Private lending disputes have become hot potatoes in recent years, and the caseload of lending matters has also surged in Chinese arbitration institutions. When making decision on these disputes, the tribunal normally needs to strictly apply the General Provisions of the Civil Law, the Contract Law and other laws and regulations, and consider the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (the provisions of private lending cases) and other judicial interpretations. In issues regarding tribunals’ discretion, the values of fairness and appropriation are required to be considered in protecting the legal interests and restricting loans unethically and immorally intended to enrich the lender.
The authors have studied cases from Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC) and summarized some major disputes and tribunal considerations in private lending cases. In general, the tribunals would consider the total sum of interest due and delayed, default interest and other fees, and balance between the parties in every individual case.
Calculations of interest within the interest period. In BAC/BIAC private lending cases, the calculation method of interest accrued within the interest period often draws attention. In some credit agreements, parties adopted an irregular method to calculate the interest, resulting in an inconsistency between the explicit written interest rate and the hidden interest rate calculated from the repayment table.
For irregular methods of calculation, the tribunals should calculate the actual interest rate hidden in the repayment table, and have it examined by the 24% criterion from the provisions of private lending cases: (1) when the actual annual interest rate is below 24%, the borrowers should pay the remaining interest; (2) when the actual annual interest rate is above 24% but below 36%, for the interest above 24%, the already paid interest is legal while the unpaid interest would not be supported; (3) when the actual annual interest rate is above 36%, for the interest above 36% the borrowers can make a claim of return.
Also under this circumstance and when the actual annual interest rate is below 24%, the tribunals would in most circumstances respect the repayment table. However, if the borrowers raise an explicit defence over the true intention, the tribunals can arrange a debate over the true intention of the interest rate, and with adequate evidence of fraud, evident unfairness or a major misunderstanding, repeal the agreement under the rules of the Contract Law.
When the calculation of interest exceeds the interest period. Another issue in private lending cases is how to calculate when the interest accrued exceeds the interest period, especially when the credit agreement did not include an obligation acceleration clause. We can observe the tribunal decisions in most circumstances.
When the credit agreement did not include an obligation acceleration clause: (1) if the lender did not claim to rescind the agreement, the obligation wouldn’t be accelerated; (2) if the lender did claim to rescind the agreement, the interest would be accrued from the date of rescission, based on the remaining principal, with the annual interest rate below 24%.
Relevant fees in private lending cases. The last issue is about fees relevant to the credit agreement. In practice, part of the principal is paid to a third party in the name of consulting fees or service fees. The question is whether to deduct such amount from the principal, which relates to in what circumstances the relevant fees can be seen as interest and be examined by the 24% criterion.
The tribunals often consider the following factors in order, and make decisions on each individual circumstance:
First, whether the borrowers make a defence. If the borrowers claim and prove that the third party did not provide any service related to the fees, or the lenders did not remind the borrowers of a format clause, resulting in an untrue intention, the tribunal will scrutinize these facts. Even if the case is heard in the borrower’s absence, when the relevant fees are a considerably large proportion of the principal, the tribunal will make an appropriate investigation.
Second, whether the third party and the lenders are the same or related. If the lenders appointed the third party, and have the same legal representative or other relations with the third party, then it is not reasonable to split the lenders’ duty to different parties and charge them fees. The tribunal may have discretion over this issue. If the tribunal makes a decision in an individual case that the relevance is adequate to determine identity, then such fees can be interpreted as interest.
Third, whether there is evidence of the third party fulfilling its obligations. If there is no such evidence of payment receipt or of fulfilling its obligations, such fees cannot be supported.
If the fees are determined to be the interest: (1) when the fees are charged at the beginning, such an amount should be deducted from the principal; (2) when the fees are charged during the interest period, the fees and interest should be added and examined by the 24% criterion.
The above was a brief summary of issues and tribunal decisions in BAC/BIAC private lending cases. The BAC/BIAC uses its extensive administration and analysis to help achieve consensus on arbitral controversies.
Sun Yu, Shen Yunqiu and Chen Xiao are case managers of Beijing Arbitration Commission/Beijing International Arbitration Centre