CHINA GUIDING CASES PROJECT

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1 TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang v. Xinjiang Ordos Yanhai Real Estate Development Co., Ltd., A Dispute over a Contract for the Sale and Purchase of Commercial Housing Guiding Case No. 72 (Discussed and Passed by the Adjudication Committee of the Supreme People s Court Released on December 28, 2016) CHINA GUIDING CASES PROJECT English Guiding Case (EGC72) September 14, 2018 Edition The citation of this translation of this Guiding Case is: 汤龙 刘新龙 马忠太 王洪刚诉新疆鄂尔多斯彦海房地产开发有限公司商品房买卖合同纠纷案 (TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang v. Xinjiang Ordos Yanhai Real Estate Development Co., Ltd., A Dispute over a Contract for the Sale and Purchase of Commercial Housing), STANFORD LAW SCHOOL CHINA GUIDING CASES PROJECT, English Guiding Case (EGC72), Sept. 14, 2018 Edition, The original, Chinese version of this case is available at 最高人民法院网 ( See also 最高人民法院关于发布第 15 批指导性案例的通知 (Notice of the Supreme People s Court on the Release of the 15th Batch of Guiding Cases), issued on and effective as of Dec. 28, 2016, This document was primarily prepared by Sean Webb and Dr. Mei Gechlik; it was finalized by Dimitri Phillips and Dr. Mei Gechlik. Minor editing, such as splitting long paragraphs, adding a few words included in square brackets, and boldfacing the headings, was done to make the piece more comprehensible to readers; all footnotes, unless otherwise noted, have been added by the China Guiding Cases Project. The following text is otherwise a direct translation of the original text released by the Supreme People s Court.

2 Keywords Civil Contract for the Sale and Purchase of Commercial Housing Borrowing Contract Clearance of Debts Legal Effect Review Main Points of the Adjudication Where, after reaching consensus by negotiation, the two parties of a borrowing contract terminate [their] borrowing contract relationship to establish a relationship [based on] a contract for the sale and purchase of commercial housing and to convert, after comparing accounts for settlement, the loan principal and interest into payment for the housing, this is not a situation prohibited by Article 186 of the Property Law of the People s Republic of China. The purpose of entering into the contract for the sale and purchase of commercial housing is also not a type of guarantee for a private lending contract as provided for in Article 24 of the Provisions of the Supreme People s Court on Several Issues Concerning the Application of Law in the Adjudication of Private Lending Cases. Under the circumstance that the situations provided for in Article 52 of the Contract Law of the People s Republic of China does not exist, the contract for the sale and purchase of commercial housing has legal effect. However, a people s court should review the amount of loan principal and interest that has been converted into payment for the housing, along with other evidence, including the borrowing contract, to prevent the parties from converting high interest rates that are beyond the legal protection limit into the purchase price of the housing. Related Legal Rule(s) Article 186 of the Property Law of the People s Republic of China Article 52 of the Contract Law of the People s Republic of China Basic Facts of the Case Plaintiffs TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang claimed: based on the stipulations in the contract [reached by] the two sides, Xinjiang Ordos Yanhai Real Estate Development Co., Ltd. 1 (hereinafter referred to as Yanhai Company ) should have delivered, on September 30, 2014, to the four persons a house that conformed to the stipulations in 1 The name 新疆鄂尔多斯彦海房地产开发有限公司 is translated herein literally as Xinjiang Ordos Yanhai Real Estate Development Co., Ltd.

3 the contract. But up until [a certain time], 2 Yanhai Company refused to perform the obligation to deliver the housing. Therefore, [the plaintiffs] requested [that the court] order: 1. Yanhai Company to pay TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang RMB 60 million as damages for breach of contract; 2. Yanhai Company to bear the loss of RMB 416,300, [an expense incurred] by TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang during the process of claiming their rights; 3. Yanhai Company to bear all the litigation costs of the case. Yanhai Company defended its position, claiming: TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang should bring their lawsuits separately. The four people and Yanhai Company did not have any intent to purchase and sell housing. The contract for the sale and purchase of housing between the two sides was named a sale and purchase [contract], but was in fact a lending [contract]. The contract for the sale and purchase of commercial housing was a guarantee for a lending contract. That [sale and purchase] agreement was in violation of Article 40 of the Guarantee Law of the People s Republic of China and Article 186 of the Property Law of the People s Republic of China and [should therefore] be invalid. The contract for the sale and purchase of housing signed by the two sides was obviously unfair and [entered into] to take advantage of others. There was no factual basis for the liquidated damages and losses incurred by the four people. The court handled the case and ascertained: TANG Long, LIU Xinlong, MA Zhongtai, WANG Honggang, and Yanhai Company successively signed a number of borrowing contracts in [The four people] obtained, through actual lending [to Yanhai Company] and accepting the transfer of other people s claims [against Yanhai Company], the claims of Yanhai Company s total loan of RMB 260 million. In order to guarantee the performance of the borrowing contract, the four persons signed separately multiple contracts for the pre-sale of commercial housing with Yanhai Company, and filed a registration with the local housing property transaction management center. After the claims matured, Yanhai Company did not repay the principal and interest of the loan. The two sides compared [their] accounts and confirmed that Yanhai Company still owed the four people principal and interest amounting to RMB 361,398, in total. The two sides subsequently signed a contract for the sale and purchase of commercial housing, agreeing that Yanhai Company sold a house under its name to the four people, and the above-mentioned arrears of principal and interest were to be converted into [partial] payment for the housing. The remaining amount of RMB 38,601, for the housing was to be paid to Yanhai Company [by the four people] after the registration of the transfer of all the subject matter property rights was completed. A table comparing their accounts submitted by the four people, including TANG Long, showed that the interest on the loan between the two sides was calculated according to the monthly 2 The Chinese text reads 至今为止 ( up until now ), but it is not clear from the context which date this refers to.

4 interest rate of 3% and 4%, and the overdue interest rate of 10%, and the compound interest was calculated. Results of the Adjudication On April 27, 2015, the High People s Court of Xinjiang Uygur Autonomous Region rendered the (2015) Xin Min Yi Chu Zi No. 2 Civil Judgment, ordering: 1. Yanhai Company to pay TANG Long, MA Zhongtai, LIU Xinlong, and WANG Honggang RMB 9,275, as damages for breach of contract; 2. Yanhai Company to pay TANG Long, MA Zhongtai, LIU Xinlong, and WANG Honggang lawyers fees in the amount of RMB 416,300; 3. to reject other litigation requests [made by] TANG Long, MA Zhongtai, LIU Xinlong, and WANG Honggang. The aforementioned amount should, within ten days of the judgment s coming into effect, be paid off by one payment. After the judgment was pronounced, Yanhai Company appealed on the grounds that the sale and purchase contract between the two sides was a guarantee for the borrowing contract, instead of being the two sides true expression of intent [to sell and buy housing] and that the amount owed included high interest rates. On October 8, 2015, the Supreme People s Court rendered the (2015) Min Yi Zhong Zi No. 180 Civil Judgment: 1. [the court] revokes the (2015) Xin Min Yi Chu Zi No. 2 Civil Judgment [rendered by] the High People s Court of Xinjiang Uygur Autonomous Region; 2. [the court] rejects the litigation requests [made by] TANG Long, LIU Xinlong, MA Zhongtai, and WANG Honggang. Reasons for the Adjudication In the effective judgment, the court opined: 3 before the contract for the sale and purchase of commercial housing at issue in this case was signed, a borrowing contract relationship had indeed existed between Yanhai Company and the four people, including TANG Long. In addition, in order to perform the borrowing contract, the two sides signed the corresponding contracts for the pre-sale of commercial housing and handled the registration of the advanced purchase of the commercial housing. The contract for the sale and purchase of commercial housing was [signed] by the two sides after Yanhai Company had not paid off the loan principal and interest. After re-negotiation and comparing their accounts, they converted the borrowing contract relationship into a relationship with a contract for the sale and purchase of commercial housing and converted the loan principal and interest into the paid purchase price of the housing. In addition, the rights and 3 The Chinese text does not specify which court opined. Given the context, this should be the Supreme People s Court.

5 obligations of housing delivery, payment of the remaining amount, liability for breach of contract, etc. had been agreed upon. Except for special provisions of the law, the creation, change, and elimination of civil legal relations are consistently formed by the expressions of intent of the subjects participating in the legal relations. In civil transaction activities, it is not uncommon for a party s intent to change. The change should be permitted unless prohibited by special provisions of the law. In this case, the two sides terminated the borrowing contract relationship after negotiation. They formed a relationship [based on] the contract for the sale and purchase of commercial housing, not for the purpose of guaranteeing the performance of the borrowing contract between the two parties. Instead, it was a transaction arrangement [set up] by selling the commercial housing of Yanhai Company to the four creditors, including TANG Long, for balancing the rights and obligations of the two sides, if Yanhai Company was unable to pay off the debts when the borrowing contract matured. The transaction arrangement did not violate the mandatory provisions of laws and administrative regulations, and was not a type of situation prohibited by Article 186 of the Property Law of the People s Republic of China. Also, Article 24 of the Provisions of the Supreme People s Court on Several Issues Concerning the Application of Law in the Adjudication of Private Lending Cases was not applicable. Respecting the parties consistent expression of intent regarding the nature of the changed legal relationship formed subsequently [by the parties] should be the meaning of the implementation of the principle of freedom of contract. Yanhai Company s claim that the contract for the sale and purchase of commercial housing in this case was invalid was not accepted. However, in confirming that the contract for the sale and purchase of commercial housing was legal and valid, [the court also considered that] the parties on both sides had agreed that the purchase price paid under the contract was transferred from the original loan principal and interest, and Yanhai Company alleged that the amount of the arrears included high interest. When a party requests judicial confirmation and protection of a buyer s contractual rights, a people s court should review the amount of the loan principal and interest based on the actual performance of the borrowing contract, so as to avoid the parties [attempt] to legalize an illegal interest rate by signing a contract for the sale and purchase of commercial housing. After review, [the court found that] the calculation method of the interest on the loan between the two sides had exceeded the upper protection limit of the private loan interest rates as provided for by law. [The court] could not confirm, in accordance with law, the amount of arrears [involved in this case], which included high interest. Since the interest rate of borrowing protected by law was significantly lower than the interest rate of borrowing confirmed by the parties here, it should be considered that the four purchasers, including TANG Long, had not paid in full the purchase price agreed in the contract. The fact that Yanhai Company did not deliver the housing according to the agreed time should not be considered a breach of contract.

6 The four people, including TANG Long, requested that Yanhai Company pay liquidated damages and lawyers fees on the basis that Yanhai Company did not deliver the housing on time[,] constituting a breach of contract. This [claim] lacked factual and legal basis. In the first-instance judgment, [the court] ordered Yanhai Company to bear liability for liquidated damages and lawyers fees. This was wrong and was corrected by the [appellate] court. (Adjudication personnel of the effective judgment: XIN Zhengyu, PAN Jie, and SHEN Dandan)