Judicial Interpretation of the General Principles of Contract Codification: Several Difficulties in the Application of the Legal Consequences of Contract Invalidity

Drafting Group of the Supreme People's Court Understanding and application of the Interpretation of Several Issues Concerning the Application of the General Principles of Contracts of the Civil Code

Discussion on Several Issues Concerning the Judicial Application of the Interpretation of the General Principles of Contract Compilation of the Civil Code - Summary of the Special Study and Exchange Meeting on the Application of Law

The Civil Code mainly stipulates four types of contract invalidity, including the invalidity of contracts concluded by persons without civil capacity; A contract concluded with a false representation of intent is null and void; Illegal and unconventional contracts are invalid; and the invalidity of contracts that maliciously collude to damage the legitimate rights and interests of others. Once the contract is confirmed to be invalid, it will have retroactive effect, and it will not have legal effect from the time of conclusion, and will not produce the legal effect expected by the parties, but it does not mean that there are no legal consequences. What are the legal consequences of the invalidity of the contract are related to Articles 24 and 25 of the judicial interpretation of the contract. Today, I will discuss with you some difficulties in the understanding and application of these two articles.

● Article 24 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Principles of the Civil Code of the People's Republic of China: If a contract is not established, invalid, revoked, or determined to be invalid, and the parties request the return of the property, and the property can be returned after review, 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 alone or in combination; Where the property cannot be returned after review or there is no need to return it, the people's court shall make a judgment on the basis of the market value of the property or the value reasonably calculated on the date on which the contract is found to be invalid, invalid, 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; Where it is a private criminal prosecution case, the parties shall be informed that they may separately initiate litigation in the people's court with jurisdiction. ● Article 25 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Principles of Contract Codification of the Civil Code of the People's Republic of China: If a contract is not established, invalid, revoked or determined to be invalid, and one of the parties entitled to request the return of the price or remuneration requests the other party to pay the capital occupation fee, the people's court shall, within the scope of the request of the parties, calculate the one-year loan market quotation rate (LPR) published by the National Interbank Lending Center authorized by the People's Bank of China. However, if the party occupying the funds is not at fault for the contract not being formed, invalid, revoked or determined to be ineffective, it shall be calculated based on the benchmark interest rate of the same type of deposit announced by the People's Bank of China for the same period. Where both parties bear mutual obligations to return, and the parties claim simultaneous performance, the people's court shall support it; Where the party in possession of the subject matter has circumstances in which the subject matter is used or may be used in accordance with law, and the other party requests that the capital occupation fees it should pay offset with the fees it should collect for the use of the subject matter, the people's court shall support it, except as otherwise provided by law. ▲ Swipe up to see more

Where did the original "malicious collusion" and "recovery" provisions go?

The so-called recovery was first provided for in Article 61 of the General Principles of the Civil Law implemented in 1987, and Article 59 of the Contract Law implemented in 1999 still follows the handling of the General Principles of the Civil Law. In 2017, after the implementation of the General Provisions of the Civil Law, Article 157 has in fact repealed the above-mentioned recovery provisions. Subsequently, Article 157 of the Civil Code, which came into effect on January 1, 2021, and Article 24 of this judicial interpretation, continue to follow the provisions of the General Provisions of the Civil Law, and the relevant provisions on recovery and recovery have been deleted. The provisions of the General Principles of the Civil Law and the Contract Law on the recovery and return of the collective and third party in the consequences of malicious collusion resulting in the invalidity of the contract have obvious administrative and public law sanctions, and the basis and subject of the claim are not clear, and do not fall within the scope of civil liability. Therefore, the relevant provisions have been deleted from the General Provisions of the Civil Law, the Civil Code and the Judicial Interpretations of the Contract Edition, and the civil liability system has become more standardized after the adjustment.

● Article 61 of the General Principles of the Civil Law: After a civil act is confirmed to be invalid or revoked, the property acquired by the parties as a result of the act shall be returned to the party who suffered the loss. 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 corresponding responsibility. Where the two parties maliciously collude to carry out civil acts that harm the interests of the state, the collective, or a third party, the property acquired by both parties shall be recovered, and the property shall be returned to the state or collective or returned to the third party. ● Article 59 of the Contract Law: Where the parties maliciously collude to harm the interests of the state, the collective or a third party, the property thus acquired shall be returned to the state or returned to the collective or the third party. ● Article 157 of the General Provisions of the Civil Law: After a civil juristic act is invalid, revoked, or determined not to take effect, the property acquired by the actor as a result of the act shall be returned; where it cannot be returned or there is no need to return it, compensation shall be made at a discounted price. The party at fault shall compensate the other party for the losses suffered thereby; Where all parties are at fault, they shall each bear corresponding responsibility. Where the law provides otherwise, follow those provisions.

Although the provisions on recovery have been deleted, not all contracts are invalid and property is returned, and it should be noted that Article 157 of the current Civil Code clearly states that "where the law provides otherwise, follow those provisions." "According to the spirit of the Supreme People's Court's understanding and application, the law here includes laws and administrative regulations, and when laws and administrative regulations clearly stipulate that the subject property and illegal gains shall be confiscated or confiscated in certain contracts, such provisions shall be followed. Of course, in specific trial practice, there may also be some issues to be resolved, one is how to achieve or deal with the consequences of liability in civil litigation in accordance with this article even if the consequences of liability are provided for in administrative or criminal matters; Second, the invalidity situations are complex, some contracts are invalid due to illegality, and some are invalid due to violation of public order and good customs, but "the law otherwise provides" is after all a minority, and in this regard, whether the parties can request the return of property in accordance with Article 157 of the Civil Code is a very controversial issue in practice and theory. During the drafting stage of the Civil Code, some experts and scholars proposed the establishment of a payment system for illegal causes in China, but it was ultimately not adopted. At present, there are great differences in the handling of judicial decisions in various places, and I am personally inclined to believe that for contracts that seriously violate the law and seriously deviate from public order and good customs, the parties should consider taking into account factors such as the reprehensibility of the parties, and consider using legal principles such as public order and good customs as the basis, and not support the parties' requests for the return of property.

Is the party at fault and needs to be considered when returning the property?

The legal basis for the return of property is that after the original contract is invalid and has no legal effect, the basis for the party receiving the property to acquire and occupy the property is extinguished, and in order to restore the property relationship between the parties to the point before the conclusion of the contract, one party may naturally request the other party to return the property. According to the general theory, at the same time, the legislative viewpoint of the Civil Code also holds that the right to request the other party to return the movable or immovable property here is in nature the right to claim for the return of the real right: if it belongs to the movable property, it has the right to request the other party to transfer possession; If it is immovable property, it has the right to request the other party to transfer possession and cooperate in handling the transfer registration. In the case of a claim in rem, whether the counterparty is at fault or not does not affect the scope of return of the claim in rem. Therefore, after the contract is invalid, the return of the property has nothing to do with the fault of the parties, and the parties have the obligation to return the property regardless of whether they are at fault for the invalidity of the contract. Where the property cannot be returned or is not necessary to be returned, the right to return the original property is to be converted into a claim for unjust enrichment, and one party may request compensation from the other party at a discount. As with the return of property, the parties are obliged to compensate for the discount, regardless of whether they are at fault for the invalidity of the contract. Although the scope of the return will be affected by the fault of the party who obtained the benefit in the claim for the return of unjust enrichment, the discount compensation here is an alternative way to return the original goods, with the purpose of restoring the initial state before the conclusion of the contract, so fault should not be the main consideration in determining the scope of the discount compensation.

● According to Articles 986 and 987 of the Civil Code, when the profiteer is bona fide, the scope of return is limited to the existing property, and if the benefit does not exist, it is no longer obliged to return; If the profiteer is in bad faith, he shall be liable for compensation for the loss of property.

How to delineate the scope of the return of property?

After the contract is invalid, the party who acquires and takes possession of the property shall have no right to take possession and shall return the original property and the fruits. The original will not be repeated. Fruits are divided into natural fruits and legal fruits. natural fruits, such as grain and other products obtained from cultivated land, fruits from planting fruit trees; Legal fruits are things that are born from the original according to a certain legal relationship, typically housing rent and deposit interest. For example, if the property acquired by one of the parties based on the contract is used for lease after the contract is invalid, the rent shall be returned together.

With regard to the scope of the above-mentioned returned property as the original goods and fruits, let's imagine an example, after the private loan contract is invalid, the party who obtains the loan will temporarily deposit the loan in the bank for savings, and after the contract is invalid, should the deposit interest be returned together? If the loan is transferred to a third party, should the interest paid by the third party be returned after the contract is invalidated? If the loan is used for stock speculation and financial management, should the income obtained be returned after the contract is invalid? The answer should be no. Article 24 of the Judicial Interpretation provides that the return of property is based on the legal theory that there is no right to possess and return the original property in the right to claim in rem, and the original property and the fruits thereof shall be returned together. However, the acquisition and loss of the possession of money directly lead to the acquisition and loss of the ownership of the currency, and the ownership of the currency has no retroactive effect, and in principle, there is no right to claim the return of the original thing. In the above three cases, after the contract is invalid, the lender may request the return of the monetary principal delivered based on the loan contract based on the right to claim for the return of unjust enrichment, but neither the deposit interest nor the loan interest or wealth management income obtained are unjust enrichment obtained by the borrower after the invalidity of the private lending contract, and the lender cannot claim the return of the loan. In this case, the lender may claim the capital occupation fee in accordance with Article 25 of the Judicial Interpretation.

● The income from stock speculation and wealth management is no longer in the category of statutory fruits. The civil fruits must meet the following characteristics: 1. They must be the consideration for the usufruct of the transfer. 2. It must be a cyclical income, on the one hand, the legal fruits must be generated according to its underlying legal relationship, rather than a probabilistic event; On the other hand, civil fruits are a continuous rather than a one-off or incidental income, and their collection is generally calculated on a duration basis.

How to deal with intangible property acquired by one of the parties to a labor contract and other parties that cannot be returned?

Article 24 of the judicial interpretation stipulates that "property after review cannot be returned", including legal non-return, such as the return of property is restricted by law (e.g., when acquired in good faith); It also includes the fact that it cannot be returned, such as the damage or loss of the subject property, and the nature of the subject property cannot be returned. Labor contracts and other contracts that provide intangible property for labor services or services, where the intangible property cannot be returned after being invalid, compensation shall be made in accordance with Article 24 of the Judicial Interpretation.

When the court determines the amount of compensation for discount, it may not be consistent with the amount agreed in the original contract. First of all, this judicial interpretation makes it clear that the time point of the adjudication is used as the time reference point for determining the amount of discount compensation, and specifically, the price at the time when the contract is found to be invalid in the first-instance judgment is converted into the underlying property. Second, if the market price of intangible property such as labor or services can be found in the open market, the amount of monetary compensation shall be converted into the market price, and if the intangible property is not substitutable and the market price cannot be determined, the price agreed in the original contract may be referred to as the basis for the discount compensation. The same can be applied to the issue of invalid return of lease contracts and other continuing contracts.

Is the compensatory loss an actual loss, or does it include a loss of anticipated benefits?

If the contract is found to be invalid and has no effect from the beginning, and if the property cannot be restored to the original state at the time of the conclusion of the contract after the return of property or compensation at a discount, and the other party is requested to compensate for the loss, it is in nature a liability for negligence in the contract, not a liability for breach of contract. Paragraph 2 of Article 24 of this judicial interpretation is a dynamic system regulation clause, and there is no distinction between the factors enumerated and the factors to be considered, and not every factor must be considered in individual cases. The scope of damages for liability for contractual negligence is limited to the actual losses suffered as a result of reliance on the validity of the contract, and does not include the loss of profits. Generally speaking, the scope of compensation for damages after the contract is invalid mainly includes the costs incurred in concluding the contract and the costs of performing the contract. For example, in a private lending contract, if the lender takes a loan from a financial institution and re-lends it, and the contract is found to be invalid, the loan interest paid by the lender to the financial institution may be regarded as the actual loss of the invalid contract, and the amount of compensation can be reasonably determined according to the degree of fault of both parties for the invalidity of the contract. Based on the above understanding, let's understand the fund occupation fee stipulated in Article 25 of the Judicial Interpretation. According to Article 25, if a person has the right to request the other party to repay the money, he may also request the other party to pay the capital occupation fee, so does the capital occupation fee here not belong to the "loss" provided for in the second paragraph of Article 24? In practice, some people may hold that if the party delivering the funds loses the interest on the bank's deposit for the same period, it should be compensated by the other party as a loss caused by the invalidity of the contract, which is the capital occupation fee stipulated in Article 25. This understanding is erroneous, and the scope of compensation for losses after the invalidity of the contract is limited to actual losses, excluding the loss of available profits, and of course excluding the expected loss of interest on bank deposits for the same period. The capital occupation fee provided for in Article 25 of the Judicial Interpretation is unjust enrichment in legal nature, which is the unjust enrichment obtained by the party that obtains the money from the usufruct value of the money, and the content of the enrichment is the cost saved by obtaining the use of the money or the consideration that should have been expended, so it should generally be calculated in accordance with the loan market prime interest rate (LPR). At the same time, Article 25 also stipulates that if the party who obtains the money is not at fault for the invalidity of the contract, it shall be calculated according to the interest rate of the same type of deposit in the same period.

Transferred from the same judgment rule for similar cases