Case about disputes over a contract on the sale of commercial houses

 Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang v. Xinjiang Erdos Yanhai Real Estate Development Co., Ltd.
(Issued on December 28, 2016 as deliberated and adopted by the Judicial Committee of the Supreme People's Court)
Keywords: civil; a contract on the sale of commercial houses; a loan contract; liquidation of debts; legal effect; examination

Key Points of Judgment
Where both parties to a loan contract terminate the loan contract upon negotiation and establish a new contract on the sale of commercial houses, the principal and interest of the loan is transformed into the paid house purchase fund upon account checking and clearing, the aforesaid arrangement does not fall under the prohibitive circumstance as prescribed in Article 186 of the Property Law of the People's Republic of China, and the purpose for the conclusion of the contract on the sale of commercial houses is not “guarantee for the private lending contract” as prescribed in Article 24 of the Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases. Where there is no circumstance as prescribed in Article 52 of the Contract Law of the People's Republic of China, the contract on the sale of commercial house has legal effect. However, the people's court should examine the amount of the principal and interest of the loan that has transformed into the paid house purchase fund on the basis of the loan contract and other evidence, so as to avoid the party's transformation of high interest exceeding the ceiling protected by the law to the paid house purchase fund.
Legal Provisions
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
Plaintiffs Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang alleged that: As agreed in the contract concluded by and between both parties, Xinjiang Erdos Yanhai Real Estate Development Co., Ltd. (hereinafter referred to as “Yanhai Company”) should deliver houses conforming to the stipulations of the contract to these four persons on September 30, 2014. However, up to now, Yanhai Company refused to perform the obligation of delivering the houses. Therefore, plaintiffs requested the Higher People's Court of Xinjiang Uygur Autonomous Region to order that: (1) Yanhai Company should pay Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang the liquidated damages of CNY 60 million; (2) Yanhai Company should bear the losses of CNY 416,300 to Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang in the process of claiming rights; and (3) Yanhai Company should bear all litigation costs of the case.
Yanhai Company contended that: Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang should file separate lawsuits. These four persons and Yanhai Company had no intention of purchasing and selling houses, the contract on the sale of commercial houses was actually a loan contract in the name of a sale contract, and it was guarantee for the loan contract, the stipulation thereof violated the provisions 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. The contract on the sale of commercial houses concluded by and between both parties was obviously unfair by taking advantage of Yanhai Company's difficulties. The liquidated damages and losses claimed by these four persons also lacked factual basis.
After a trial, the Higher People's Court of Xinjiang Uygur Autonomous Region found that: In 2003, Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang concluded multiple loan contracts with Yanhai Company respectively and they obtained the creditor's rights of the loans borrowed by Yanhai Company, CNY 260 million in total, by means of lending and accepting the creditor's rights transferred from other persons. In order to provide guarantee for the performance of such loan contracts, the four persons and Yanhai Company concluded multiple contracts on the presale of commercial houses and they handled formalities for recordation and registration at the local real estate transaction management center. After the creditor's rights were successively mature, since Yanhai Company failed to repay the principal and interest of the loans, it was confirmed upon account checking between both parties that Yanhai Company still owed these four persons CNY 361,398,017.78, which was the principal and interest of the loans. Subsequently, both parties concluded a new contract on the sale of commercial houses, which stipulated that Yanhai Company sold houses under its name to these four persons, the principal and interest of the aforesaid loans were transformed into the paid house purchase funds, and the remaining house purchase funds of CNY 38,601,982.22 would be paid in a lump sum to Yanhai Company after the formalities for the property transfer registration of all subject matter were handled. The sheets of account checking between Tang Long and other three persons and Yanhai Company submitted by Tang Long and other three persons showed that the monthly interest rates of the loans between both parties were 3% and 4%, the overdue interest rate was 10%, and compound interest was also calculated.
Judgment
On April 27, 2015, the Higher People's Court of Xinjiang Uygur Autonomous Region rendered a civil judgment (No. 2 [2015], First, Civil DivisionI, HPC, Xinjiang) that: (1) Yanhai Company should pay Tang Long, Ma Zhongtai, Liu Xinlong, and Wang Honggang the liquidated damages of CNY 9,275,057.23; (2) Yanhai Company should pay Tang Long, Ma Zhongtai, Liu Xinlong, and Wang Honggang the lawyer's fees of CNY 416,300; and (3) other claims of Tang Long, Ma Zhongtai, Liu Xinlong, and Wang Honggang should be dismissed. The aforesaid funds should be paid in a lump sum within ten days after the judgment came into force. After the judgment was pronounced, Yanhai Company appealed on the grounds that the sale contract concluded by and between both parties was guarantee for the loan contract, it was not the true intention of both parties, and the arrears included high interest. On October 8, 2015, the Supreme People's Court rendered a civil judgment (No. 180 [2015], Final, Civil DivisionI, Supreme People's Court) that: (1) The civil judgment (No. 2 [2015], First, Civil DivisionI, HPC, Xinjiang) as rendered by the Higher People's Court of Xinjiang Uygur Autonomous Region should be vacated; and (2) The claims of Tang Long, Liu Xinlong, Ma Zhongtai, and Wang Honggang should be dismissed.
Judgment's Reasoning
In the effective judgment, the Higher People's Court of Xinjiang Uygur Autonomous Region held that: Before the conclusion of the contract on the sale of commercial houses in dispute, there were actual loan contracts between Yanhai Company and Tang Long and other three persons and for the purpose of performing such loan contracts, both parties concluded the corresponding contract on the presale of commercial houses and handled the formalities for the advance-notice registration of pre-sold commercial houses. However, the contract on the sale of commercial houses in dispute was transformed from loan contracts upon renegotiation and account checking under the circumstance where Yanhai Company failed to repay the principal and interest of the loans. The principal and interest of the loans have been transformed into the paid house purchase funds, and the contract in dispute stipulated such rights and obligations as house delivery, balance payment, and liability for breach of contract. In addition to be based on the special legal provisions, the establishment, alteration, or elimination of a civil legal relationship should be formed through consistent intention of participants of the legal relationship. In civil trading activities, it was not rare that the intention of a party changed. The change in the intention should be permitted unless otherwise prohibited by the special legal provisions. Upon consensus reached between both parties, the loan contracts were terminated and a new contract on the sale of commercial houses was established. It was not guarantee provided for the performance of the loan contracts between both parties, but a transaction arrangement for realizing the balance of both parties' rights and obligations by means of selling the commercial houses owned by Yanhai Company to Tang Long and other three creditors when the loan contracts were expired and it was difficult for Yanhai Company to repay the debts. This transaction arrangement did not violate the mandatory provisions of laws and administrative regulations, did not fall under any prohibitive circumstance as prescribed in Article 186 of the Property Law of the People's Republic of China, and was not governed by the provisions of Article 24 of the Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases. Respecting the subsequently-formed consistent intention of the parties to change the nature of the legal relationship should be the due intention for implementing the principle of freedom of contract. The claim of Yanhai Company that the contract on the sale of commercial houses involved was invalid should not be admitted.
However, under the circumstance where the contract on the sale of commercial houses was confirmed legal and valid, since both parties acknowledged that the paid house purchase funds under the contract was transformed from the principal and interest of the original loans and Yanhai Company claimed that the amount of arrears included high interest, when the party requested judicial confirmation and protection of house buyers' contractual rights, the people's court should examine the amount of loan principal and interest formed on the basis of the actual performance of the loan contracts, so as to avoid the legalization of illegal high interest obtained by the party through the conclusion of a contract on the sale of commercial houses and by other means. It was found upon examination that the method for calculating the interest of loans between both parties has exceeded the upper limit of protection of private lending interest rate as provided by the law. The amount of arrears between both parties including high interest should not be confirmed according to the law. Since the interest rate of loans protected by the law was obviously lower than the interest rate confirmed in the account checking between both parties, it should be determined that as house purchasers, Tang Long and other three persons have not paid the house purchase funds in full amount as agreed in the contract and Yanhai Company's failure to deliver the houses by the scheduled time should not be deemed as breach of contract. The claims of Tang Long and other three persons that Yanhai Company should pay the liquidated damages and lawyers' fees on the factual basis that Yanhai Company's delayed delivery of houses constituted breach of contract lacked legal and factual basis. The judgment of first instance was erroneous in ordering that Yanhai Company should assume the liability for breach of contract and pay the liquidated damages and lawyers' fees, and the Higher People's Court of Xinjiang Uygur Autonomous Region corrected it accordingly.
(Judges of the effective judgment: Xin Zhengyu, Pan Jie, and Shen Dandan)