Viewpoint... The nature of overdue interest in financial lease contracts and the analysis of judicial application rules.

Published:

2022-03-04

Foreword In a financial lease contract, for the sake of safeguarding the performance of the contract and safeguarding its own interests, the lessor, in addition to establishing a performance bond clause in the contract, usually agrees that the lessee shall bear the obligation to pay overdue interest and/or liquidated damages in the event of a breach of contract, such as late payment of rent. The lessee should pay the corresponding overdue interest when defaulting is not too controversial, but how to determine the nature of the overdue interest, overdue interest and liquidated damages jointly claimed the interest rate ceiling standard, the current theory and judicial practice are controversial. Determination of the Nature of Overdue Interest in 1. Financial Leasing Contracts Regarding the nature of overdue interest in financial lease contracts, there are mainly two theories in academic circles-"the calculation method of damages" and "the theory of liquidated damages". The "theory of calculation method of damages" is based on a clear distinction between agreed damages and agreed liquidated damages, and holds that the two cannot be confused. The theory holds that agreed damages need to be based on the occurrence of losses. In addition, some scholars in this theory believe that if the parties to a financial lease contract agree on overdue interest and overdue payment liquidated damages at the same time, the adjudication body should inform the parties to make a choice. The "liquidated damages" is that the liquidated damages clause and the calculation clause of damages are often difficult to distinguish in practice, and the overdue interest calculation clause can be characterized as the liquidated damages clause to obtain the opportunity of judicial adjustment, which is more conducive to balancing the interests of both parties, so there is no need to distinguish. By searching the relevant cases, it can be found that judicial practice is more inclined to "liquidated damages", that is, the court usually determines the overdue interest clause as the nature of liquidated damages, and according to the actual situation of the case, with reference to a certain interest rate standard to the parties to claim the overdue interest, liquidated damages unified adjustment. Although there are disputes on the nature of overdue interest in financial leasing contracts in academic circles and judicial practice, according to Article 9 of the Interpretation of the Supreme People's Court on Applicable Legal Issues in the Trial of Financial Leasing Contract Disputes (hereinafter referred to as the Judicial Interpretation of Financial Leasing), "The lessee is late in fulfilling the obligation to pay rent or other payment obligations, and the lessor requires the lessee to pay overdue interest and corresponding liquidated damages in accordance with the agreement of the financial leasing contract, the people's court shall support the provision that, regardless of the nature of the overdue interest in the financial lease contract, in the event of a breach of contract such as late payment of rent by the lessee, the lessor shall have the right to claim both overdue interest and liquidated damages in accordance with the contract. The judicial applicable rules of overdue interest in 2. financial lease contracts. As mentioned above, with regard to the application of overdue interest in financial leasing contracts, the judicial interpretation of financial leasing clearly stipulates that overdue interest can be claimed at the same time as liquidated damages, but the upper limit and applicable standards of overdue interest and liquidated damages are not clearly stipulated in the relevant laws and regulations of our country, so there are different understandings in judicial practice, and the court's judgments are also different (take the following three judgments as examples). [Case 1]:(2021) Supreme People's Court No. 458 The court of first instance held that: regarding the delayed interest, according to Article 19.1 of the Financial Lease Contract, if Jiuda Salt Making Company fails to pay the rent and other payables to Wanjiang Leasing Company as agreed in this contract, Jiuda Salt Making Company shall pay the delayed interest to Wanjiang Leasing Company at 5/10000 per day on the overdue amount from the payment date, and the interest agreement does not violate the legal provisions, based on this, Wanjiang Leasing Company argued that Jiu Da Salt Company should pay the delayed interest to be supported by the court of first instance. The court of second instance held that Article 19.1 of the "Financial Leasing Contract" signed by Jiu Da Salt Company and Wanjiang Leasing Company stipulated that from the content, the two parties clearly agreed in this article as "deferred interest". The essence of the delayed interest is the overdue interest that the lessee shall pay to the lessor in respect of the overdue rent if the lessee fails to pay the rent within the prescribed time limit. According to the Interpretation of the Supreme People's Court on the Legal Issues Applicable to the Trial of Financial Lease Contracts (Fa Shi [2014] No. 3), Article 20 stipulates that "if the lessee fails to pay rent or delays in other payment obligations, and the lessor requires the lessee to pay overdue interest and corresponding liquidated damages in accordance with the provisions of the financial lease contract, the people's court shall support it". Overdue interest and liquidated damages are not equivalent, therefore, the claim that the delay interest agreed by the two parties is the liquidated damages cannot be established. Jiu Da Salt Company claims that the two sides agreed to the five-tenths-of-a-day delay interest calculation standard is too high, the delay interest is too high than the actual losses suffered by Wanjiang Leasing Company, but the five-tenths-of-a-day can be converted into an annual interest rate of about 18%, even with reference to the relevant judicial interpretation of private lending, it does not exceed the legal limit. On the other hand, Jiuda Salt Company argued that the delayed interest was excessively higher than the actual loss, but did not submit evidence to prove the amount of the actual loss and how it was "excessively higher", so its claim could not be established. [Case 2]:(2021) Beijing Financial Court, No. 689, Beijing 74 Min Zhong The court of first instance held that with regard to liquidated damages, the contract agreed liquidated damages = 3% of the remaining lease principal, and the current lessee constituted a breach of contract. China Construction Investment Company's request to pay liquidated damages of 72335.99 yuan was in line with the contract and legal provisions, and the court supported it. For overdue interest, considering that China Construction Investment Company has already collected the lease interest during the financing period according to the annual interest rate of 5.7, and then calculated the liquidated damages based on the total rent, that is, compound interest is charged for the interest. The standard is too high, and both liquidated damages and interest are liable for breach of contract in nature. Considering the relevant circumstances, our hospital adjusted the interest item to take the 12th rental principal of 2411199.75 yuan as the base, according to the standard of 5/10000, calculated from January 29, 2021 to the date of actual liquidation. The court of second instance held that: first of all, this case is a dispute over a financial lease contract, not a dispute over private lending, and this case should not be adjusted by the provisions of the Supreme people's Court on several issues concerning the Application of Law in the trial of Private Lending cases, which stipulates that the interest rate agreed in the contract exceeds four times the quoted interest rate in the one-year loan market at the time of the establishment of the contract. Secondly, the existing laws and regulations do not explicitly limit the interest rate ceiling of the financial lease contract. Even if the interest rate ceiling agreed in the financial lease contract should refer to the standard of four times the quoted interest rate of the one-year loan market or 24% of the annual interest rate, the ceiling should be the interest rate of the comprehensive capital cost of the capital user during the period of full capital use. In this case, the overdue interest stipulated in the contract has the nature of liquidated damages, the overdue interest is calculated on the basis of unpaid rent and the period of overdue payment is the calculation period, and the calculation standard of overdue interest is not decisive for measuring whether the interest rate of the comprehensive cost of capital is too high. The court of first instance has lowered the contractual overdue interest calculation base and interest rate, respectively, as appropriate. The Court held that although Hengtong Juice Company believed that the calculation standard of overdue interest was still too high, the legal basis for its claim to continue to adjust overdue interest was insufficient, and the adjustment of the calculation method of overdue interest by the court of first instance had made the amount of overdue interest within a reasonable range and should be maintained. [Case 3]:(2021) Lu 01 Min Zhong No. 8766, Jinan Intermediate People's Court, Shandong Province The court of first instance held that with regard to Huitong Company's request for Pan Zhongren's liquidated damages, according to Article 20 of the Interpretation of the Supreme People's Court on Applicable Legal Issues in the Trial of Disputes over Financial Lease Contracts, the people's court shall support the provision that "if the lessee fails to pay rent or delays in other payment obligations, and the lessor requires the lessee to pay overdue interest and corresponding liquidated damages in accordance with the provisions of the financial lease contract, although Huitong Company may require Pan Zhongren to pay overdue interest and liquidated damages at the same time, the sum of the overdue interest and liquidated damages requested by Huitong Company shall not exceed the overdue interest calculated at the annual interest rate of 24% based on the outstanding rent due. Huitong Company now advocates a liquidated damages calculated at 4 times the quoted market interest rate, which is supported by the court of first instance. The court of second instance held that the question of whether the sum of liquidated damages and delayed performance should be capped should be limited. Financial leasing is a typical financing method with financial attributes. Financial leasing companies are under the supervision of the China Banking and Insurance Regulatory Commission. According to the requirements of my country's financial services to the real economy and reducing the financing costs of the real economy, the lease rate of return should be limited by the upper limit of the financial lending interest rate. Based on the total amount of financing, the total amount of rent, liquidated damages and delayed performance payments cannot exceed 24% of the annual interest rate. Due to the lack of clear legal provisions, the measurement standards of different regional courts are not completely uniform on the issue of the upper limit of the sum of overdue interest and liquidated damages. The Reply of the Supreme People's Court on the Scope of Application of the Judicial Interpretation of New Private Lending specifies that the disputes caused by financial leasing companies engaged in relevant financial businesses are not applicable to the judicial interpretation of new private lending. However, judging from the retrieved cases, in judicial practice, the court tends to take the annual interest rate of 24% as the upper limit to determine whether the sum of overdue interest and liquidated damages is reasonable or to reduce or adjust it at 24%, some other courts determine the interest rate cap by considering the financial lease contract and performance. 3. Summary At present, there are still different views on the nature of overdue interest in judicial practice. Some people think that overdue interest has the nature of "damages", and the "damages" should be based on the occurrence of losses and should not be excessively higher than the actual losses. Tracing the origin of such different views, it is not difficult to find that most of them are due to different understandings of the content of the contract itself, and there is a dispute over whether the overdue interest is "the purpose of punishing the breach of contract" or "the purpose of filling the loss. In view of this, it is suggested that in the agreement of the corresponding provisions of the financial lease contract, the expression of this part should not be simply summarized as "if the loss caused by the breach of contract, the payment of interest...", but should be as detailed as possible the purpose and application of the establishment of the "deferred interest. For example, the statement in Case 1 "If Jiuda Salt Company fails to pay rent and other payables to Wanjiang Leasing Company as agreed in this contract, Jiuda Salt Company shall pay deferred interest to Wanjiang Leasing Company on the overdue amount of 5/10000 per day from the date of payment". In addition, since the existing laws and regulations do not explicitly limit the upper limit of interest rate of financial leasing contracts, the theoretical and practical disputes of "adjustment is not adjusted and how to adjust" have arisen. Whether the principle of discretionary reduction of liquidated damages can be applied when overdue interest and liquidated damages are filed together, and how to make discretionary adjustment, the considerations during adjustment, whether the discretionary adjustment conforms to the original intention of relevant legislation and the principle of fairness, etc, at this stage, it is still a problem that needs to be explored in judicial practice, and it is still necessary to pass legislative provisions or unify the judgment standards to clarify the specific applicable rules.

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