right to dispose of it. Thus, in such a case, the assignee should generally not be supported even if it requested the grantor to perform the contract on the basis of a valid contract. In this case, the buyer may, according to the actual circumstances, request the termination of the sales contract and request the actor to compensate for losses because the performance cannot achieve the purpose of the contract. Of course, not all contracts without the right to dispose cannot be performed, and an exception is that the transferor can request the transferor to perform the contract if the real right holder recognizes it retrospectively or the transferor obtains the right of disposition after the transferor. However, in this case, the original "no right to dispose" has been changed to "right to dispose of" based on retrospective recognition and other acts. Another exception is that the assignee satisfies the requirement of bona fide acquisition. Case reference 1: China CITIC Bank Co., Ltd. Dongguan Branch v. Chen Zhihua et al., A Financial Loan Contract Dispute (Guiding Case No. 168 of the Supreme People's Court) Key points of the case: If the mortgage is secured by immovable property, and the mortgagor fails to register the mortgage in accordance with the mortgage contract, the validity of the mortgage contract shall not be affected. Where the creditor claims that the mortgagor bears liability for breach of contract within the value of the collateral on the basis of the mortgage contract, the people's court shall support it. If the mortgagee is at fault for failing to register the mortgage, the mortgagor's liability for compensation shall be reduced accordingly. Case reference 2: Liu Zhibing v. Lu Zhicheng, a dispute over property ownership [Gazette of the Supreme People's Court, No. 2, 2008] Summary of the adjudication: bona fide acquisition refers to the transfer of immovable or movable property by a person without the right of disposition to the transferee, and the transferee acquires the ownership of the immovable or movable property in accordance with the law with good faith and at a reasonable price. Therefore, the acquisition in good faith should meet the following three conditions: (1) the transferee received the movable property in good faith; Although motor vehicles are movable property, there are some strict management measures that make motor vehicles different from other movable assets that do not need to be registered. Where the perpetrator did not trade in the second-hand motor vehicle trading market to obtain a motor vehicle lawfully owned by others, and cannot prove that he was bona fide and paid a reasonable price, the people's court will not support his request to claim that he has acquired the ownership of the motor vehicle in good faith. | Article 597 of the Civil Code [Effect of Disposition without Authority] If the ownership of the subject matter cannot be transferred because the seller has not obtained the right to dispose of it, the buyer may rescind the contract and request the seller to bear the liability for breach of contract. Where laws or administrative regulations prohibit or restrict the transfer of subject matter, follow those provisions. Article 646 [Applicable to Contracts for Payment] Where the law has provisions on other contracts for compensation, such provisions shall prevail; Article 215 [Distinction between the validity of a contract and a change in real rights] Unless otherwise provided by law or otherwise agreed by the parties, a contract concluded between the parties concerning the creation, modification, transfer and extinction of real property rights shall take effect upon the conclusion of the contract; Article 209 [Effect of Registration of Immovable Property Rights] The creation, alteration, transfer and extinction of real estate rights shall take effect upon registration in accordance with law, and shall not take effect without registration, unless otherwise provided by law. The ownership of natural resources that belong to the State in accordance with the law may not be registered. Article 224 [Effect of Delivery of Movable Property] The creation and transfer of movable property rights shall take effect from the time of delivery, unless otherwise provided by law. Article 311 [Acquisition in Good Faith] If the person without the right of disposition transfers the immovable or movable property to the transferee, the owner shall have the right to recover it, and unless otherwise provided by law, the transferee shall acquire the ownership of the immovable or movable property under the following circumstances: (1) The transferee is acting in good faith when he transfers the immovable or movable property; (2) transfer at a reasonable price; (3) The transferred immovable or movable property shall be registered in accordance with the provisions of law, and the transfer shall be delivered to the transferee if it is not required to be registered. Where the transferee obtains the ownership of immovable or movable property in accordance with the provisions of the preceding paragraph, the original owner has the right to claim damages from the person without the right of disposition. Where the parties acquire other real rights in good faith, the provisions of the preceding two paragraphs shall apply by reference. Article 37 of the Interpretation of the Supreme People's Court on the Application of the Civil Code of the People's Republic of China on the Guarantee System (hereinafter referred to as the "Interpretation of the Guarantee System of the Civil Code"). Where a party mortgages property whose ownership or right to use is unclear or disputed, and upon review it constitutes that it has no right to dispose of it, the people's court shall handle it in accordance with the provisions of article 311 of the Civil Code. Where a party mortgages property that has been sealed or seized in accordance with law, and the mortgagee requests to exercise the mortgage right, and upon review the sealing or seizure measures have been lifted, the people's court shall support it. Where the mortgagor claims that the mortgage contract is invalid on the grounds that the property was sealed or seized at the time of the establishment of the mortgage, the people's court will not support it. Where property that is subject to supervision in accordance with law is mortgaged, the provisions of the preceding paragraph apply. |
| Article 20 [Contractual Validity of Ultra Vires Representatives] In order to restrict the representation rights of the legal representative of a legal person or the person in charge of an unincorporated organization, laws and administrative regulations stipulate that the matters involved in the contract shall be resolved by the power or decision-making body of the legal person or unincorporated organization, or shall be decided by the executive body of the legal person or unincorporated organization. Where an unincorporated organization takes effect and it bears liability for breach of contract, the people's court will not support it, but where the legal person or unincorporated organization is at fault, a judgment may be made to bear the corresponding liability for compensation with reference to article 157 of the Civil Code. Where the counterpart has already fulfilled the obligation of reasonable review and constitutes an apparent representative, the people's court shall handle it in accordance with the provisions of article 504 of the Civil Code. Where the matters involved in the contract do not exceed the authority of the legal representative or responsible person as provided for by laws or administrative regulations, but exceed the restrictions on the right of representation by the charter or authority of the legal person or unincorporated organization, and the counterparty claims that the contract is effective against the legal person or unincorporated organization and that it bears liability for breach of contract, the people's court shall support it in accordance with law. However, this is not the case where legal persons or unincorporated organizations present evidence to prove that the counterparty knew or should have known of the restriction. Where, after a legal person or unincorporated organization bears civil liability, it recovers losses caused by the ultra vires representative or responsible person from the legally-designated representative or responsible person who is at fault, the people's court is to support it in accordance with law. Where laws and judicial interpretations have other provisions on the civil liability of legal representatives or responsible persons, follow those provisions. Interpretation: If the legal representative of a legal person or the person in charge of another organization concludes a contract beyond his authority, the representative act is generally valid, that is, the so-called "apparent representative". However, in the event that laws and administrative regulations restrict the representation rights of the legal person's legal representative or the person in charge of an unincorporated organization, and stipulate that the matters involved in the contract shall be decided by the power or decision-making body of the legal person or unincorporated organization, or shall be decided by the executive body of the legal person or unincorporated organization, and the counterparty cannot prove that it has fulfilled its obligation of reasonable review, but still concludes a contract with it, it shall be deemed to have "bad faith", and there is no need to protect the counterparty of the contract at this time. However, if a legal person or unincorporated organization is at fault, although the validity of the contract is not protected, based on the perspective of balance of interests, a judgment may be made that the legal person or unincorporated organization compensate the counterparty for certain losses based on article 157 of the Civil Code. Restrictions on the representation rights of the legal representative of a legal person or the person in charge of an unincorporated organization mainly include two situations: one is intentional restrictions, including general restrictions on representation made in advance by the articles of association of the company, as well as individual restrictions on the representation rights made by the company's authority such as shareholders' meetings and shareholders' meetings. The second is statutory restrictions, that is, the restrictions imposed by laws and administrative regulations on the right of representation. It should be noted that the intentional restriction only has internal effect and cannot be used against a bona fide counterpart. In other words, in the case of the good faith of the counterpart, there is still the possibility of constituting an apparent representative. Unlike intended restrictions, once laws and administrative regulations are promulgated, it is presumed that everyone should know about and abide by them. Therefore, in the case of a statutory restriction on the right of representation, the counterparty generally cannot claim that it is bona fide and constitutes an apparent representation on the ground that it is not aware of the statutory restriction. It is worth noting that although the matters involved in the contract do not exceed the representative authority of the legal representative or the person in charge of the unincorporated organization, but exceed the restrictions imposed by the legal person or the unincorporated organization's articles of association or the authority on the representation rights of the legal representative or the responsible person, such a situation should be regarded as an intentional restriction. In this case, the restriction on the representation of the legal representative or responsible person originates from within the organization, and its effect is relative, and generally cannot be used against a bona fide third party, unless there is evidence to prove that the counterpart knew or should have known of the restriction. Case reference: "China Merchants Bank Co., Ltd. Dalian Donggang Sub-branch v. Dalian Zhenbang Fluorine Coatings Co., Ltd. and Dalian Zhenbang Group Co., Ltd. Loan Contract Dispute Case" [Gazette of the Supreme People's Court, Issue 2, 2015] Summary of the Adjudication: The second paragraph of Article 16 of the Company Law stipulates that if a company provides a guarantee for the shareholders or actual controller of the company, it must be resolved by the shareholders' meeting or the general meeting of shareholders. This clause is a provision on the management of the company's internal control, and should not be used as a basis for evaluating the validity of the contract. If the guarantor argues that its legal representative's act of entering into a mortgage contract exceeds the right of representation, and the creditor has performed its obligation to conduct a formal review of the relevant shareholders' meeting resolution, and claims that the legal representative of the guarantor constitutes an apparent representative, the people's court should support it. Note: Article 15 of the Company Law (2023 Revision) stipulates that a company provides guarantees for shareholders or actual controllers. | Article 504 of the Civil Code [Validity of Contracts Concluded in Excess of Authority] Where the legal representative of a legal person or the person in charge of an unincorporated organization enters into a contract beyond his authority, the act of the representative is valid unless the counterparty knows or should know that he has exceeded his authority, and the contract concluded is effective against the legal person or unincorporated organization. Article 61 Legal Representatives In accordance with the provisions of the law or the legal person's charter, the responsible person who engages in civil activities on behalf of the legal person is the legal representative of the legal person. The legal consequences of civil activities carried out by the legal representative in the name of the legal person shall be borne by the legal person. The legal person's charter or the legal person's authority body's restrictions on the legal representative's right to represent must not be opposed to the bona fide counterpart. Article 157 [Legal Consequences of Civil Juristic Acts Being Invalid, Revocation, or Determined to Be Ineffective] After a civil juristic act is invalid, revoked, or determined to be ineffective, the property acquired by the actor as a result of the act shall be returned; The party at fault shall compensate the other party for the losses suffered thereby, and if both parties are at fault, they shall each bear the corresponding responsibility. Where the law provides otherwise, follow those provisions. Article 15 of the Company Law (2023 Revision). If a company invests in other enterprises or provides guarantees for others, the board of directors or the shareholders' meeting shall make a resolution in accordance with the provisions of the articles of association; if the articles of association stipulate that the total amount of investment or guarantee and the amount of individual investment or guarantee shall not be exceeded. If the company provides a guarantee for the company's shareholders or actual controllers, it shall be resolved by the shareholders' meeting. The shareholders provided for in the preceding paragraph, or the shareholders under the control of the actual controller provided for in the preceding paragraph, must not participate in the voting on the matters provided for in the preceding paragraph. The vote shall be passed by a majority of the voting rights held by the other shareholders present at the meeting. Article 7 of the Interpretation of the Guarantee System of the Civil Code If the legal representative of the company violates the provisions of the Company Law on the procedures for the resolution of the company's external guarantee and exceeds his authority to enter into a guarantee contract with the counterparty on behalf of the company, the people's court shall deal with it in accordance with the provisions of Articles 61 and 504 of the Civil Code: (1) If the counterparty is bona fide, the guarantee contract shall take effect against the company, and if the counterparty requests the company to bear the guarantee liability, the people's court shall support it. (2) If the counterparty is not in good faith, the guarantee contract shall not be effective against the company, and if the counterparty requests the company to bear the liability for compensation, the relevant provisions of Article 17 of this interpretation shall apply by reference. Where the legal representative exceeds his authority to provide guarantees and causes losses to the company, and the company requests that the legal representative bear the liability for compensation, the people's court shall support it. The term "good faith" as used in the first paragraph refers to the fact that the counterparty did not know and should not have known that the legal representative exceeded his authority at the time of entering into the guarantee contract. Where the counterparty has evidence to prove that a reasonable review of the company's resolution has been conducted, the people's court shall find that it constitutes good faith, except where the company has evidence to prove that the counterparty knew or should have known that the resolution was forged or altered. 17. In order to prevent the legal representative from arbitrarily providing guarantees for others on behalf of the company and causing losses to the company and harming the interests of small and medium-sized shareholders, Article 16 of the Company Law restricts the representation of the legal representative. According to this article, the guarantee act is not a matter that can be decided by the legal representative alone, but must be based on the resolution of the company's shareholders' meeting, board of directors and other corporate organs as the basis and source of authorization. The people's court shall, in accordance with the provisions of article 50 of the Contract Law on ultra vires representation of the legal representative, distinguish whether the creditor is bona fide at the time of conclusion of the contract and determine the validity of the contract: if the creditor is bona fide, the contract is valid, otherwise, the contract is invalid. The Contract Law has been repealed, and the relevant provisions are found in Article 504 of the Civil Code 18. The "good faith" mentioned in the preceding article refers to the creditor's knowledge or should not have known that the legal representative exceeded his authority to conclude the security contract. Article 16 of the Company Law makes a distinction between the resolution organs of related and non-affiliated guarantees, and accordingly, there should be a distinction in the criteria for judging good faith. Article 16 of the Company Law clearly stipulates that the resolution of the shareholders' (general meeting) must be made by the shareholders' (general meeting) to provide a related guarantee for the company's shareholders or actual controllers. In this case, if the creditor claims that the guarantee contract is valid, it shall provide evidence to prove that it has reviewed the resolution of the shareholders' (general meeting) meeting at the time of entering into the contract, and the voting procedure of the resolution complies with the provisions of Article 16 of the Company Law, that is, under the condition that the voting rights of the secured shareholders are excluded, the vote shall be passed by more than half of the voting rights held by the other shareholders present at the meeting, and the signatories shall also comply with the provisions of the articles of association. On the other hand, if the company provides a non-affiliated guarantee to a person other than the company's shareholders or actual controllers, according to Article 16 of the Company Law, the articles of association of the company stipulate whether it is a resolution of the board of directors or a resolution of the shareholders' (general meeting). Regardless of whether the articles of association provide for the resolution organ, and whether the articles of association stipulate that the resolution organ is the board of directors or the shareholders' (general meeting), according to paragraph 3 of article 61 of the General Provisions of the Civil Law, "the articles of association of a legal person or the restriction of the legal representative's right of representation by the legal person authority shall not be opposed to a bona fide counterpart" As long as the creditor can prove that it has reviewed the resolution of the board of directors or the resolution of the shareholders' (general meeting) at the time of entering into the guarantee contract, and the number of persons who agree to the resolution and the signatories comply with the provisions of the company's articles of association, it shall be deemed to constitute good faith, unless the company can prove that the creditor is aware that the company's articles of association have clear provisions on the resolution authority. The creditor's review of the content of the company's resolution is generally limited to a formal review, and only requires the necessary duty of care to be performed, and the standard should not be too strict. Where the company argues that the creditor is not bona fide on the grounds that the resolution of the organ is forged or altered by the legal representative, the resolution procedure is illegal, the signature (name) is false, or the amount of the guarantee exceeds the statutory limit, the people's court will generally not support it. However, unless the company has evidence to prove that the creditor knew that the resolution was forged or altered. 20. In accordance with the provisions of the preceding 3 articles, if the guarantee contract is valid and the creditor requests the company to bear the guarantee liability, the people's court shall support it in accordance with law; if the guarantee contract is invalid and the creditor requests the company to bear the guarantee liability, the people's court shall not support it, but may handle it in accordance with the provisions of the Guarantee Law and relevant judicial interpretations on the invalidity of the guarantee. Where the company adduces evidence to prove that the creditor clearly knew that the legal representative exceeded his authority or that the resolution of the organ was forged or altered, and the creditor requested the company to bear the civil liability after the contract was invalid, the people's court will not support it. 21. Where the legal representative's ultra vires guarantee causes losses to the company, and the company requests that the legal representative bear the liability for compensation, the people's court shall support it in accordance with law. If the company does not file a lawsuit, and the shareholder requests the legal representative to bear the liability for compensation in accordance with Article 151 of the Company Law, the people's court shall support it in accordance with law. |
| Article 21: [Duty Agency and Validity of Contracts] Where a staff member of a legal person or unincorporated organization concludes a contract in the name of a legal person or unincorporated organization on matters beyond the scope of his or her authority, and the counterparty claims that the contract is effective against the legal person or unincorporated organization and that it bears liability for breach of contract, the people's court will not support it. However, where a legal person or unincorporated organization is at fault, the people's court may make a judgment with reference to article 157 of the Civil Code that it bears the corresponding liability for compensation. Where the circumstances described above constitute apparent representation, the people's courts shall handle it in accordance with the provisions of article 172 of the Civil Code. In any of the following circumstances, the people's court shall find that the staff of a legal person or unincorporated organization exceeded the scope of their authority when concluding the contract: (1) Matters that shall be resolved by the power or decision-making body of the legal person or unincorporated organization in accordance with law; (2) Matters that shall be decided by the enforcement body of a legal person or unincorporated organization in accordance with law; (3) Matters that shall be carried out by the legally-designated representative or responsible person on behalf of the legal person or unincorporated organization in accordance with law; (4) It is not a matter that can be handled in accordance with their authority under normal circumstances. Where the matters involved in the contract do not exceed the scope of authority determined in accordance with the preceding paragraph, but exceed the restrictions imposed by legal persons or unincorporated organizations on the scope of authority of staff, and the counterparty claims that the contract is effective for legal persons or unincorporated organizations and that they bear liability for breach of contract, the people's court shall support it. However, this is not the case where legal persons or unincorporated organizations present evidence to prove that the counterparty knew or should have known of the restriction. Where legal persons or unincorporated organizations recover compensation from staff members who have intentionally or grossly negligent after they bear civil liability, the people's courts are to support it in accordance with law. Interpretation: The will of a legal person or unincorporated organization can be expressed not only through the representative system, but also through the agency system, that is, the employees of the legal person or unincorporated organization enjoy the right of agency within the scope of their duties based on their positions, and the legal effects of the relevant acts carried out by them shall be borne by the legal person or unincorporated organization to which they belong. However, for an agency that exceeds the limits of its authority, it is necessary to see whether the counterparty is bona fide and then determine whether the agency act is valid. If an agent does not have the power of agency and acts as an agent, the rule of non-agency provided for in Article 171 of the Civil Code shall apply. However, in the case where the counterparty has reason to believe that the actor has the power of agency, and therefore acts in good faith, the apparent agency is established, and Article 172 of the Civil Code is applicable, and the legal person or unincorporated organization as the principal shall bear the consequences of the agency act, so as to protect the interests of the counterparty. Paragraph 2 of Article 170 of the Civil Code only stipulates one of the types of apparent agency that exceeds the power of agency, and in fact it is a special provision for apparent agency. The reason why the special provisions are made through paragraph 2 of Article 170 is that in the case of agency of duty, the special nature of the composition of apparent agency is that as long as the agent of duty does not have the power of agency and the counterpart is bona fide, the apparent agency will be established, and other possible elements of apparent agency will not be allowed to hinder the establishment of apparent agency. Paragraph 2 of this article clarifies the common situation of exceeding the scope of authority in the case of duty agents. In addition, similar to the preceding article, and also based on the perspective of balance of interests, in the case of denying the validity of the contract, the legal person or unincorporated organization at fault may be judged to compensate for certain losses by referring to Article 157 of the Civil Code. Case reference: "Xi'an Engineering Co., Ltd. v. Xi'an Industrial Co., Ltd. Construction Contract Dispute Case" [People's Justice, Cases, Issue 23, 2020] The gist of the case: the duty agent is the agency obtained in accordance with the labor or employment relationship, according to the authority to perform the work tasks of the legal person, and it naturally enjoys the corresponding agency power, and does not need the legal person to separately authorize it again; the project manager of the contractor, as the person in charge of the company, signs the construction contract with the employer in the name of the contractor, and performs the obligations according to the contract, and the project manager shall be regarded as the person who performs the work tasks of the contractor; the project cost settlement voucher signed by the project manager and the employer is a duty agency act, and the civil liability shall be borne by the contractor. | Article 170 of the Civil Code [Duty Agency] Civil juristic acts carried out in the name of legal persons or unincorporated organizations by persons performing the work tasks of legal persons or unincorporated organizations on matters within the scope of their authority are effective against legal persons or unincorporated organizations. Legal persons or unincorporated organizations must not restrict the scope of authority of personnel carrying out their work tasks against their bona fide counterparts. Article 171 [No Authorized Agency] Where the actor does not have the power of agency, exceeds the power of agency, or after the power of agency is terminated, he still carries out acts of agency, and it is not recognized by the principal, it is not effective against the principal. The counterpart may urge the principal to make a retrospective recognition within 30 days of receiving the notice. Where the principal does not make an expression, it is viewed as a refusal to recognize. Before the act carried out by the perpetrator is recognized, the bona fide counterpart has the right to revoke it. The revocation shall be made by way of notification. Where the conduct carried out by the actor is not recognized, the bona fide counterpart has the right to request that the actor perform the debt or request compensation from the actor for the harm suffered. However, the scope of compensation shall not exceed the benefits that the counterparty can obtain when the agent recognizes it. Where the counterpart knows or should know that the actor has no authority to represent, the counterpart and the actor bear responsibility in accordance with their respective faults. Article 172 [Apparent Agency] Where the actor does not have the power of agency, exceeds the power of agency, or after the power of agency is terminated, but still carries out the act of agency, and the counterpart has reason to believe that the actor has the power of agency, the act of agency is valid. Article 503 [Recognition of a Contract by a Principal without Authority] Where an agent without authority concludes a contract in the name of the principal, and the principal has already begun to perform its contractual obligations or accepts performance from the counterparty, it shall be deemed to be a retrospective recognition of the contract. Article 61 Legal Representatives In accordance with the provisions of the law or the legal person's charter, the responsible person who engages in civil activities on behalf of the legal person is the legal representative of the legal person. The legal consequences of civil activities carried out by the legal representative in the name of the legal person shall be borne by the legal person. The legal person's charter or the legal person's authority body's restrictions on the legal representative's right to represent must not be opposed to the bona fide counterpart. Article 157 [Legal Consequences of Civil Juristic Acts Being Invalid, Revocation, or Determined to Be Ineffective] After a civil juristic act is invalid, revoked, or determined to be ineffective, the property acquired by the actor as a result of the act shall be returned; The party at fault shall compensate the other party for the losses suffered thereby, and if both parties are at fault, they shall each bear the corresponding responsibility. Where the law provides otherwise, follow those provisions. Article 27 of the Interpretation of the General Provisions of the Civil Code: Where the act of not having the authority to act as an agent is not recognized, and the counterpart requests the actor to perform the debt or compensate for losses, the actor shall bear the burden of proof that the counterpart knew or should have known that the actor did not have the authority to act as an agent. Where the actor is unable to prove it, the people's court supports the counterpart's corresponding litigation claim in accordance with law; |
| Article 23: [Malicious Collusion between Representatives or Agents and Counterparts] Where the legally-designated representative, responsible person, or agent maliciously colludes with the counterpart to conclude a contract in the name of a legal person or unincorporated organization, harming the lawful rights and interests of the legal person or unincorporated organization, and the legal person or unincorporated organization claims not to bear civil liability, the people's court shall support it. Where legal persons or unincorporated organizations request that the legally-designated representatives, responsible persons, or agents and counterparts bear joint and several liability for the losses suffered, the people's courts shall support it. On the basis of the evidence adduced by legal persons or unincorporated organizations, and comprehensively considering factors such as the trading habits between the parties, whether the contract was obviously unfair at the time of conclusion, whether the relevant persons obtained improper benefits, and the performance of the contract, where the people's court is able to determine that there is a high probability of malicious collusion between the legal representative, responsible person, or agent and the counterpart, it may require the aforementioned persons to make statements or provide corresponding evidence on the relevant facts such as the process of contract conclusion and performance. Where they refuse to make a statement without a legitimate reason, or the statement they make is unreasonable and they cannot provide relevant evidence, the people's court may find that the fact of malicious collusion is established. Interpretation: Whether it is the representative behavior of the legal representative or the person in charge, or the agency behavior of the personnel performing the work task, the subject of the contract behind it is a legal person or an unincorporated organization. However, it is the lawful rights and interests of legal persons or unincorporated organizations that maliciously collude with their counterparts when entering into a contract, or the legal representative or person in charge of the legal person or unincorporated organization, or the personnel performing work tasks, to harm the counterpart. In such a case, it is clear that the contract concluded should not be considered to be in line with the true intention of the legal person or unincorporated organization, and it is more appropriate to determine that the legal person or unincorporated organization does not bear civil liability as a result than to directly determine that it is invalid on the basis of Article 154 of the Civil Code, which is more conducive to protecting the legitimate interests of all parties concerned. In addition, with regard to the losses caused by the malicious collusion to the legal person or unincorporated organization, because collusion refers to the fact that the two parties subjectively have a common intention to communicate, malicious faith refers to both parties knowing or should know that the act they carry out will cause damage to the legitimate rights and interests of the principal, and malicious collusion refers to the two parties colluding together to carry out certain acts to damage the legitimate rights and interests of the principal. Therefore, both parties shall be jointly and severally liable. | Article 154 of the Civil Code [Effect of Civil Juristic Acts of Malicious Collusion] Civil juristic acts in which the actor maliciously colludes with the counterparty to harm the lawful rights and interests of others are invalid. Article 164 [Legal Consequences of Misconduct by Agents] Where agents do not perform or do not fully perform their duties, causing harm to the principal, they shall bear civil liability. Where the agent and the counterpart maliciously collude to harm the lawful rights and interests of the principal, the agent and the counterpart shall bear joint and several liability. Article 157 [Legal Consequences of Civil Juristic Acts Being Invalid, Revocation, or Determined to Be Ineffective] After a civil juristic act is invalid, revoked, or determined to be ineffective, the property acquired by the actor as a result of the act shall be returned; The party at fault shall compensate the other party for the losses suffered thereby, and if both parties are at fault, they shall each bear the corresponding responsibility. Where the law provides otherwise, follow those provisions. Article 84 [Restriction on Improper Use of Related Relationships] The controlling investors, actual controllers, directors, supervisors, and senior managers of a for-profit legal person shall not use their related relationships to harm the interests of the legal person; Article 22 of the Company Law (2023 Revision). The controlling shareholders, actual controllers, directors, supervisors, and senior managers of the company shall not use their affiliated relationships to harm the interests of the company. Anyone who violates the provisions of the preceding paragraph and causes losses to the company shall be liable for compensation. Article 188 Where a director, supervisor or senior manager violates the provisions of laws, administrative regulations or the articles of association in the performance of his or her duties, causing losses to the company, he or she shall be liable for compensation. |
| Article 24 [Legal Consequences of a Contract Not Established, Invalid, Rescinded, or Determined to Be Ineffective] If a contract is not established, invalid, revoked, or determined to be invalid, and the parties request the return of property, and the property can be returned after examination, the people's court shall, according to the specific circumstances of the case, apply methods such as returning the subject matter in possession and correcting the records in the register, either separately or in combination; Compensation for discount shall be awarded on the basis of the market value of the property or the value calculated in other reasonable ways on the date on which it is revoked or determined to be ineffective. In addition to the circumstances provided for in the preceding paragraph, where the parties also request compensation for losses, the people's court shall, in consideration of the circumstances of the return of property or compensation at a discount, comprehensively consider facts such as gains from the appreciation of property and losses from depreciation, and expenses of transaction costs, and reasonably determine the amount of compensation for losses in accordance with the degree of fault and causal force of both parties, and in accordance with the principles of good faith and fairness. Where a contract is not established, invalid, revoked, or determined to be ineffective, and the parties' conduct is suspected of being illegal and has not been addressed, which may lead to one or both parties obtaining improper benefits through the illegal act, the people's court shall submit a judicial recommendation to the relevant administrative departments. Where a party's conduct is suspected of a crime, the case leads shall be transferred to the criminal investigation organs; Interpretation: The legal consequences of this article include the circumstances in which the contract is not established, invalid, revoked or determined to be ineffective. The so-called determination of invalidity refers to the situation that although the contract has been established, it cannot take effect because the conditions for its effectiveness cannot be met. There are two main types: first, if laws and administrative regulations stipulate that it must be approved to take effect, it cannot take effect because it has not been approved; second, if it takes effect conditionally, the conditions for taking effect cannot be met. In the event that the contract is not established, invalid, revoked or determined to be ineffective, there will be legal consequences such as return of property, compensation for discount, compensation for losses, etc. On the basis of referring to the relevant provisions of the minutes of the Ninth People's Congress, this article makes relatively clear provisions on the determination of the liability for the return of property, compensation for discounts, and compensation for losses after the contract is not established, invalid, revoked, or determined to be ineffective. In addition, the legal consequences of the non-formation, invalidity, revocation or determination of invalidity of the contract are not limited to civil liabilities such as return of property, compensation for discounts and compensation for losses. For the circumstances under which a contract is not established, invalid, revoked, or determined to be ineffective, such as a contract that has been approved to take effect, a contract that is inconsistent with the name and the truth, a contract that violates mandatory provisions, a contract that needs to bear public law liability, a contract that violates local regulations or administrative rules, and also involves administrative acts such as administrative examination and approval, administrative punishment, etc. If the court discovers during the trial of a civil case that the illegal acts of the parties have not been dealt with by the administrative department, it shall issue a judicial recommendation to the relevant administrative department to avoid the unreasonable phenomenon that the illegal acts of the parties have not been negatively evaluated by the validity of the contract or dealt with by the administrative department. In addition, if the contract-related act is suspected of being a crime, the court should also transfer the case clues to the criminal investigation authority, and if it is a criminal private prosecution case, inform the parties that they can file a separate lawsuit with the court with jurisdiction. | Article 508 of the Civil Code [Reference to the Validity of Contracts] Where this Part does not provide for the validity of a contract, the relevant provisions of Chapter VI of Part I of this Law shall apply. Article 157 [Legal Consequences of Civil Juristic Acts Being Invalid, Revocation, or Determined to Be Ineffective] After a civil juristic act is invalid, revoked, or determined to be ineffective, the property acquired by the actor as a result of the act shall be returned; The party at fault shall compensate the other party for the losses suffered thereby, and if both parties are at fault, they shall each bear the corresponding responsibility. Where the law provides otherwise, follow those provisions. Article 23 of the "Interpretation of the General Provisions of the Civil Code" Where a civil juristic act is not established, and the parties request the return of property, compensation at a discount, or compensation for losses, the provisions of Article 157 of the Civil Code shall be applied by reference. 32. [Legal Consequences of the Contract's Non-Establishment, Invalidity or Revocation] Article 58 of the Contract Law stipulates the liability for the return of property and the liability for damages when the contract is invalid or revoked, but does not stipulate the legal consequences of the non-establishment of the contract. In view of the fact that the issue of property return and liability for damages may also arise when the contract is not concluded, the provisions of this article should be applied by reference. When determining the scope of compensation for the return of property or discount compensation after the contract is not established, invalid or revoked, it should be reasonably distributed among the parties in accordance with the requirements of the principle of good faith, so that the dishonest parties cannot benefit from the non-establishment, invalidity or revocation of the contract. In the event that the contract is not formed, invalid or revoked, the liability of the parties for the negligence of the contract shall not exceed the interest in the performance of the contract. For example, according to Article 2 of the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts, if a construction contract is invalid, the construction project may be paid with reference to the contract if the construction project passes the completion acceptance, but unless a new project is added to the contract, the payment of the project price shall generally not exceed the contract agreement. The Contract Law has been repealed, and the relevant provisions are found in Article 157 of the Civil Code, and Article 2 of the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts has been absorbed by Article 793 of the Civil Code 33. [Return of Property and Compensation for Discount] After the contract is not established, invalid or revoked, the factors of property appreciation or depreciation should be fully considered when determining the return of property. After the bilateral contract is not established, invalid or revoked, if the two parties acquire property as a result of the contract, they shall return it to each other. Where the value of equity, houses, or other property that should be returned increases or depreciates relative to the agreed price of the contract, the people's court should comprehensively consider market factors, the relevance of the transferee's business or attachment, and the appreciation or depreciation of the property, and reasonably distribute or share it among the parties, so as to avoid one party benefiting from the non-establishment, invalidity or revocation of the contract. Where the subject matter has been lost, resold to others, or otherwise cannot be returned, the people's court will not support the party's claim for the return of the original item, but where it claims compensation at a discount, the people's court shall support it in accordance with law. In the case of discount, the compensation standard shall be determined on the basis of the price agreed upon by the parties at the time of the transaction, and at the same time taking into account the parties' benefits from the loss or resale of the subject matter. The insurance money or other compensation obtained by the parties when the subject matter is lost, and the consideration obtained at the time of resale, are all benefits obtained by the parties due to the subject matter. The portion of the benefit that is higher or lower than the price shall also be reasonably distributed or shared among the parties. 34. [Return of Price] When the bilateral contract is not established, invalid or revoked, the return of the subject matter and the return of the price shall be treated and paid to each other, and both parties shall return them at the same time. On the issue of whether interest should be paid, as long as one party has a use of the subject matter, it shall generally pay a royalty, which can be offset against the capital occupation fee payable by the party in possession of the price, so the other party only needs to pay the principal and no interest before one party returns the original thing. 35. [Compensation for Damages] In the event that a contract is not formed, invalid, or revoked, the mere return of property or compensation at a discount is not enough to compensate for the loss, and one party may also claim damages from the other party at fault. When determining the scope of damages, it is necessary not only to reasonably determine the liability according to the degree of fault of the parties, but also to consider the factors of property appreciation or depreciation that have been considered when determining the scope of property return, so as to avoid the occurrence of the phenomenon of double profit or double loss. |
| Article 63 [Determination of the Amount of Damages for Breach of Contract] When determining that "the breaching party foresaw or should have foreseen the losses that may be caused by the breach of contract when entering into the contract" as provided for in Article 584 of the Civil Code, the people's court shall, based on the purpose of the parties entering into the contract, comprehensively consider factors such as the subject of the contract, the content of the contract, the type of transaction, the transaction habits, and the negotiation process, and make a determination in accordance with the losses foreseen or should have been foreseen by the civil entity in the same or similar situation as the breaching party at the time of entering into the contract. In addition to the benefits that can be obtained after the performance of the contract, the non-breaching party claims that there are other losses caused by the breach of contract, such as additional expenses that it should incur to the third party for breach of contract, and requests the breaching party to compensate for the breach, and finds that the losses were foreseen or should have been foreseen by the breaching party when the contract was concluded, the people's court shall support it. When determining the amount of compensation for damages for breach of contract, the people's court shall support the deduction of the enlarged losses caused by the non-breaching party's failure to take appropriate measures, the corresponding losses caused by the fault of the non-breaching party, the additional benefits obtained by the non-breaching party as a result of the breach, or the necessary expenses reduced. Interpretation: Article 60 of this Interpretation clarifies that the profit method, the alternative transaction method, the market price method and other methods can be used to determine the loss of profits. Paragraph 2 of this article further clarifies that if there are other losses caused by breach of contract in addition to the loss of available benefits, the court shall also compensate if the court finds that the loss was foreseen or should have been foreseen by the breaching party when entering into the contract. In addition, as far as foreseeability is concerned, paragraph 1 of this article further refines the foreseeability rule, clarifying that the benefits to be obtained shall be determined according to the type of loss foreseeable by a civil subject in the same situation as the breaching party at the time of conclusion of the contract based on the purpose of the contract, taking into account factors such as the subject, content, type of transaction, transaction habits, negotiation process, etc., and adopting the analogy method. Article 584 of the Civil Code limits the scope of damages for breach of contract by "shall not exceed the losses that may be caused by the breach of contract foreseen or should have been foreseen by the breaching party at the time of entering into the contract", that is, the standard of foreseeability of damages for damages. It should be noted that the subject of foreseeability here should be the breaching party, the time node for determining foreseeability should be the time when the contract is concluded rather than the time of breach of contract, the content of foresight refers to the loss foreseen or should have been foreseen by the breaching party at the time of the conclusion of the contract, and the judgment standard of foresight should be based on the abstract rational standard, that is, from the perspective of a rational person. With regard to the determination of the amount of damages for breach of contract, paragraph 3 of this article further provides that the rules of offsetting profits and losses, the rules of negligence, and the rules of preventing the expansion of losses shall be comprehensively used to determine the amount to be borne by the breaching party. Case reference 1: "Chai and a management company housing lease contract dispute case" [The Supreme People's Court issued a typical case related to the judicial interpretation of the General Principles of Civil Code Contracts, Case 10] Main Points of the Adjudication: If one of the parties fails to take appropriate measures after the breach of contract, resulting in an increase in losses, compensation shall not be claimed for the increased losses. The lessee has expressed its intention to terminate the contract to the lessor through various channels, but the lessor has consistently refused to accept the house, resulting in the long-term vacancy of the house involved in the case, and the tenant shall not claim the rent for the entire vacant period. | Article 584 of the Civil Code [Scope of Damages] If one of the parties fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, resulting in losses to the other party, the amount of compensation for the losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract; Minutes of the National Conference on the Implementation of the Civil Code by Courts (hereinafter referred to as the "Minutes of the Civil Code") 11. The scope of losses provided for in paragraph 2 of Article 585 of the Civil Code shall be determined in accordance with the provisions of Article 584 of the Civil Code, including the benefits that can be obtained after the performance of the contract, but shall not exceed the losses that may be caused by the breach of contract that the breaching party foresaw or should have foreseen at the time of entering into the contract. Where a party requests the people's court to increase liquidated damages, the amount of the increased liquidated damages shall not exceed the losses provided for in article 584 of the Civil Code. Where, after the liquidated damages have been increased, the parties request the other party to compensate for losses, the people's court will not support it. Where the parties request the people's court to reduce the liquidated damages, the people's court shall make a judgment on the basis of the losses provided for in article 584 of the Civil Code, taking into account comprehensive factors such as the performance of the contract and the degree of fault of the parties, and in accordance with the principles of fairness and good faith. Where the agreed liquidated damages exceed 30% of the losses determined in accordance with article 584 of the Civil Code, it may generally be found to be "excessively higher than the losses caused" as provided for in paragraph 2 of article 585 of the Civil Code. Where a party claims that the agreed liquidated damages are too high and requests an appropriate reduction, it shall bear the burden of proof, and if the counterparty claims that the liquidated damages are reasonable, it shall also provide corresponding evidence. |
| Interpretation of the General Provisions of the Civil Code | Related Provisions |
| Article 23: [Legal Consequences of Civil Juristic Acts Not Established] Where civil juristic acts are not established, and the parties request the return of property, compensation at a discount, or compensation for losses, the provisions of article 157 of the Civil Code are to be applied by reference. Interpretation: Article 157 of the Civil Code only stipulates the legal consequences of the invalidity, revocation or determination of invalidity of civil juristic acts, but does not provide for the legal consequences of the invalidity of civil juristic acts. However, the establishment of a civil juristic act itself requires that specific requirements be met, and if the requirements for its establishment are not met, the civil juristic act should be found to be unestablished, rather than invalid or revocable. To this end, it is necessary to provide for the legal consequences of the non-establishment of civil juristic acts. On the basis of referring to the provisions of Article 32 of the minutes of the Ninth People's Congress, the interpretation of this article clarifies the legal effect of the non-establishment of civil juristic acts, that is, the provisions of Article 157 of the Civil Code shall be applied by reference. It should be noted that the term "applicable by reference" rather than "applicable" is used here, and it is limited to the liability method of "request for return of property, compensation for discounted value or compensation for losses". | Article 157 of the Civil Code [Legal Consequences of the Invalidity of a Civil Juristic Act, Revocation or Determination of Ineffectiveness] After a civil juristic act is invalid, revoked or determined to be ineffective, the property acquired by the actor as a result of the act shall be returned; The party at fault shall compensate the other party for the losses suffered thereby, and if both parties are at fault, they shall each bear the corresponding responsibility. Where the law provides otherwise, follow those provisions. Minutes of the Nine People's Meetings 32.[Legal Consequences of the Failure of the Contract and Other Situations] Article 58 of the Contract Law stipulates the liability for the return of property and the liability for damages when the contract is invalid or revoked, but does not stipulate the legal consequences of the contract not being formed. In view of the fact that the issue of property return and liability for damages may also arise when the contract is not concluded, the provisions of this article should be applied by reference. When determining the scope of compensation for the return of property or discount compensation after the contract is not established, invalid or revoked, it should be reasonably distributed among the parties in accordance with the requirements of the principle of good faith, so that the dishonest parties cannot benefit from the non-establishment, invalidity or revocation of the contract. In the event that the contract is not formed, invalid or revoked, the liability of the parties for the negligence of the contract shall not exceed the interest in the performance of the contract. For example, according to Article 2 of the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts, if a construction contract is invalid, the construction project may be paid with reference to the contract if the construction project passes the completion acceptance, but unless a new project is added to the contract, the payment of the project price shall generally not exceed the contract agreement. The Contract Law has been repealed, and the relevant provisions are found in Article 157 of the Civil Code, and Article 2 of the Interpretation of the Supreme People's Court on Issues Concerning the Application of Law in the Trial of Cases Involving Disputes over Construction Contracts has been absorbed by Article 793 of the Civil Code 33. [Return of Property and Compensation for Discount] After the contract is not established, invalid or revoked, the factors of property appreciation or depreciation should be fully considered when determining the return of property. After the bilateral contract is not established, invalid or revoked, if the two parties acquire property as a result of the contract, they shall return it to each other. Where the value of equity, houses, or other property that should be returned increases or depreciates relative to the agreed price of the contract, the people's court should comprehensively consider market factors, the relevance of the transferee's business or attachment, and the appreciation or depreciation of the property, and reasonably distribute or share it among the parties, so as to avoid one party benefiting from the non-establishment, invalidity or revocation of the contract. Where the subject matter has been lost, resold to others, or otherwise cannot be returned, the people's court will not support the party's claim for the return of the original item, but where it claims compensation at a discount, the people's court shall support it in accordance with law. In the case of discount, the compensation standard shall be determined on the basis of the price agreed upon by the parties at the time of the transaction, and at the same time taking into account the parties' benefits from the loss or resale of the subject matter. The insurance money or other compensation obtained by the parties when the subject matter is lost, and the consideration obtained at the time of resale, are all benefits obtained by the parties due to the subject matter. The portion of the benefit that is higher or lower than the price shall also be reasonably distributed or shared among the parties. 34. [Return of Price] When the bilateral contract is not established, invalid or revoked, the return of the subject matter and the return of the price shall be treated and paid to each other, and both parties shall return them at the same time. On the issue of whether interest should be paid, as long as one party has a use of the subject matter, it shall generally pay a royalty, which can be offset against the capital occupation fee payable by the party in possession of the price, so the other party only needs to pay the principal and no interest before one party returns the original thing. 35. [Compensation for Damages] In the event that a contract is not formed, invalid, or revoked, the mere return of property or compensation at a discount is not enough to compensate for the loss, and one party may also claim damages from the other party at fault. When determining the scope of damages, it is necessary not only to reasonably determine the liability according to the degree of fault of the parties, but also to consider the factors of property appreciation or depreciation that have been considered when determining the scope of property return, so as to avoid the occurrence of the phenomenon of double profit or double loss. |
| Article 27: [Allocation of the Burden of Proof in the Case of Lack of Authority] Where the act of not having the authority to act as an agent is not recognized, and the counterpart requests that the actor perform the debt or compensate for losses, the actor shall bear the burden of proof that the counterpart knew or should have known that the actor did not have the authority to act as an agent. Where the actor is unable to prove it, the people's court supports the counterpart's corresponding litigation claim in accordance with law; Interpretation: In accordance with the provisions of paragraphs 3 and 4 of Article 171 of the Civil Code, if the act of agency is not recognized in the case of no agency, the counterparty has the right to claim compensation from the actor for its losses. In terms of the degree of liability, a distinction should be made according to whether the counterparty is bona fide or not. Although Article 171 of the Civil Code provides for compensation for the losses of counterparties in different circumstances, it does not specify who should bear the burden of proof for the fact that "the counterparty knew or should have known that the actor had no authority to act as an agent". For this reason, the interpretation of this article provides that the actor bears the burden of proof that the counterpart knew or should have known that the actor did not have the authority to act as an agent. If the actor can prove that "the counterpart knew or should have known that the actor had no authority to act as an agent", the court shall determine the liability of the actor and the counterpart according to their respective faults (compensation for fault as provided for in paragraph 4 of Article 171 of the Civil Code); | Article 171 of the Civil Code [No Authorized Agency] Where the actor does not have the power of agency, exceeds the power of agency, or after the power of agency is terminated, he still carries out acts of agency, and it is not recognized by the principal, it is not effective against the principal. The counterpart may urge the principal to make a retrospective recognition within 30 days of receiving the notice. Where the principal does not make an expression, it is viewed as a refusal to recognize. Before the act carried out by the perpetrator is recognized, the bona fide counterpart has the right to revoke it. The revocation shall be made by way of notification. Where the conduct carried out by the actor is not recognized, the bona fide counterpart has the right to request that the actor perform the debt or request compensation from the actor for the harm suffered. However, the scope of compensation shall not exceed the benefits that the counterparty can obtain when the agent recognizes it. Where the counterpart knows or should know that the actor has no authority to represent, the counterpart and the actor bear responsibility in accordance with their respective faults. |
| Interpretation of the guarantee system of the Civil Code | Related Provisions |
| Article 7 [Effect of the Company's Legal Representative Exceeding His Authority to Guarantee Others] If the legal representative of the company violates the provisions of the Company Law on the procedures for the resolution of the company's external guarantee and exceeds his authority to enter into a guarantee contract with the counterparty on behalf of the company, the people's court shall deal with it in accordance with the provisions of Articles 61 and 504 of the Civil Code: (1) If the counterparty is bona fide, the guarantee contract shall take effect against the company, and if the counterparty requests the company to bear the guarantee liability, the people's court shall support it. (2) If the counterparty is not in good faith, the guarantee contract shall not be effective against the company, and if the counterparty requests the company to bear the liability for compensation, the relevant provisions of Article 17 of this interpretation shall apply by reference. Where the legal representative exceeds his authority to provide guarantees and causes losses to the company, and the company requests that the legal representative bear the liability for compensation, the people's court shall support it. The term "good faith" as used in the first paragraph refers to the fact that the counterparty did not know and should not have known that the legal representative exceeded his authority at the time of entering into the guarantee contract. Where the counterparty has evidence to prove that a reasonable review of the company's resolution has been conducted, the people's court shall find that it constitutes good faith, except where the company has evidence to prove that the counterparty knew or should have known that the resolution was forged or altered. Interpretation: As far as the validity of the legal representative of the company exceeding his authority to provide security to the outside world is concerned, this article distinguishes whether the counterparty is bona fide and determines the validity of the guarantee act: if the counterparty is bona fide and constitutes an apparent representative, the effect of the act is equivalent to that of a valid guarantee; if the counterparty is not in good faith, the guarantee act is not effective against the company, and the company does not bear the guarantee liability arising from the effective guarantee, but bears the liability for negligence in contracting. This provision is that the ultra vires representative act of the legal representative is still an act of the company in essence, and if the guarantee contract is invalid, if the company is at fault, it should still bear the liability for damages, which is in the nature of negligence in contracting. For the determination of specific liability, the relevant content of Article 17 of this Interpretation may be applied by reference. In addition, as far as the determination of good faith referred to in paragraph 1 of this article is concerned, paragraph 3 of this article specifically provides for further strengthening the counterparty's obligation to review, stipulating that it must fulfill the obligation of reasonable review. Article 20 of the Interpretation of the General Principles of Contract also provides for this. Of course, if the legal representative does not exceed the authority of the representative, then the representative act is naturally valid, and there is no need to further distinguish between good faith and bad faith. In addition, paragraph 2 of this article clearly stipulates that if the legal representative exceeds its authority to provide security and causes losses to the company, the company shall have the right to recover from the legal representative after assuming responsibility. Case reference: China National Building Materials Group Import and Export Co., Ltd. v. Beijing Dadi Hengtong Economic and Trade Co., Ltd., Beijing Tianyuan Shengtang Investment Co., Ltd., Tianbao Shengshi Technology Development (Beijing) Co., Ltd., Jiangsu Yinda Technology Co., Ltd., Sichuan Yibin Russia-Europe Engineering Development Co., Ltd., Import and Export Agency Contract Dispute [Gazette of the Supreme People's Court, Issue 2, 2011] Summary of the Adjudication: The first paragraph of Article 16 of the Company Law, as amended in 2005, stipulates that: "If a company invests in other enterprises or provides guarantees for others, it shall be resolved by the board of directors, shareholders' meeting or general meeting of shareholders in accordance with the provisions of the articles of association; The second paragraph of this article stipulates: "If a company provides a guarantee for the shareholders or actual controllers of the company, it must be resolved by the shareholders' meeting or the general meeting of shareholders." However, if the company violates the provisions of the aforesaid clause by entering into a guarantee contract with another person, the contract cannot simply be determined to be invalid. First, this clause does not clearly stipulate that the guarantee contract will be invalid if the company violates the above provisions; second, the company's internal resolution procedure shall not bind a third party; third, the clause is not a mandatory provision of validity; and fourth, the determination that the guarantee contract is invalid based on this clause is not conducive to maintaining the stability of the contract and the security of the transaction. | Article 61 of the Civil Code [Definition of Legal Representative and Legal Consequences of Actions] In accordance with the provisions of the law or the legal person's charter, the responsible person who engages in civil activities on behalf of the legal person is the legal representative of the legal person. The legal consequences of civil activities carried out by the legal representative in the name of the legal person shall be borne by the legal person. The legal person's charter or the legal person's authority body's restrictions on the legal representative's right to represent must not be opposed to the bona fide counterpart. Article 504 [Effect of Contracts Concluded in Excess of Authority] Where the legal representative of a legal person or the person in charge of an unincorporated organization concludes a contract beyond his authority, the act of the representative is valid unless the counterparty knows or should know that he has exceeded his authority, and the contract concluded becomes effective against the legal person or unincorporated organization. Article 15 of the Company Law (Revised in 2023) If a company invests in other enterprises or provides guarantees for others, it shall be resolved by the board of directors or the shareholders' meeting in accordance with the provisions of the articles of association. If the company provides a guarantee for the company's shareholders or actual controllers, it shall be resolved by the shareholders' meeting. The shareholders provided for in the preceding paragraph, or the shareholders under the control of the actual controller provided for in the preceding paragraph, must not participate in the voting on the matters provided for in the preceding paragraph. The vote shall be passed by a majority of the voting rights held by the other shareholders present at the meeting. Article 17 of the Interpretation of the Guarantee System of the Civil Code [Determination of Liability and Proportion of Liability for Invalidity of Guarantee Contract] Where the main contract is valid and the guarantee contract provided by a third party is invalid, the people's court shall determine the liability of the guarantor in different circumstances: (1) If both the creditor and the guarantor are at fault, the liability of the guarantor shall not exceed one-half of the debtor's inability to pay off; (2) If the guarantor is at fault and the creditor is not at fault, the guarantor shall be liable for the part that the debtor cannot repay; (3) If the creditor is at fault and the guarantor is not at fault, the guarantor shall not be liable for compensation. If the invalidity of the main contract leads to the invalidity of the guarantee contract provided by a third party, the guarantor shall not be liable for compensation if it is not at fault; if the guarantor is at fault, its liability shall not exceed one-third of the debtor's inability to pay off. Article 20 of the Interpretation of the General Principles of Contract Codification of the Civil Code [Contractual Validity of Ultra Vires Representatives] In order to restrict the representation rights of the legal representative of a legal person or the person in charge of an unincorporated organization, laws and administrative regulations stipulate that the matters involved in a contract shall be resolved by the power or decision-making body of the legal person or unincorporated organization, or shall be decided by the executive body of the legal person or unincorporated organization. Where an unincorporated organization takes effect and it bears liability for breach of contract, the people's court will not support it, but where the legal person or unincorporated organization is at fault, a judgment may be made to bear the corresponding liability for compensation with reference to article 157 of the Civil Code. Where the counterpart has already fulfilled the obligation of reasonable review and constitutes an apparent representative, the people's court shall handle it in accordance with the provisions of article 504 of the Civil Code. Where the matters involved in the contract do not exceed the authority of the legal representative or responsible person as provided for by laws or administrative regulations, but exceed the restrictions on the right of representation by the charter or authority of the legal person or unincorporated organization, and the counterparty claims that the contract is effective against the legal person or unincorporated organization and that it bears liability for breach of contract, the people's court shall support it in accordance with law. However, this is not the case where legal persons or unincorporated organizations present evidence to prove that the counterparty knew or should have known of the restriction. Where, after a legal person or unincorporated organization bears civil liability, it recovers losses caused by the ultra vires representative or responsible person from the legally-designated representative or responsible person who is at fault, the people's court is to support it in accordance with law. Where laws and judicial interpretations have other provisions on the civil liability of legal representatives or responsible persons, follow those provisions. 17. [Violation of Article 16 of the Company Law constitutes ultra vires representative] In order to prevent the legal representative from arbitrarily providing guarantees for others on behalf of the company, causing losses to the company and harming the interests of small and medium-sized shareholders, Article 16 of the Company Law restricts the legal representative's right of representation. According to this article, the guarantee act is not a matter that can be decided by the legal representative alone, but must be based on the resolution of the company's shareholders' meeting, board of directors and other corporate organs as the basis and source of authorization. The people's court shall, in accordance with the provisions of article 50 of the Contract Law on ultra vires representation of the legal representative, distinguish whether the creditor is bona fide at the time of conclusion of the contract and determine the validity of the contract: if the creditor is bona fide, the contract is valid, otherwise, the contract is invalid. 18. [Determination of Good Faith] The term "good faith" as used in the preceding article refers to the creditor's knowledge or should not have known that the legal representative had exceeded his authority to conclude the security contract. Article 16 of the Company Law makes a distinction between the resolution organs of related and non-affiliated guarantees, and accordingly, there should be a distinction in the criteria for judging good faith. Article 16 of the Company Law clearly stipulates that the resolution of the shareholders' (general meeting) must be made by the shareholders' (general meeting) to provide a related guarantee for the company's shareholders or actual controllers. In this case, if the creditor claims that the guarantee contract is valid, it shall provide evidence to prove that it has reviewed the resolution of the shareholders' (general meeting) meeting at the time of entering into the contract, and the voting procedure of the resolution complies with the provisions of Article 16 of the Company Law, that is, under the condition that the voting rights of the secured shareholders are excluded, the vote shall be passed by more than half of the voting rights held by the other shareholders present at the meeting, and the signatories shall also comply with the provisions of the articles of association. On the other hand, if the company provides a non-affiliated guarantee to a person other than the company's shareholders or actual controllers, according to Article 16 of the Company Law, the articles of association of the company stipulate whether it is a resolution of the board of directors or a resolution of the shareholders' (general meeting). Regardless of whether the articles of association provide for the resolution organ, and whether the articles of association stipulate that the resolution organ is the board of directors or the shareholders' (general meeting), according to paragraph 3 of article 61 of the General Provisions of the Civil Law, "the articles of association of a legal person or the restriction of the legal representative's right of representation by the legal person authority shall not be opposed to a bona fide counterpart" As long as the creditor can prove that it has reviewed the resolution of the board of directors or the resolution of the shareholders' (general meeting) at the time of entering into the guarantee contract, and the number of persons who agree to the resolution and the signatories comply with the provisions of the company's articles of association, it shall be deemed to constitute good faith, unless the company can prove that the creditor is aware that the company's articles of association have clear provisions on the resolution authority. The creditor's review of the content of the company's resolution is generally limited to a formal review, and only requires the necessary duty of care to be performed, and the standard should not be too strict. Where the company argues that the creditor is not bona fide on the grounds that the resolution of the organ is forged or altered by the legal representative, the resolution procedure is illegal, the signature (name) is false, or the amount of the guarantee exceeds the statutory limit, the people's court will generally not support it. However, unless the company has evidence to prove that the creditor knew that the resolution was forged or altered. Article 15 of the Company Law (revised in 2023) stipulates that a company provides guarantees to shareholders or actual controllers. 21. [Rights and Remedies] If the legal representative's ultra vires guarantee causes losses to the company, and the company requests the legal representative to bear the liability for compensation, the people's court shall support it in accordance with law. If the company does not file a lawsuit, and the shareholder requests the legal representative to bear the liability for compensation in accordance with Article 151 of the Company Law, the people's court shall support it in accordance with law. Article 189 of the Company Law (2023 Revision) provides for shareholder representative litigation. |
| Article 9 [External Guarantee of Domestic Listed Companies] Where the counterparty enters into a guarantee contract with the listed company on the basis of information publicly disclosed by the listed company that the guarantee matter has been approved by the board of directors or the general meeting of shareholders, and the counterparty claims that the guarantee contract is effective against the listed company and that the listed company bears the guarantee liability, the people's court shall support it. Where the counterparty fails to conclude a guarantee contract with the listed company on the basis of the information publicly disclosed by the listed company that the guarantee matter has been resolved and approved by the board of directors or the general meeting of shareholders, and the listed company claims that the guarantee contract is not effective against it and does not bear the guarantee liability or compensation liability, the people's court shall support it. The provisions of the preceding two paragraphs shall apply to the guarantee contract entered into between the counterparty and the holding subsidiary of the listed company that has been publicly disclosed, or the guarantee contract entered into between the counterparty and the company whose shares are traded on other national securities trading venues approved by the State Council. Interpretation: Listed companies in mainland China involve the interests of many small and medium-sized investors and are public companies. Based on this, in order to protect the interests of small and medium-sized investors, domestic listed companies have the obligation to disclose information, and guarantee matters are also the content that they must disclose. For this reason, this article imposes special restrictions on the provision of external guarantees by domestic listed companies. On the one hand, its external guarantee must not only be subject to the pre-procedure of a resolution by the board of directors or the general meeting of shareholders in accordance with Article 15 of the Company Law (2023 Revision), but also need to be publicly disclosed to the resolution. If the creditor signs a guarantee contract with the domestic listed company solely on the basis of the disclosed information, the guarantee shall also be deemed to be valid, and the listed company shall bear the guarantee liability. On the other hand, if the guarantee has been approved by the board of directors of the domestic listed company, but the domestic listed company has not publicly disclosed it, and the creditor does not sign the guarantee contract based on the publicly disclosed information on the external guarantee, the guarantee contract entered into between the counterparty and the domestic listed company will not be effective against the listed company, and the company will bear neither the guarantee liability nor other compensation liabilities. It can be seen from this that the determination of the validity of external guarantees of domestic listed companies is not only stricter than that of ordinary companies, but also different in terms of liability. Generally, if the guarantee contract is not effective against the company, the company shall bear the relevant liability for compensation although it does not bear the guarantee liability, while the listed company does not bear any liability at this time, as mentioned above. Case reference: "A Company Limited by Shares and a Wind Energy Co., Ltd. v. Bank Co., Ltd. Shanghai Branch Pledge Contract Dispute Case", People's Justice, Cases, Issue 8, 2022] The gist of the case: Article 9 of the Interpretation of the Guarantee System of the Civil Code provides for a broad legal interpretation in the nature of rule creation, and if the obligation of review of the counterparty stipulated in Article 9 of the Interpretation of the Guarantee System of the Civil Code is applied to the guarantee contract signed by the holding subsidiary of the listed company before the implementation of the Civil Code, it will obviously derogate from the legitimate rights and interests of the parties, increase the legal obligations of the parties, or deviate from the reasonable expectations of the parties. Article 9 of the Interpretation of the Guarantee System of the Civil Code shall not have retroactive effect on the guarantee rules of listed companies, and the court shall not find that the relevant guarantee contract is invalid on this basis. | 22. [Listed Companies Provide Guarantees to Others] The people's court shall find that the guarantee contract entered into by the creditor on the basis of the information publicly disclosed by the listed company on the guarantee matters has been approved by the board of directors or the general meeting of shareholders. Announcement of the China Securities Regulatory Commission, the Ministry of Public Security, the State-owned Assets Supervision and Administration Commission and the China Banking and Insurance Regulatory Commission on Announcing the Regulatory Guidelines for < Listed Companies No. 8 - Regulatory Requirements for Capital Transactions and External Guarantees of Listed Companies > Article 7 The external guarantee of a listed company must be deliberated by the board of directors or the general meeting of shareholders. Article 8 The Articles of Association of a listed company shall specify the authority of the general meeting of shareholders and the board of directors to examine and approve external guarantees, as well as the accountability system for violating the approval authority and deliberation procedures. Article 9 The external guarantee that shall be approved by the general meeting of shareholders shall be deliberated and approved by the board of directors before it can be submitted to the general meeting of shareholders for approval. External guarantees subject to the approval of the general meeting of shareholders, including but not limited to the following circumstances: (1) The total amount of external guarantees of the listed company and its holding subsidiaries exceeds 50% of the latest audited net assets; (2) Guarantees provided to the recipients of guarantees with an asset-liability ratio of more than 70%; (3) The amount of a single guarantee exceeds 10% of the latest audited net assets; (4) Guarantees provided to shareholders, actual controllers and their affiliates. When the general meeting of shareholders deliberates the proposal to provide guarantees for shareholders, actual controllers and their affiliates, the shareholders or shareholders under the control of the actual controller shall not participate in the voting, and the vote shall be passed by more than half of the voting rights held by other shareholders present at the general meeting. Article 10 The external guarantee that shall be approved by the Board of Directors shall be deliberated and approved by more than two-thirds of the directors present at the Board of Directors and a resolution shall be made. Article 11 Where a listed company provides a guarantee for the controlling shareholder, the actual controller and its affiliates, the controlling shareholder, the actual controller and its affiliates shall provide a counter-guarantee. Article 12 The external guarantee deliberated and approved by the board of directors or the general meeting of shareholders of a listed company shall be disclosed in a timely manner on the website of the stock exchange and in the media that meet the conditions stipulated by the China Securities Regulatory Commission, and the content of the disclosure shall include the resolution of the board of directors or the general meeting of shareholders, the total amount of external guarantees provided by the listed company and its holding subsidiaries as of the date of information disclosure, and the total amount of guarantees provided by the listed company to the holding subsidiaries. Article 13 When a listed company handles the loan guarantee business, it shall submit to the banking financial institutions the Articles of Association, the original resolution of the board of directors or the resolution of the general meeting of shareholders on the guarantee matters, and the disclosure information of the guarantee matters. Article 14 The independent directors of a listed company shall, in their annual reports, make a special explanation of the external guarantees that have not been fulfilled at the end of the reporting period and the external guarantees that occur in the current period, as well as the implementation of the provisions of this chapter, and express independent opinions. Article 15 Where a holding subsidiary of a listed company provides a guarantee to an entity outside the scope of the consolidated statements of the listed company, it shall be deemed to have been provided by the listed company as a guarantee, and the listed company shall implement it in accordance with the provisions of this Chapter. |
| Article 11 [Effect of External Guarantees of Company Branches] Where a branch of the company provides a guarantee in its own name without a resolution of the company's shareholders (general meeting) or the board of directors, and the counterparty requests that the company or its branch bear the guarantee liability, the people's court will not support it, except where the counterparty does not know and should not know that the branch has provided external guarantee without the company's resolution procedures. Where a branch of a financial institution issues a letter of guarantee within the scope of business recorded in its business license, or is authorized to issue a letter of guarantee by a superior institution authorized to engage in guarantee business, and the financial institution or its branch claims that it does not bear the guarantee liability on the grounds that it violates the provisions of the Company Law on the procedures for the resolution of the company's external guarantees, the people's court shall not support it. Where a branch of a financial institution provides a guarantee other than a letter of guarantee without the authorization of the financial institution, and the financial institution or its branch asserts that it does not bear the guarantee liability, the people's court shall support it, except where the counterparty does not know and should not know that the branch provides guarantee to the outside world without the authorization of the financial institution. Where a branch of a guarantee company provides a guarantee to the outside world without the authorization of the guarantee company, and the guarantee company or its branch claims that it does not bear the guarantee liability, the people's court shall support it, except where the counterparty does not know and should not know that the branch provides an external guarantee without the authorization of the guarantee company. Where a branch of the company provides a guarantee to the outside world, and the counterparty is not in good faith and requests the company to bear the liability for compensation, it shall be handled with reference to the relevant provisions of Article 17 of this Interpretation. Interpretation: According to the provisions of Article 74, Paragraph 2 of the Civil Code, if a branch engages in civil activities in its own name, the civil liability arising shall be borne by the legal person; Therefore, there is an argument that the guarantee provided by the company's branches in its own name is valid and that the company or its branches should bear the guarantee liability. However, it should be noted that although this paragraph of the Civil Code stipulates that a company's branches may engage in civil activities in their own name, the guarantee is subject to special regulation under the Company Law because it is an abnormal transaction. In fact, after the amendment of the Company Law in 2005, it was clarified that the provision of external guarantees by a branch of a company on behalf of the company must not only obtain the company's individual authorization, but also the authorization itself must be resolved by the board of directors or the shareholders' (general meeting). Without the resolution of the company's shareholders' meeting or the board of directors, the company's branches will constitute ultra vires representation if they provide guarantees on behalf of the company. In such a case, the counterparty can only claim that the company or its branches bear the guarantee liability when it constitutes an apparent representative (i.e., the counterparty does not know and should not have known that the branch has not been subject to the company's resolution procedure). Paragraph 1 of this article clarifies all of the above. In addition, since the issuance of a letter of guarantee by a financial institution or the provision of a guarantee by a guarantee company are both normal business activities of the company, in terms of effectiveness, the external guarantee provided by its branches should also be different from the external guarantees provided by the branches of other companies, as provided for in paragraphs 2 and 3 of this Article respectively. In addition, similar to the guarantee provided by the legal representative on behalf of the ultra vires representative, if the counterparty is not bona fide, the company or branch cannot be requested to bear the guarantee liability, but can only request the company or branch to bear the liability for contractual negligence in accordance with Article 17 of this Interpretation. Case reference: "Zhang Moumou v. Company C and Company B Loan Contract Dispute" [Civil Trial Guidance and Reference" Volume 81 (2020.1)) The gist of the case: The company's branches do not have the effect of joining the debts beyond their authority without the resolution of the company's competent authority, and if the company and its branches are at fault, they shall bear the corresponding civil liability according to their faults. | Article 74 of the Civil Code [Branches of Legal Persons and Their Liability] A legal person may establish a branch office in accordance with the law. Where laws and administrative regulations provide that branch offices shall be registered, follow those provisions. If a branch engages in civil activities in its own name, the civil liability arising therefrom shall be borne by the legal person; Company Law (Revised in 2023) Article 13 A company may establish a subsidiary, which has the status of a legal person and independently bears civil liability in accordance with the law. A company can set up a branch office. A branch office does not have legal personality, and its civil liability is borne by the company. Article 15 If a company invests in other enterprises or provides guarantees for others, the board of directors or the shareholders' meeting shall make a resolution in accordance with the provisions of the articles of association; if the articles of association stipulate that the total amount of investment or guarantee and the amount of individual investment or guarantee shall not be exceeded. If the company provides a guarantee for the company's shareholders or actual controllers, it shall be resolved by the shareholders' meeting. The shareholders provided for in the preceding paragraph, or the shareholders under the control of the actual controller provided for in the preceding paragraph, must not participate in the voting on the matters provided for in the preceding paragraph. The vote shall be passed by a majority of the voting rights held by the other shareholders present at the meeting. Article 17 of the Interpretation of the Guarantee System of the Civil Code If the main contract is valid but the guarantee contract provided by the third party is invalid, the people's court shall determine the liability of the guarantor in different circumstances: (1) If both the creditor and the guarantor are at fault, the liability of the guarantor shall not exceed one-half of the debtor's inability to pay off; (2) If the guarantor is at fault and the creditor is not at fault, the guarantor shall be liable for the part that the debtor cannot repay; (3) If the creditor is at fault and the guarantor is not at fault, the guarantor shall not be liable for compensation. If the invalidity of the main contract leads to the invalidity of the guarantee contract provided by a third party, the guarantor shall not be liable for compensation if it is not at fault; if the guarantor is at fault, its liability shall not exceed one-third of the debtor's inability to pay off. |
| Article 17 Liability of the Guarantor in the Event of Invalidity of the Guarantee Contract If the main contract is valid but the guarantee contract provided by the third party is invalid, the people's court shall determine the liability of the guarantor in different circumstances: (1) If both the creditor and the guarantor are at fault, the liability of the guarantor shall not exceed one-half of the debtor's inability to pay off; (2) If the guarantor is at fault and the creditor is not at fault, the guarantor shall be liable for the part that the debtor cannot repay; (3) If the creditor is at fault and the guarantor is not at fault, the guarantor shall not be liable for compensation. If the invalidity of the main contract leads to the invalidity of the guarantee contract provided by a third party, the guarantor shall not be liable for compensation if it is not at fault; if the guarantor is at fault, its liability shall not exceed one-third of the debtor's inability to pay off. Interpretation: There are many reasons and circumstances for the invalidity of the guarantee contract, which may be manifested in the invalidity of the main contract and the invalidity of the guarantee contract, or the validity of the main contract and the invalidity of the guarantee contract. Therefore, it is necessary to distinguish between different circumstances and determine whether the guarantor should be liable and the extent of the liability. In fact, after the guarantee contract is confirmed to be invalid, the liability of each party shall bear the corresponding civil liability for the creditor's losses according to whether it is at fault and the degree of fault. Regardless of whether the main contract is valid or invalid, for the guarantor, because the guarantee contract is invalid, it bears the liability for contractual negligence, which is supplementary in nature, and the scope of liability is generally smaller than the liability for breach of contract. Case reference: Jiangbei Bank of China v. Fandong Agricultural Bank et al., a dispute over L/C advances [Gazette of the Supreme People's Court, No. 3, 2006] Summary of the Adjudication: If the guarantee contract is invalid due to the invalidity of the main contract, and the guarantor is not at fault, he shall not bear civil liability; The so-called fault of the guarantor refers to the situation where the guarantor clearly knows that the main contract is invalid but still provides security for it, or clearly knows that the main contract is invalid but still promotes the formation of the main contract or acts as an intermediary for the signing of the main contract. | Article 682 of the Civil Code [Subordination of Guarantee Contracts and Legal Consequences of Invalidity of Guarantee Contracts] The guarantee contract is a subordinate contract of the main creditor's rights and debts. Where the principal creditor's rights and debts contract is invalid, the guarantee contract is invalid, except as otherwise provided by law. After the guarantee contract is confirmed to be invalid, if the debtor, guarantor and creditor are at fault, they shall each bear the corresponding civil liability according to their fault. |
| Article 18 [Recovery from the Debtor after Undertaking Guarantee or Compensation Liability] Where a guarantor who has assumed the guarantee liability or compensation liability recovers from the debtor within the scope of its responsibility, the people's court shall support it. Where the same creditor's right has both the security provided by the debtor itself and the security provided by a third party, and a third party who bears the guarantee liability or liability for compensation, claims to exercise the security interest enjoyed by the creditor against the debtor, the people's court shall support it. Interpretation: The guarantor's right of recourse refers to the right of the guarantor to request the return of the principal debtor after assuming civil liability. Since the debtor is the ultimate obligor of the liability, the guarantor's guarantee liability or liability is essentially the performance of the debt of the principal debtor, rather than the performance of its own debt, so it can recover from the principal debtor who has benefited from its repayment. In principle, the recovery in this case only gives rise to rights and no obligations to the guarantor. In other words, the guarantor's recovery against the debtor after assuming the guarantee or compensation liability is in principle unconditional. The scope of recoverability of the guarantor should include the costs incurred for assuming the liability, the interest from the date of assuming the liability and other necessary expenses incurred for the assumption of the liability. In addition, if the same claim is secured by both the goods provided by the debtor itself and the security provided by a third party, the third party has the right to recover from the debtor after assuming the guarantee liability or compensation liability, and enjoys the creditor's rights against the debtor, which of course includes the mortgage right and other security interests in the debtor's mortgaged property. Case reference: "Sun Moumou v. Liu Moumou, Yue Moumou, Chengde Kaixuan Real Estate Development Co., Ltd., Luanping County Information and Communication Technology Microfinance Co., Ltd. Recovery Right Dispute Case" ["Civil Trial Guidance and Reference" Volume 77 (2019.1)] The gist of the case: The guarantor's right of recourse and subrogation are closely related, and there are obvious differences in terms of the basic legal relationship, legal nature, statute of limitations, and defense causes. Based on these differences, the right of recovery of the guarantor against the debtor after assuming the guarantee liability under the guarantee law should not be in the nature of subrogation, and the legal rules on the transfer of creditor's rights should not apply. As for the scope of recovery, whether the guarantor is at fault should be determined based on factors such as whether the guarantor has performed its obligations in accordance with the contract, whether it has fulfilled its obligation to notify before assuming the guarantee liability, and whether the debtor has fulfilled its obligation to inform. If the guarantor is not at fault, the debtor shall not oppose the guarantor on the grounds that the amount of the principal claim has changed in the course of performance. | Article 700 of the Civil Code [Guarantor's Right of Recourse] After the guarantor assumes the guarantee liability, unless otherwise agreed by the parties, it has the right to recover from the debtor within the scope of its guarantee liability, and enjoys the rights of the creditor against the debtor, but shall not harm the interests of the creditor. Article 392 [Rules for the Implementation of Security Rights in the Context of the Coexistence of PICC and Property Insurance] If the secured creditor's right is secured by both a real and a personal security, and the debtor fails to perform the due debt or the parties agree to realize the security interest, the creditor shall realize the creditor's right in accordance with the agreement; if there is no agreement or the agreement is unclear, and the debtor provides security for the thing, the creditor shall first realize the creditor's right on the security of the thing; if a third party provides security for the thing, the creditor may realize the creditor's right on the security in rem or may request the guarantor to bear the guarantee liability. The third party providing the guarantee has the right to recover from the debtor after assuming the guarantee liability. Minutes of the Nine People's Meetings 56. 【Recovery between guarantors in mixed guarantees】Where the secured claim is both guaranteed and secured by a third party, Article 38 of the Judicial Interpretation of the Security Law clearly stipulates that the guarantor who has assumed the guarantee liability may require other guarantors to pay off its share. However, Article 176 of the Property Law does not make a similar provision, and according to Article 178 of the Property Law, which stipulates that "if the provisions of the Guarantee Law are inconsistent with the provisions of this Law, this Law shall apply", if the guarantor who has assumed the guarantee liability recovers compensation from other guarantors, the people's court shall not support it, unless the guarantors agree in the guarantee contract that they can recover from each other. Both the Property Law and the Security Law have been repealed <中华人民共和国民事诉讼法>Article 363 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Civil Procedure Law (hereinafter referred to as the "Interpretation of the Civil Procedure Law") (Revised in 2022) In accordance with Article 392 of the Civil Code, if the secured creditor's right is secured by both a real security and a personal security, and the parties have agreed on the order in which the security interest is realized, and the application for realization of the security interest violates the agreement, the people's court shall rule not to accept it; |
| Article 19 [Validity of Counter-Guarantee Contract and Liability of Counter-Guarantor in the Event of Invalidity of Guarantee Contract] Where the guarantee contract is invalid, and the guarantor who has assumed the liability for compensation requests that the counter-guarantor bear the guarantee liability within the scope of its liability for compensation in accordance with the provisions of the counter-guarantee contract, the people's court shall support it. If the counter-guarantee contract is invalid, it shall be handled in accordance with the relevant provisions of Article 17 of this Interpretation. Where a party claims that the counter-guarantee contract is invalid solely on the ground that the guarantee contract is invalid, the people's court will not support it. Interpretation: Counter-guarantee refers to the guarantee or creation of a guarantee made by the debtor or a third party to the guarantor, and repays the guarantor when the guarantor suffers losses due to the performance of the debt or the assumption of responsibility. The main function of a counter-guarantee is to ensure the realization of the guarantor's right of recourse, which is essentially a measure taken to ensure the realization of the guarantor's right of recourse that may occur in the future, and the object of the guarantee is the guarantor's right of recourse from the debtor. Therefore, the guarantee contract is not the main contract of the counter-guarantee contract, and the invalidity of the guarantee contract does not necessarily lead to the invalidity of the counter-guarantee contract. If the counter-guarantee contract is valid, the counter-guarantor shall bear the guarantee liability in accordance with the provisions of the counter-guarantee contract; if the counter-guarantee contract is invalid, the counter-guarantor shall not be liable for compensation if it is not at fault, and if the counter-guarantor is at fault, the scope of the counter-guarantor's liability shall be determined according to the fault of the guarantor and the counter-guarantor. That is, in the case of the invalidity of the counter-guarantee contract, it shall be handled in accordance with the relevant provisions of Article 17 of this interpretation. Case reference: Anhui Foreign Economic Construction (Group) Co., Ltd. v. Oriental Real Estate Co., Ltd., a dispute over letter of guarantee fraud [Guiding Case No. 109 of the Supreme People's Court] Key points of the case: 1. When it is determined that the independent guarantee fraud requires a review of the underlying transaction, the principle of limited and necessary should be adhered to, and the scope of the review should be limited to whether the beneficiary is aware that the counterparty of the underlying contract does not have the fact of breach of contract under the underlying contract, and whether there is a fact that the beneficiary is aware that it does not have the right to claim payment. 2. The beneficiary's breach of contract under the underlying contract does not affect its right to submit documents and make a claim in accordance with the provisions of the independent guarantee. 3. When determining whether there is fraud under the independent counter-guarantee, even if there is fraud in the independent guarantee, the people's court shall not rule to stop the payment under the independent counter-guarantee if the payment has been made in good faith under the independent counter-guarantee. | 《Civil Code》 Article 689 [Counter-Guarantee] The guarantor may request the debtor to provide a counter-guarantee. Article 387 [Scope of Application of Security Interest and Counter-Guarantee] Where a creditor needs security in order to ensure the realization of its creditor's rights in civil activities such as lending and trading, it may create a security interest in accordance with the provisions of this Law and other laws. Where a third party provides security to the creditor for the debtor, the debtor may be required to provide a counter-guarantee. Counter-guarantees shall be governed by the provisions of this Law and other laws. |
| Article 33 [Whether the guarantee period system can be applied when the guarantee contract is invalid] If the guarantee contract is invalid, the creditor fails to exercise its rights in accordance with the law within the agreed or statutory guarantee period, and the guarantor claims that it does not bear the liability for compensation, the people's court shall support it. Interpretation: As far as whether the guarantee period system can be applied when the guarantee contract is invalid, since the creditor usually does not subjectively believe that the guarantee contract is invalid, otherwise it will not enter into a guarantee contract or even a main contract. Therefore, if the creditor does not know that the guarantee contract is invalid, if it believes that the guarantor should bear the guarantee liability, it should claim the guarantee liability from the guarantor within the guarantee period. If it fails to claim the guarantee liability from the guarantor within the guarantee period, it should be understood that the creditor no longer requires the guarantor to bear the guarantee liability, nor does it intend to require the guarantor to bear the liability for compensation. From the perspective of system comparison, when the guarantee contract is valid, the guarantor does not have to bear any liability because the creditor fails to exercise its rights within the guarantee period. In the event that the guarantee contract is invalid, if the guarantor cannot be protected by the guarantee period, the liability of the guarantor when the guarantee contract is invalid will be heavier than that if the guarantee contract is valid. This is contrary to the principle of fairness. This article expressly guarantees that if the contract is invalid, the creditor still has to claim its rights within the guarantee period. The same is true in the event that the guarantee contract is revoked, and should therefore be dealt with by reference to the provisions of this Interpretation. In other words, if the guarantee contract is invalid or revoked, if the creditor fails to exercise its rights in accordance with the law during the guarantee period, the guarantor's claim that it is not liable for compensation should be supported. | Article 692 of the Civil Code [Guarantee Period] The guarantee period is the period during which the guarantor's liability for the guarantee is determined, and there is no suspension, interruption or extension. The creditor and the guarantor may agree on a guarantee period, but if the agreed guarantee period is earlier than or expires at the same time as the performance period of the principal debt, it shall be deemed that there is no agreement; Where the creditor and the debtor have not agreed on the time limit for the performance of the principal debt or the agreement is not clear, the guarantee period shall be calculated from the date of expiration of the grace period for the creditor to request the debtor to perform the debt. |
| Article 46 [Effect of Real Estate Mortgage Contract] Where the mortgage registration formalities have not been completed after the immovable property mortgage contract has taken effect, and the creditor requests the mortgagor to go through the mortgage registration formalities, the people's court shall support it. Where the mortgaged property cannot be registered due to loss or expropriation for reasons not attributable to the mortgagor itself, and the creditor requests that the mortgagor bear responsibility within the scope of the agreed guarantee, the people's court shall not support it; Where the mortgagor is unable to register the mortgage due to the transfer of the mortgaged property or other reasons attributable to the mortgagor itself, and the creditor requests that the mortgagor bear responsibility within the agreed scope of security, the people's court shall support it in accordance with law, but it shall not exceed the scope of liability that the mortgagor should bear when the mortgage can be established. Interpretation: Based on the principle of distinction stipulated in Article 215 of the Civil Code, in the mortgage of immovable property, the validity of the mortgage contract and the establishment of the mortgage right are separated. The immovable property mortgage contract shall take effect when the contract is concluded, and the validity of the mortgage contract shall not be affected if the mortgage has not been registered. However, if the mortgage of the immovable property has not been registered, the mortgage right has not been established, and the creditor does not have the priority right to be repaid for the mortgage. Therefore, when the immovable property mortgage contract takes effect, the creditor may request the mortgagor to continue to perform the contract on the basis of a valid contract in order to obtain the mortgage right. In practice, it is not uncommon for a mortgage to be unrealizable due to the mortgagor's reasons. In the event that the mortgage cannot be established, that is, the mortgage contract cannot be continued to be performed, the mortgagor shall be liable for breach of contract damages for breach of the mortgage contract. In the case of circumstances not attributable to the mortgagor, such as the loss of the subject matter caused by a natural disaster, the mortgagor shall only be liable for damages for breach of contract within the scope of the subrogation obtained, and in the event of failure to register the mortgage due to reasons attributable to the mortgagor, such as the mortgagor transferring the mortgaged property to another person, the mortgagor shall be liable for breach of contract within the scope of the agreed guarantee, but shall not exceed the scope of liability that the mortgagor should bear when the mortgage can be established. In addition, if the mortgage contract is effective but the mortgage registration has not been completed, unless the mortgage contract expressly stipulates that the mortgagor shall be jointly and severally liable. Otherwise, the mortgagor will only be liable for supplementary liabilities if the debtor is unable to pay off. Such supplementary liability is limited to the value of the collateral. If the scope of security agreed in the mortgage contract is less than the value of the collateral, the scope of the agreed security shall be limited to the extent of the agreed security and shall not exceed the liability of the mortgagor when the mortgage is validly established. Case reference: China CITIC Bank Co., Ltd. Dongguan Branch v. Chen, et al., A Financial Loan Contract Dispute (Supreme People's Court Guiding Case No. 168) Main Points of the Adjudication: Where a mortgage is secured by immovable property, and the mortgagor fails to register the mortgage in accordance with the mortgage contract, the validity of the mortgage contract shall not be affected. Where the creditor claims that the mortgagor bears liability for breach of contract within the value of the collateral on the basis of the mortgage contract, the people's court shall support it. If the mortgagee is at fault for failing to register the mortgage, the mortgagor's liability for compensation shall be reduced accordingly. | Article 402 of the Civil Code [Registration of Mortgage of Immovable Property] Where the property provided for in Items 1 to 3 of the first paragraph of Article 395 of this Law is mortgaged or the building under construction as provided for in Paragraph 5 of this Law, the mortgage registration shall be completed. The mortgage is created at the time of registration. Article 395 [Scope of Mortgaged Property] The following property that the debtor or a third party has the right to dispose of may be mortgaged: (1) Buildings and other land attachments; (B) the right to use construction land; (3) the right to use maritime space; (4) Production equipment, raw materials, semi-finished products and products; (5) Buildings, ships, and aircraft under construction; (6) means of transportation; (7) Other property that is not prohibited by laws or administrative regulations from being mortgaged. The mortgagor may mortgage the property listed in the preceding paragraph. Article 215 [Distinction between the validity of a contract and a change in real rights] Unless otherwise provided by law or otherwise agreed by the parties, a contract concluded between the parties concerning the creation, modification, transfer and extinction of real property rights shall take effect upon the conclusion of the contract; Article 390 [Subrogation in rem of a security interest and deposit of subrogation] During the guarantee period, if the secured property is damaged, lost or expropriated, the security interest holder may be compensated in priority for the insurance money, compensation or compensation obtained. If the performance period of the secured creditor's right has not expired, the insurance money, compensation or compensation may also be deposited. 60. [Validity of Immovable Property Mortgage Contracts that Have Not Been Registered] Where a real estate mortgage contract is established in accordance with law, but the mortgage registration formalities have not been completed, and the creditor requests the mortgagor to go through the mortgage registration formalities, the people's court shall support it in accordance with law. Where the mortgage cannot be registered due to the loss of the mortgage or the transfer of the mortgage to another person, and the creditor requests that the mortgagor bear liability to the extent of the value of the mortgage, the people's court shall support it in accordance with law, but the scope shall not exceed the liability of the mortgagor when the mortgage is validly established. |
| Article 48 [Liability for Compensation for Registration Authority's Inability to Handle Mortgage Registration Due to Fault] When a party applies for mortgage registration formalities, if it is unable to register the mortgage due to the fault of the registration agency, and the party requests the registration agency to bear the liability for compensation, the people's court shall support it in accordance with law. Interpretation: Whether the content of real estate registration is correct or complete is of great significance to maintaining the safety and orderliness of transactions. If there is an error in the registration, it will cause losses to the real right holder and other parties who have entered into a transaction due to the reliance on the registration publicity. To this end, paragraph 2 of Article 222 of the Civil Code stipulates that: "If damage to others is caused due to registration error, the registration agency shall be liable for compensation." After the registration authority has made compensation, it may recover from the person who caused the registration error. "Generally speaking, an error in the registration of immovable property mainly refers to an error in the content of the registration, but in practice, there are also cases where the registration authority is unable to register the mortgage due to its fault. In order to reduce the occurrence of such impacts on the rights and interests of the parties and the development of the market economy, this article clearly stipulates that if the parties are unable to register the mortgage due to the fault of the immovable property registration authority, the parties may request the registration authority to compensate for the losses incurred thereby. | 《Civil Code》 Article 212 [Duties of Registration Bodies] Registration bodies shall perform the following duties: (1) Inspect the ownership certificate and other necessary materials provided by the applicant; (2) Questioning the applicant on the relevant registration matters; (3) Truthfully and promptly register relevant matters; (4) Other duties provided for by laws and administrative regulations. If the relevant circumstances of the immovable property applied for registration need to be further proved, the registration authority may require the applicant to supplement the materials and, if necessary, may inspect it on the spot. Article 222 [Compensation for Errors in the Registration of Immovable Property] Where a party provides false materials to apply for registration, causing damage to others, it shall be liable for compensation. Where damage to others is caused due to registration errors, the registration authority shall be liable for compensation. After the registration authority has made compensation, it may recover from the person who caused the registration error. Article 17 of the Interim Regulations on the Registration of Immovable Property (Revised in 2019). When the immovable property registration authority receives the application materials for immovable property registration, it shall handle it in accordance with the following circumstances: (1) Where it is within the scope of registration duties, the application materials are complete and conform to the statutory form, or the applicant submits all the supplementary and corrected application materials as required, it shall be accepted and the applicant shall be notified in writing; (2) Where there are errors in the application materials that can be corrected on the spot, the applicant shall be informed to make corrections on the spot, and after the applicant has made corrections on the spot, the applicant shall accept the application and inform the applicant in writing; (3) Where the application materials are incomplete or do not conform to the legally-prescribed form, the applicant shall be notified in writing on the spot that it will not be accepted, and shall be informed of all the contents that need to be supplemented and corrected at one time; (4) If the immovable property applied for registration does not fall within the scope of registration of the institution, the applicant shall be notified in writing on the spot that it will not be accepted and inform the applicant to apply to the institution with the right of registration. If the immovable property registration authority fails to inform the applicant in writing on the spot that it will not be accepted, it shall be deemed to have accepted the application. Article 30 Where a staff member of a real estate registration agency makes a false registration, damages or forges a real estate register, modifies the registration items without authorization, or commits other acts of abuse of power or dereliction of duty, he shall be punished according to law; |
| Article 59 [Pledge of Warehouse Receipts] Where the depositor or the holder of the warehouse receipt has endorsed the word "pledge" on the warehouse receipt, and the warehouse receipt has been delivered to the pledgee, the people's court shall determine that the pledge is established when the warehouse receipt is delivered to the pledgee. If the warehouse receipt without the certificate of right can be registered as a pledge in accordance with the law, the pledge right of the warehouse receipt shall be established when the pledge registration is handled. The pledgor shall pledge both the warehouse receipts and the warehousing to set up a guarantee, and determine the order of repayment in accordance with the order of publicity; if it is difficult to determine the order, it shall be repaid in accordance with the proportion of creditor's rights. If the custodian issues multiple warehouse receipts for the same goods, and the pledgor establishes multiple pledges on the multiple warehouse receipts, the order of repayment shall be determined in accordance with the order of publicity; if it is difficult to determine the order, it shall be repaid in accordance with the proportion of creditor's rights. Where there are circumstances provided for in paragraphs 2 and 3, and the creditor provides evidence to prove that its losses were caused by the joint acts of the pledgor and the custodian, and requests that the pledgor and the custodian bear joint and several liability for compensation, the people's court shall support it. Interpretation: Warehouse receipts have the attributes of both credit certificates and property certificates. Similar to the requirements on the pledge of bills of exchange in the previous article (Article 58) of this interpretation, the pledge of warehouse receipts must also meet the three requirements of endorsement, signature and delivery. Only the endorser is the stockholder or warehouse receipt holder, and the signatory is the custodian. In addition, it should be noted that for warehouse receipts without proof of rights, their pledge can be carried out by going through the pledge registration, so as to avoid the occurrence of empty single pledge, repeated pledge, etc. This is clarified in paragraph 1 of this article. In addition, in view of the chaos of "homogeneity of single goods" and "multiple qualities of one order" that occur frequently in the field of warehouse receipts in practice, based on the provisions of Articles 414 and 415 of the Civil Code and in combination with the spirit of the provisions, paragraphs 2 and 3 of this Article stipulate the rules of priority in corresponding circumstances. In addition, although the above-mentioned chaos such as "homogeneity of single goods" and "multiple qualities of one order" seems to be caused by the custodian's forgery of warehouse receipts, the custodian's forgery of warehouse receipts is mostly at the request of the pledgor, and the pledgor and the custodian often constitute joint infringement in essence in this case. In order to effectively reduce the chaos of warehouse receipt pledges, strengthen the protection of the legitimate interests of creditors, and effectively consolidate the responsibilities of the custodian, paragraph 4 of this article clearly stipulates that if the creditor can provide evidence to prove that its losses were caused by the joint acts of the pledgor and the custodian, it may request the pledgor and the custodian to bear joint and several liability for compensation. | Article 440 of the Civil Code [Scope of Rights Pledge] The following rights that the debtor or a third party has the right to dispose of may be pledged: (1) Bills of exchange, promissory notes, and checks; (2) Bonds and certificates of deposit; (3) Warehouse receipts and bills of lading; (4) Fund shares and equity that can be transferred; (5) Property rights in intellectual property rights such as the exclusive right to use registered trademarks, patent rights, and copyrights that can be transferred; (6) existing and future accounts receivable; (7) Other property rights that laws and administrative regulations provide may be pledged. Article 441 [Establishment of Pledge in the Pledge of Securities] If a bill of exchange, promissory note, check, bond, deposit receipt, warehouse receipt or bill of lading is pledged, the pledge shall be established when the certificate of right is delivered to the pledgee; Where the law provides otherwise, follow those provisions. Article 442 [Special Methods for Realizing the Pledge of Securities Pledged] If the date of encashment or delivery of a bill of exchange, promissory note, check, bond, deposit certificate, warehouse receipt, or bill of lading is prior to the maturity of the principal creditor's right, the pledgee may cash or take delivery of the goods, and agree with the pledgor to pay off the debts or deposit the cashed price or the goods withdrawn in advance. Article 908 [Obligation of the custodian to issue warehouse receipts and warehousing receipts] If the depositor delivers the warehousing goods, the custodian shall issue warehouse receipts, warehousing receipts and other vouchers. Article 910 [Nature and Transfer of Warehouse Receipts] A warehouse receipt is a voucher for the withdrawal of stored goods. If the stockholder or the holder of the warehouse receipt endorses the warehouse receipt and the custodian signs or seals it, the right to withdraw the stored goods may be transferred. Article 414 [Order of Repayment of Several Mortgages] Where the same property is mortgaged to two or more creditors, the proceeds from the auction or sale of the mortgaged property shall be repaid in accordance with the following provisions: (1) Where the mortgage has already been registered, the order of repayment shall be determined in accordance with the time of registration; (2) where the mortgage has been registered before the unregistered payment; (3) If the mortgage is not registered, it shall be repaid in proportion to the creditor's rights. For other registrable security interests, the provisions of the preceding paragraph shall apply by reference to the order of repayment. Article 415 [Order of Repayment of Mortgage and Pledge] Where both a mortgage and a pledge are created on the same property, the order of repayment shall be determined according to the time of registration and delivery. |
| Interpretation of the Supreme People's Court on the Application of the Marriage and Family Section of the Civil Code of the People's Republic of China (1) | Related Provisions |
| Article 86: [Scope of Damages for Divorce]"Compensation for damages" as provided for in Article 1091 of the Civil Code includes compensation for material damages and compensation for moral damages. Where compensation for moral damages is involved, the relevant provisions of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Determination of Liability for Moral Damages in Civil Torts" apply. Interpretation: This article clarifies that there are two types of divorce damages under Article 1091 of the Civil Code: one is material damages, and the other is moral damages. Compensation for material damages mainly refers to the property losses caused by the at-fault party to the non-at-fault party, and is not conditional on the direct effect of the damage on the property, as long as the wrongful act causes the damage consequences of the property loss, including the reduction of positive property and the increase of negative property, but does not include the loss of expected benefits. Compensation for moral damages, including mental damage caused by the wrong-fault party's personal injury to the victim, as well as mental trauma and mental anguish caused solely by the wrong-party's behavior. The former, such as domestic violence, and the latter, such as bigamy. Article 5 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Determination of Liability for Moral Damages in Civil Torts (2020 Amendment) provides specific provisions on the basis for determining the basis for compensation for moral damages. | Article 1091 of the Civil Code [Divorce Damages] In any of the following circumstances, if the divorce is caused, the innocent party has the right to claim damages: (1) bigamy; (2) cohabitation with another person; (3) Committing domestic violence; (4) Ill-treatment or abandonment of family members; (5) There are other major faults. Article 5 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Determination of Liability for Moral Damages in Civil Torts (Revised in 2020) The amount of compensation for moral damages shall be determined on the basis of the following factors: (1) The degree of fault of the infringer, except as otherwise provided by law; (2) The specific circumstances of the infringement, such as the purpose, method, and occasion; (3) the consequences of the infringement; (4) the infringer's profits; (5) the infringer's economic capacity to bear responsibility; (6) The average standard of living for the location of the court accepting the litigation. |
| Article 87 [Subject of Liability for Damages in Divorce and Conditions for Claim] The entity liable for damages as provided for in Article 1091 of the Civil Code is the spouse of the innocent party to the divorce proceedings. In cases where a people's court decides not to grant a divorce, the parties' request for damages based on Article 1091 of the Civil Code is not supported. Where, during the existence of the marital relationship, the parties do not sue for divorce but separately file a claim for damages in accordance with article 1091 of the Civil Code, the people's court will not accept it. Interpretation: Interpretation of this article is about the subject of liability for divorce damages and the conditions for request, which are specifically divided into two levels: First, the subject of divorce damages is limited to the spouse of the innocent party, excluding others. Second, the damages for divorce should be based on the premise of divorce. Where a court decides not to grant a divorce or the parties directly claim damages without filing a request for divorce, it does not fall within the scope of application of Article 1091 of the Civil Code. Of course, divorce here is not limited to litigation divorce, and divorce by mutual agreement should also apply. Article 89 of this Interpretation makes this clear. | Article 1091 of the Civil Code [Divorce Damages] In any of the following circumstances, if the divorce is caused, the innocent party has the right to claim damages: (1) bigamy; (2) cohabitation with another person; (3) Committing domestic violence; (4) Ill-treatment or abandonment of family members; (5) There are other major faults. |
Note: This article is excerpted from "Comparison and Key Interpretation of the Supporting Judicial Interpretations of the Civil Code", China Legal Publishing House, January 2024 edition, with slight deletion and correction when reprinting.
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