Key words
Identification and application of the laws of the Hong Kong Special Administrative Region
Referee points
Whether the case can refer to the British case when it comes to the application of the law of the Hong Kong Special Administrative Region, and whether it is possible to refer to the content of the foreign law that has been identified by the effective referee of the court when the foreign law is applied
The relevant laws
Article 3, article 4, article 5 and article 10 of The Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations
Article 10, article 18, and article 19 of Explanation on the Application of the Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations(1) issued by the Supreme People’s Court
Article 29 and article 31 of the Provisions on the Foreign Exchange management of Cross-Border Guarantee issued by the foreign exchange administration of the People’s Republic of China
Case index
Shenzhen Qianhai Cooperation Zone People’s Court, Guangdong (2016), Yue 0391, the early Republic of China 1947 (March 14, 2017)
The basic facts of the case
On May 7, 2014, one Hong Kong trading company applied for one Hong Kong financial company to purchase a “SAFANDARLEY” bending machine (Model: E-Brake 100-3100; Serial number: M2999) from a designated supplier, Lifeng Sheet Metal Machinery Co., Ltd. According to the instructions of the Hong Kong trading company, the Hong Kong financial company paid HK $ 1,612,500 to the supplier, obtaining the invoice issued by the supplier and the ownership of the rental equipment. On May 20, 2014, the Hong Kong financial companies (as the lessor of the financial leasing contract) and the Hong Kong trading company (as the lessee of the financial leasing contract) formally signed the Financial Leasing Agreement in both English and Chinese, No. 6728049. They agreed that the rental equipment would be leased to the Hong Kong trading company by the Hong Kong financial companies. The lease term is 30with HK $ 48,046 per term payable on the 20th of each month. Article 32.1 of the Agreement provides that the agreement is governed by the laws of the Hong Kong Special Administrative Region. On May 20, 2014, the Hong Kong financial company delivered the rental equipment to the Hong Kong trading company, and the rental equipment was deposited by the Hong Kong trading company in a related company’s production site in Shenzhen for the actual use of the Shenzhen Company. The Hong Kong trading company, the Hong Kong financial company, and the Shenzhen Company confirmed the above facts and signed the Chinese Confirmation of Rights and Interests. On the same day, the three guarantors separately issued the Guarantee Letter in both Chinese and English to the Hong Kong financial company and agreed to bear the joint liquidated liability for the debts of the Hong Kong trading company to the Hong Kong financial company under the aforesaid Financial Leasing Agreement, and agreed that the Guarantee Letter is governed by the laws of the Hong Kong Special Administrative Region. After that, the Hong Kong trading company paid a total down payment equal to 3 periods of rent, and the subsequent 24-term finance leases to the Hong Kong financial company, owning 3 terms unpaid, totaling less than HK $ 190,684.
During the hearing of the case, the parties concerned applied Hong Kong Law to reach a mediation agreement to pay rent and various expenses in installments.
Shenzhen Qianhai Cooperation Zone People’s Court has conducted a review of the mediation agreement in accordance with the law.
Referee results
Shenzhen Qianhai Cooperation Zone People’s Court issued the Paper of Civil Mediation, Guangdong (2016), Yue 0391, the early Republic of China 1947 on March 14, 2017, and believed that the considered mediation agreement reached by the parties is the true meaning of the parties concerned, which does not violate the procedural provisions and other provisions of the mainland law of the People’s Republic of China, or the relevant provisions of the law of the Hong Kong Special Administrative Region. Qianhai Cooperation Zone People’s Court also confirmed the contents of all mediation agreements reached by the parties.
Referee Reasons
This case is a Hong Kong-related commercial case involving the financial leasing contract disputes of the Hong Kong Special Administrative Region. The review procedures for the mediation agreement on Hong Kong-related factors are in the category of Procedure Law. This procedure shall apply to the Civil Procedure Law of the People’s Republic of China in accordance with the provisions of Article 259 of the Civil Procedure Law of the People’s Republic of China on “The provisions of this Regulation shall apply to foreign-related civil litigation in the territory of the People’s Republic of China”. In accordance with Article 96 of the law, the people’s court shall examine the mediation agreement, which involves both voluntary and legal aspects.
The voluntary issue has been checked and verified by the court in advance because of the identity of the parties and the mediation authority of the entrusted agent. The above mediation agreement shall be concluded by the parties under the auspices of the court and the mediation agreement shall be confirmed as a voluntary agreement.
The legitimacy issue must first determine the law applicable to this case, and then review whether the content of the agreement is in accordance with the provisions of the applicable law. Here are the following:
1. The parties in this case choose the applicable law
According to article 3 of The Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations on “In accordance with the provisions of the law, the parties may explicitly choose the law applicable to foreign-related civil relations” and article 19 of Judicial Explanation on the Application of the Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations(1) issued by the Supreme People’s Court on “The application of laws concerning the civil relations of the Hong Kong Special Administrative Region and the Macao Special Administrative Region shall be governed by the provisions of the present Provisions”, this case is a Hong Kong-related commercial case involving the financial leasing contract disputes of the Hong Kong Special Administrative Region, and the parties involved in Hong Kong-related commercial disputes can explicitly choose the applicable law in accordance with the law.
The plaintiff and defendant of Hong Kong Hualin Company agreed that the agreement is governed by the law of the Hong Kong Special Administrative Region in the case of article 32.1 of the lease agreement. The three guarantors in the case declared that the Guarantee Letter is governed by the laws of the Hong Kong Special Administrative Region. In the course of the trial, the parties concerned expressly indicated that the law of the original agreement was unchanged, so the parties in this case chose the law of the Hong Kong Special Administrative Region as the applicable law.
2. The applicable law determined in this case in accordance with the law
Article 4 and article 5 of The Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations stipulate that: Where the laws of the People’s Republic of China have mandatory provisions on foreign - related civil relations, the compulsory provisions shall be applied directly; where the application of foreign law will harm the public interests of the People’s Republic of China, the laws of the People’s Republic of China shall be applied. That is, the premise of the application of foreign law, including China’s Hong Kong and Macao laws, must meet the demand that there is no mandatory provisions on the foreign-related civil relation in the law of the People’s Republic of China and the application of foreign law will harm the public interests of the People’s Republic of China.
The article 10 of Judicial Explanation on the Application of the Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations(1) issued by the Supreme People’s Court defines what circumstances belong to the mandatory provisions mentioned above, respectively, involving the protection of workers' rights and interests, food or public health security, environment safety, foreign exchange control and other financial security, antitrust, anti-dumping or other circumstances. If it involves the social and public interests of the People’s Republic of China, the parties can not apply the provisions of laws and administrative regulations that are directly applicable to foreign-related civil relations without the need of conflict norms.
In the light of the specific circumstances of this case, it should examine whether there are mandatory provisions concerning the financial security of the People’s Republic of China, such as foreign exchange control, in the case of cross-border guarantees in the legal relationship of Hong Kong-related financial leasing in this case. Cross-border guarantees refer to the guarantor offering a written and legally binding statement to the creditor, promising to fulfill the relevant payment obligations in accordance with the guarantee contract, which may result in cross-border payments or asset transboundary movements and other international payments transactions. The creditors (the plaintiff) and the debtor (the defendant, Hong Kong Hualin Company) are registered in the Hong Kong Special Administrative Region, and the guarantor of the case, Shenzhen Hualin Company, Shuai Wanlin, Xiao Ligui are registered or live in mainland China. The cross-border guarantees between the three guarantors and the creditors belong to the form of offshore financing against domestic guarantees provided by the Provisions on the Foreign Exchange management of Cross-Border Guarantee. This has been fully discussed in the effective Paper of Civil Mediation, (2006) Yue 0391, the early Republic of China 713, and believes that the cross-border guarantee registration or filing and other procedures are no longer effective provisions, but regulatory requirements, and whether the parties have fulfilled the relevant registration or filing and other procedures does not affect the effectiveness of financial leasing contracts in accordance with the Provisions on the Foreign Exchange management of Cross-Border Guarantee issued by the foreign exchange administration of the People’s Republic of China on June 1, 2014. Therefore, the legal relationship of cross border guarantees in this case does not belong to the mandatory provisions of the law of the People’s Republic of China on the foreign-related civil relations provided by the article 4 of The Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations.
In addition, the matters relating to the mediation agreement in this case belong to the compromise negotiated by the party concerned after the breach of the contract by one party, which belongs to the category of freedom of contract in the foreign-related commercial contract. The People’s Bank of China said in Notice on Further Promoting the Reform of Interest Rate Marketization that since July 20, 2013, the loan interest rate control of financial institutions had been fully liberalized, and the lower limit of the loan interest rate of financial institutions had been abolished, and the financial institutions independently determined the level of loan interest rates in accordance with commercial principles. That is to say, the loan rate of the People’s Bank of China to the mainland financial institutions has been fully liberalized since July 20, 2013, and there is no restrictive regulation on the interest rate of the financial leasing related to Hong Kong. Therefore, this case applies to the provisions of the Hong Kong Special Administrative Region, and there is no harm to the public rights and interests of the People’s Republic of China.
In conclusion, the case may apply the law of the Hong Kong Special Administrative Region as the applicable law.
3. The provisions of the Hong Kong Special Administrative Region identified in this case
The article 4 of The Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations provides that the foreign law applicable to foreign-related civil relations shall be identified by the people’s court, the arbitration institution or the administrative organ, and if the parties choose to apply foreign laws, the law of the state shall be provided. That is, the law of the Hong Kong special administrative region agreed by the parties concerned in this case shall be provided by the parties hereto and shall be reviewed and determined by the people’s court.
The plaintiff of the case has submitted the Legal Opinions on the form of the text of the Financial Leasing Agreement and Guarantee Letter, which was issued by the lawyer, Ye Zhixing of the Luo Wenjin lawyer’s office in Hong Kong, entrusted by the plaintiff on February 10, 2017. After the review of the court, the Financial Leasing Agreement and Guarantee Letter discussed in this Legal Opinions is consistent with the contents signed by the parties concerned.
The main contents of the Legal Opinions are as follows:
1. The validity of the Financial Leasing Agreement
According to the common law, generally speaking, the contracts concluded on the basis of equality and voluntariness and in accordance with the principle of autonomy of the parties are legally binding on both parties of the contract. Under the contract law, a contract must be supported at a cost or made in deed, so that an effective contract can be formed. According to the common law, the cost can be defined as “the rights, interests, profits or benefits of a party, or tolerance, damage, loss or responsibility that the other party pays, tolerates or assumes”. In other words, the cost is that suffered by the party obtaining the pledge of the promisor, or the benefit obtained by the promisor for his promise. In accordance with the terms of the lease, the plaintiff rents the goods to the lessee, and the lessee pays the rent of the leased goods to the plaintiff in accordance with the terms of the lease contract. According to Hong Kong law, the lease contract is legal and effective, and it is legally binding on the plaintiff and lessee of the case since the lease contract is supported by the plaintiff in this case to rent the goods to the lessee.
2. The legality of a breach of contract stipulated in the Financial Leasing Agreement
According to common law, if the contractor stipulated in the contract that if one party must pay a specified amount to the other party in the event of a breach, the court will distinguish whether the clause is an enforceable “liquidated damages” clause or an unenforceable “penalty clause”. According to the UK case “Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. (1915) AC 79”, Lord Dunedin pointed out that the key element of “liquidated damages” is the specified amount of compensation, which is a serious assessment of the losses that are expected to be incurred in default, and the key element of the “penalty clause” is the specified amount of compensation, which is made in order to prevent the breach of contract (that is, it does not represent the contractor’s serious assessment of the expected loss). If the relevant terms are deemed effective and enforceable “liquidated damages” by the court, even if the actual loss of the innocent party exceeds or is less than the specified amount, the damages shall be subject to the amount of compensation stipulated in the relevant articles. Since the provisions of the article 20.4 and the article 20.6 of the lease contract do not constitute a “penalty clause”, therefore, in accordance with Hong Kong law, the plaintiff may require the lessee to pay the residual rent of the goods and liquidated damages. As a lessee, he shall not perform the liquidated damages of the plaintiff in this case. In addition, in accordance with Article 12.1 of the lease contract, the lessee guarantees that the plaintiff shall exercise his powers in accordance with the lease contract and the lessee also bears all expenses and losses(including law fees and expenses paid by the plaintiff) arising from the failure of the lessee to perform his duty.
3. Validity of the Guarantee Letter
According to the guarantee, in view of the fact that the plaintiff agreed to lease the equipment to the lessee under the lease contract, the guarantor shall irrevocably and unconditionally assure the lessee that the lessee is responsible for all the lease contracts and shall be responsible for the completion of the lease contract on time, including but not limited to, all rent due to the failure of the lessee to fulfill the lease contract,all interest arising from the overdue payment, and all losses incurred by the plaintiff due to the lessee’s breach of the lease contract. The guarantor declares that although the plaintiff may have other warranties and guarantees to control the lessee’s responsibilities in the lease contract, the plaintiff in this case has the right to treat the guarantor as the principal debtor, and the Guarantee Letter will be mandatory to the guarantor.
According to Hong Kong law, this Guarantee Letter is legal and effective, and it has legal binding on the guarantor. As the guarantor agrees that the plaintiff has the right to treat the guarantor as the principle debtor in this case, the plaintiff in this case may recover the debt directly from the guarantor. The guarantor’s liability is independent of the responsibility of the principal debtor, as if he were the principal debtor. Even if the principal debtor does not bear the liability for repayment, the guarantor shall still bear the liability for repayment.
4. The legality of the overdue interest rate stipulated in the lease contract
According to the article of Hong Kong’s Money Lenders Ordinance (Chapter 163 of the laws of Hong Kong), anyone who lends money or offers a loan at a real annual interest rate of over 60 per cent per annum commits a crime. This provision also notes that any loan repayment agreement or loan interest payment agreement and the guarantee provided on such agreement or loan shall not be enforced if the actual interest rate is more than 60 per cent per annum. Article 24 of the above shall not apply to any loan made by a company with a capital contribution of no less than HK $1 million (or other acceptable currency of equal amount). The exact meaning of the article 11.2 of the lease agreement is that the overdue interest rate is calculated at 3% per month and the lessee is required to pay the interest arising under article 11.1.
The above Legal Opinions was notarized by Hong Kong lawyer Chen Zhenxiang and China commissioned notary public, commissioned by the Ministry of Justice of the People’s Republic of China on February 10, 2017, and was transmitted by China law Service (Hong Kong) Co. Ltd. on February 14, 2017. Ye Zhihang, the lawyer of this Legal Opinions, has been practicing in Hong Kong since 2012, and belongs to legal profession, so the court believes that he has the qualification to issue legal opinions regarding this case. All parties involved in this case have no objection to the contents of the above mentioned Legal Opinions in the procedure of review of the mediation agreement of the court. The court noticed that the case “Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. (1915)AC 79” had occurred in Britain in 1915. British law was one of the legal components before the return of the Hong Kong Special Administrative Region in 1997, and the common law case is an important part of the law of the Hong Kong Special Administrative Region. According to article 8 of the Basic Law of the Hong Kong Special Administrative Region, the original laws of Hong Kong, namely, common law, equity law, ordinances, subsidiary legislation and customary law, shall be retained except in conflict with this law or amended by the legislature of the Hong Kong Special Administrative Region. This case does not contravene the Basic Law of the Hong Kong Special Administrative Region, nor has it been amended by the legislature of the Special Administrative Region, so this case is a British precedent reserved in Hong Kong’s legal system and is part of the law of the Hong Kong Special Administrative Region. According to article 18 of Explanation on the Application of the Law of the People’s Republic of China on the Application of Laws Concerning Foreign-related Civil Relations(1) issued by the Supreme People’s Court, the people’s court shall hear from the parties concerned about their understanding and opinions on the applicable foreign laws, and if the parties have no objection to the contents and application of the foreign law, the people’s court may confirm it, so the court will confirm the laws identified by the Legal Opinions and the understanding and application of the law of the Hong Kong Special Administrative Region.
4. Whether the content of the mediation agreement is in accordance with the provisions of the law of the Hong Kong Special Administrative Region
Although the above Legal Opinions is not the only report interpreting law and detailing expert opinions, the Legal Opinions has made a corresponding introduction to the basis of the general contract and validity of the Guarantee Letter under the common law in this case. In the aspect of the legality of the breach of contract damages and overdue interest rate, the Legal Opinions introduces the principles determined by the relevant precedents of the common law and the corresponding statute law of the Hong Kong Special Administrative Region, so as to examine the relevant legal issues involved in the case. In addition, the case (2006) Yue 0391, the early Republic of China 713 concluded the court is similar to this case, belonging to the same type of Hong Kong-related financial leasing dispute. The plaintiff in the case (lessor) is a Hong Kong bank, and defendant A (lessee) is also a Hong Kong company. The leasing equipment is used by defendant B in Shenzhen and many defendants provide guarantees. In this case, after the parties have applied the law mediation of the Hong Kong Special Administrative Region, the parties reached an agreement to pay the arrears in installments and how to dispose the ownership of the leased property. After the examination, the court will confirm all the mediation clauses. The laws of Hong Kong Special Administrative Region identified by the Legal Opinions and the understanding and application is richer than the content of the Legal Opinions in this case, but the conclusion is essentially the same.
Therefore, according to the laws of the Hong Kong Special Administrative Region identified by this case and other cases heard by the court, the court decides that the Financial Leasing Agreement and Guarantee Letter are legal and effective under the interpretation of the laws of the Hong Kong Special Administrative Region. The contracts and documents signed by the parties, on the basis of the autonomy, shall be fully complied with. All matters of the mediation agreement may be confirmed by the court if the lessor in the case has fulfilled the corresponding obligation, the lessee and the lessor have reached a mediation agreement of installment payment, the guarantor has performed joint liquidated liability, and the disposal of the relevant liquidated damages, interest and equipment ownership does not violate the laws of the Hong Kong Special Administrative Region.
To sum up, if the above mediation agreement is the real meaning of the parties concerned, which doesn’t violate the procedural provisions of the mainland laws, other provisions and relevant laws and regulations of the Hong Kong Special Administrative Region, nor harm the social and public interests of the mainland of China, the court will approve it.
Case notes
This is the second case applying the laws of the Hong Kong Special Administrative Region to review the mediation agreement in Qianhai Court, and in the aspect of the review process, law identification, expert qualifications, understanding and application, it is essentially the same as the first case in Qianhai Court.
However, although the two cases both belong to financial leasing contract disputes, the financiers are respectively professional banks and financial institutions, so the identification report issued by legal experts is slightly different. Under this situation, the case not only applies the law identification opinions issued by the legal experts in accordance with the law, but also directly cites the relevant laws that have been identified in the first instance of the court, applying the laws of the Hong Kong Special Administrative Region. This action has set up a new example of applying the extraterritorial law that has been identified by the effective referee of the court in a separate case.
In addition, for the case “Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.(1915)AC 79” cited in the identification report, this case also makes it clear that although the case occurred in Britain in 1915, it can still be cited in the case. British law was one of the legal components before the return of the Hong Kong Special Administrative Region in 1997, and the common law case is an important part of the law of the Hong Kong Special Administrative Region. According to article 8 of the Basic Law of the Hong Kong Special Administrative Region, the original laws of Hong Kong, namely, common law, equity law, ordinances, subsidiary legislation and customary law, shall be retained except in conflict with this law or amended by the legislature of the Hong Kong Special Administrative Region. This case does not contravene the Basic Law of the Hong Kong Special Administrative Region, nor has it been amended by the legislature of the Special Administrative Region, so as a retained British precedent in the legal system of the Hong Kong Special Administrative Region and a part of the laws of the Hong Kong Special Administrative Region, it can be cited in this case.
