Rules of the Supreme People's Court on Some Issues
Concerning the Trial on the Disputed Cases
over the Contracts for Financial Leasing

Fa Fa [1996] No.19
Adopt Date: 27th May1996
Effective Date: 27th May 1996
Issued by: the Supreme People's Court at its 793rd Meeting of Judicial Committee

In order to ensure the correct trial and judgment on the disputed cases over the contracts for financial leasing and protect the legal rights and interests of the litigants, and pursuant to the provisions of related laws of the People's Republic of China as well as on the basis of the experience gained in the trial practice, we hereby issue the following rules:

Article 1 The litigants of the disputed case over the contract for financial leasing shall include the leasor and the lessee. Whether the supplier must be one of the litigants or not shall be decided by the court according to the actual circumstances of the case. However, if arbitration clause is included in the contract, the supplier shall not be determined to be one of the litigants.

Article 2 When the lessee in the contract for financial leasing is not the user who actually uses the leased property, the court may determine the user to be one of the litigants in the case according to the related facts.

Article 3 The litigants in the disputed case over the contract for financial leasing, may choose through negotiation the court in the place substantially associating to the controversy to have the jurisdiction over the case. If the litigants do not choose the court with jurisdiction, the court in the place of residence of the defendant or the place of the performance of the contract shall have the jurisdiction over the case. The place where the leased property is used shall be deemed to be the place of the performance of the contract for financial leasing.

Article 4 The litigants in the disputed case for the contract for financial leasing relating to the foreign interests may choose through negotiation the law applicable to the dispute over the contract. If the litigants do not choose such law, the law in enforcement in the place of residence of the lessee shall be applicable to the case.

Article 5 If the items involved in the contract for financial leasing shall have been approved by the related authorities but actually have not been approved, such contract shall be held null and void.

Article 6 If one of the following circumstances exists, the contract for financial leasing shall be deemed to be invalid contract:
(1) The leasor has no right to do business within the scope of financial leasing;
(2) The lessee and supplier swindles the fund of the leasor through malicious collaboration;
(3) The contract sidesteps the law and regulations of the State in the form of the contract for financial leasing; and
(4) The contracts that shall be deemed to be null and void in accordance with the related laws and regulations.

Article 7 The contract for financial leasing, after being deemed to be null and void, shall be handled respectively according to the following circumstances:
(1) If the invalidity of the contract is caused due to the fault of the lessee, and the leasor do not claim for returning the leased property to it, the leased property may not be returned to the leasor, but the lessee shall make compensation for the damages caused to the leasor due to the faults of the lessee;
(2) If the invalidity of the contract is caused due to the fault of the leasor, and the lessee claims for returning the leased property to the leasor, the leased property may be returned to the leasor, and the leasor shall make compensation for the damages caused to the lessee due to the faults of the leasor, if any; and
(3) If the invalidity of the contract is caused due to the faults of both the leasor and lessee, the leased property may be returned to its owner, and each party shall bear the responsibilities for compensating for the damages corresponding to its own faults.
If the leased property is in use currently and is producing economic benefits, the leasor and lessee may decide through negotiation whether the leased property shall be returned. If the negotiation fails, the court shall make a ruling based on the facts.

Article 8 If the State's agencies act as guarantor after it was stipulated in the Opinions of the Supreme People's Court on Some Issues Concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China (trial implementation), such guarantor shall be deemed null and void. If the invalidity of the guarantor has caused damages to the creditor, the State's agency that has provided the guarantee shall bear corresponding responsibility for compensation.

Article 9 The leased property purchased from foreign countries and for which the litigants in the contract for financial leasing agreed in the contract to pay the rent in foreign currency, such contract shall be deemed valid.

Article 10 Before the completion of the performance of the contract for financial leasing, the lessee, without prior consent of the leasor, provides mortgage against the leased property, transfers or subleases it to others, or makes investment based on the leased property and holds shares in a venture, his acts shall be deemed null and void, and the leasor has right to take back the leased property and claim damages if any from the lessee. The third party has right to request the lessee to make compensation for damages caused to it.

Article 11 If the leasor illegally interferes in the normal use of the leased property by the lessee, or takes back the leased property without prior consent of the lessee, and such act has resulted in damage to the lessee, the leasor shall bear the responsibilities for compensation.

Article 12 If the supplier delayed in the delivery of the goods, or the quality or quantities of the delivered goods is not in accordance with the agreement, or other acts in breach of the supply contract, the claims for the damage shall be handled in consideration of the following different circumstances:
(1) For the supply contract or lease contract where the transfer of claim is stipulated, the leasor shall enjoy and exercise the claim right, and the lessee shall provide necessary evidences; and
(2) If the transfer of claim is stipulated in the supply contract or lease contract, the lessee shall directly lodges claim to the supplier.

Article 13 Where one of the following circumstances exists, the leasor shall bear the responsibilities for compensation when the lessee is unable to lodge claim to the supplier or the compensation provided by the supplier is insufficient for the damage caused due to the quantity or quality of the leased property:
(1) According to the lease contract, the leasor has selected the supplier or leased property completely based on its own knowledge and judgement for the lessee;
(2) The leasor has appointed the supplier or leased property; and
(3) The leasor, not subject to the approval of the lessee, has changed the supplier or leased property chosen by the lessee;
Save as stated in the above, the leasor shall generally not bear any responsibilities for the quantity or quality of the leased property.

Article 14 Where the lessee has no faults, the cost incurred and the result produced in the claim against the supplier shall be respectively born and enjoyed by the lessee. If the non-claim or overdue claim is caused due to the faults of the leasor, the leasor shall bear the corresponding responsibility.

Article 15 Where claim is lodged against the supplier for the quality or quantity, and the leasor has not any faults, the exercise of the right of the leasor to collect the rent to the lessee shall not be affected.

Article 16 Where lessee has not paid the partial or whole rent as agreed in the contract, such acts shall be deemed illegal and the lessee shall pay the rent according to the contract, overdue interests and make compensation for the damage to the leasor accordingly.

Article 17 Where the lessee goes bankrupt, the leasor may take back the leased property, or request the court that accept the bankruptcy case to auction the leased property, and apply the incomes from the auction for repayment of the debts of the lessee due to the leasor. Where the value of the leased property is greater than the credit of the leasor, the amount above the credit shall be returned to the lessee. Where the value of the leased property is less than the credit, the part of the debt that is not repaid, shall enter the liquidation procedure as general credit or shall be paid off by the guarantor of the lessee.

Article 18 Where the lessee goes bankrupt, the leasor may, as the creditor for the bankruptcy, declares its credit, and participate into the bankruptcy. Where a third party has provided security for the credit of the leasor, the leasor also may request the guarantor to perform his obligations as a guarantor.

Article 19 If the credit of the leasor is not satisfied completely, the leasor may request the guarantor to pay off the shortfalls.

Article 20 Where the leasor has decided not to participate in the bankruptcy procedure, he shall inform the guarantor of the lessee in time, and the guarantor may declare his credit equal to the amount of the debt under his guarantee and participate in the distribution of the insolvent properties.

Article 21 The limitation of action for the litigants in the contract for financial leasing to request the court to protect the rights thereof shall be governed by the provisions of Article 135 of the General Principles of the Civil Law of the People's Republic of China.