Perspective | A Summary of Practical Key Points in Disputes over Financial Loan Contracts (Part 2)

The loan acceleration clause (also known as the early maturity clause) is an important provision for banks to manage and mitigate risks. A typical agreement stipulates: “If the borrower fails to repay any due debt on time or commits any other breach of contract, the lender shall have the right to declare that the outstanding principal and interest under this contract shall become immediately due and payable, and the borrower shall promptly settle all remaining debts.” This clause enables banks to recover the loan principal ahead of schedule and claim corresponding breach-of-contract liabilities upon a borrower’s default, without waiting until the contractual maturity date has expired.

In practice, borrowers sometimes argue that prepayment clauses deprive them of the benefit of the loan’s full term and thus constitute invalid standard-form clauses that exempt the lender from liability while imposing heavier obligations on the borrower. However, most courts recognize the validity of such clauses. For instance, the Shanghai Higher People’s Court’s “Answers to Several Questions in Loan Contract Disputes” explicitly holds that as long as the agreement to call in the loan ahead of schedule does not violate any mandatory provisions of laws and regulations, it should be deemed valid. In fact, acceleration clauses are a type of default clause—essentially conditional amendments to the contract—and do not fall under the category of standard-form clauses that are automatically deemed invalid by law. Therefore, when a borrower meets the conditions stipulated in the contract, the bank’s request for early repayment should be upheld by the court. As can be seen from judicial practice, prepayment clauses do not represent an unreasonable deprivation of the borrower’s rights; rather, they are commercial arrangements through which banks manage risk and are legally grounded in the legal doctrine of anticipatory breach under contract law.

It is important to distinguish between the legal effects of accelerating the maturity date and terminating the contract. Declaring a loan due and payable ahead of schedule is equivalent to treating the outstanding claims as if they had already matured, while maintaining the validity of the underlying contract. As a result, the borrower assumes liability for default by failing to repay on time. At this point, the contract is not terminated; provisions regarding interest, liquidated damages, and other terms remain in effect, enabling the bank to calculate overdue interest and penalty interest according to the contractual agreements. On the other hand, if the bank chooses to terminate the contract, the contractual relationship comes to an end, and any remaining claims become statutory debts subject to interest claims based on statutory standards. As mentioned earlier, the Shanghai Higher People’s Court has indicated that a claim for early maturity does not require the prior termination of the contract, and lenders neither need nor should simultaneously assert termination of the contract. Once the contract is terminated, the calculation of interest and penalty interest may shift to a less favorable regime for the bank. In practice, there have indeed been cases where banks, when filing a lawsuit, have requested both termination of the contract and early repayment. However, the courts have informed these banks of the adverse consequences—namely, that after termination, the penalty interest rate would be reduced. This serves as a reminder to banks: prioritize the use of acceleration clauses and exercise caution when invoking the right to terminate the contract, so as to safeguard their own rights and interests.

Regarding the triggering and notification of early maturity clauses: Typically, contracts will specify conditions that trigger accelerated maturity—for example, when the borrower is in default for more than a certain number of days, loses the ability to perform its obligations, the value of the collateral significantly declines, or the borrower breaches other contractual obligations. Upon discovering a triggering event, the bank should issue a notice of early maturity to the borrower in accordance with the method stipulated in the contract. While such a notice is not legally mandatory per se, it is crucial for determining the starting point of late-payment interest. If the contract explicitly specifies the method and timing of notification for declaring early maturity—for instance, “notification by EMS mail, with the date of mailing deemed as the early maturity date”—the bank must strictly adhere to these provisions and retain proof of delivery. In cases where the contract does not specify a notification procedure, some courts require banks to provide evidence that they have notified the borrower; otherwise, it may be difficult for the bank to support its claim regarding the early maturity date. In some instances, due to insufficient proof of delivery, courts have simply treated the creditor’s claim as having accelerated maturity from the date of filing the lawsuit or the date of the court hearing, causing the bank to lose out on a portion of the penalty interest period. Therefore, we recommend that banks clearly specify in the contract the method of notification (including the possibility of electronic delivery) and set forth the exact time at which the notification takes effect. Moreover, in practical operations, once the decision to accelerate maturity is made, the bank should promptly deliver a written notice to both the borrower and any guarantors—preferably using a method that can reliably prove delivery (such as EMS mail or in-person delivery with signed receipt). This will enable the bank to demonstrate in litigation that the acceleration of maturity has indeed taken effect.

As can be seen, the application of early maturity clauses is highly significant. Banks can use these clauses to counter borrowers’ defenses claiming that the repayment period has not yet arrived, thereby exercising their creditor rights ahead of time and immediately taking measures such as preserving collateral or freezing accounts—without having to wait until the contract term expires. This approach plays a positive role in preventing borrowers from transferring assets or worsening their financial condition. It is important to note that triggering early maturity typically hinges on the occurrence of a default; therefore, any related security interests remain legally protected. For instance, a joint and several guarantor may not refuse to assume guarantee liability on the ground that the principal debt has not yet become due, since the debt is already deemed due according to the terms of the contract. The Supreme People’s Court has also upheld this view in several cases: in situations involving accelerated maturity, the guarantor must fulfill its guarantee obligations upon the creditor’s request; otherwise, it would constitute delayed performance and would be liable for interest accordingly.

In summary, prepayment clauses in bank loan contracts are generally lawful and enforceable. However, banks should clearly and reasonably word such clauses in the contract, adequately alert borrowers to their existence, and make good use of these clauses when a default occurs—promptly notifying the borrower and preserving relevant evidence—to ensure that the court recognizes the validity of early termination and determines the precise time of its effectiveness, thereby maximizing the protection of their own credit rights.

When a borrower is unable to fulfill its repayment obligations under the original contract, banks sometimes opt for debt restructuring, adjusting the repayment terms through negotiation to improve the recovery rate. Common restructuring methods include extending the repayment period (postponing repayment), reducing or waiving principal and interest, replacing old loans with new ones (borrowing new to repay old), converting debt into equity, and having a third party assume the debt. Judicial practice places varying emphasis on the recognition and legal effects of different restructuring methods.

“Borrowing new to repay old” refers to a situation in which, upon the maturity of an existing loan that has not been repaid, the bank extends a new loan to the borrower specifically to settle the principal or interest of the old loan. From a legal perspective, this typically involves two separate loan agreements: the funds from the new contract are used to pay off the old debt, thereby extinguishing the obligations under the old contract and creating new obligations under the new contract. According to the opinion expressed in the reply letter from the People's Bank of China [Yin Ban Han [1997] No. 320], the validity of a “borrowing new to repay old” contract does not violate financial regulations and should therefore be recognized as valid. The reply clarifies that the practice of using a new loan to repay an old one essentially constitutes an amendment to the terms of the original loan, including its term. Consequently, the new loan agreement is not a fictitious contract and does not contravene the then-current... General Guidelines for Loans In accordance with the relevant provisions, the agreement should be deemed valid. Therefore, when a bank and a borrower agree to replace an old loan with a new one, the validity of the contract will generally not be invalidated on the grounds of violating financial policies.

However, the impact of borrowing new to repay old on guarantees is critically important. As mentioned earlier in the section on guarantees, Article 39 of the Supreme People’s Court’s Judicial Interpretation of the Guarantee Law stipulates: “If the parties to the principal contract agree to use a new loan to repay an old one, the guarantor shall not bear civil liability unless the guarantor knew or should have known about such arrangement.” In judicial practice, how do we determine whether a guarantor “knew or should have known”? Typically, evidence is required to prove that the guarantor participated in or explicitly consented to the arrangement of borrowing new to repay old. For example, if the guarantor is also the legal representative or de facto controller of the borrowing enterprise, and both the old and new loan contracts were signed by him or her, it can be presumed that the guarantor was aware of the arrangement. Similarly, if the guarantor signs the new loan contract or related agreement expressly agreeing to continue providing the guarantee, this is naturally taken as explicit consent to assume responsibility. On the other hand, if the guarantor was completely unaware of the extension or the borrowing-new-to-repay-old arrangement, and the new loan contract did not require his or her signature, the guarantor’s guarantee liability will often be deemed discharged along with the extinction of the original debt. In a case heard by the Fujian High People’s Court, the borrower failed to repay the loan at maturity but signed an extension agreement with the bank without notifying the guarantor. Subsequently, the borrower went bankrupt, and the guarantor successfully argued that the guarantee period had expired and that he or she had never agreed to the extension, thereby ultimately being exempted from guarantee liability. Such cases have prompted banks to pay extra attention to handling guarantors during debt restructuring—seeking, whenever possible, to involve the original guarantor in signing the restructuring agreement or requiring the guarantor to issue a written consent confirming that he or she continues to provide a guarantee for the restructured debt. Otherwise, once litigation ensues, the guarantor might invoke the defense that the contract amendment was made without his or her consent and thus avoid liability.

In addition to ensuring liability, it is also necessary to consider the succession of mortgage guarantees in the context of borrowing new funds to repay old ones. Generally speaking, if a new loan is used to pay off an existing loan and is secured by the same property, it is usually required to re-register the mortgage. Although the Property Rights Section of the Civil Code of the People’s Republic of China does not explicitly address this situation, given the accessory nature of mortgage guarantees, when the original debt is extinguished, the corresponding mortgage right is also extinguished, necessitating the establishment of a new mortgage right for the new debt. If the bank is negligent, there could be a gap during which the old mortgage becomes invalid while the new mortgage has not yet been established, thereby affecting priority rights. In practice, a better approach is to enter into a tripartite agreement among the bank, the borrower, and the mortgagor, stipulating that the original mortgage guarantee will continue to apply to the new debt. At the same time, it is important to promptly complete the registration of the change in mortgage rights to ensure the continuous validity of the mortgage.

Regarding the validity of debt restructuring agreements, as long as the expressions of intent of all parties are genuine and do not harm the interests of the state or third parties, the agreement is validly established and binding on all signatory parties. It is important to note that if a debt restructuring involves waiving or reducing creditors’ claims, it may impair the security interests of third parties. For example, if a bank privately agrees with a debtor to reduce the principal and interest or waive the guarantor’s liability without notifying the guarantor, the guarantor may, pursuant to Article 700 of the Civil Code of the People’s Republic of China, claim exemption from liability for the corresponding reduced or waived portion. Therefore, before making any concessions, banks should communicate with the guarantors or reserve the right to seek reimbursement from them, so as to avoid finding themselves in a passive position due to the debt restructuring.

No matter which method is used, the ultimate goal of debt restructuring is to optimize the recovery of creditors’ claims. From a legal perspective, different restructuring methods have varying impacts on the original debt relationship:

• An extension of the repayment term constitutes a modification to the original contract’s repayment schedule, while the parties to the debt remain unchanged and other provisions of the original contract continue to be valid. Essentially, an extension is a contractual amendment rather than a new contract signing; therefore, the original guarantee generally remains in effect (though attention should be paid to obtaining the guarantor’s consent).

• “Borrowing new to repay old” refers to the repayment of existing debt accompanied by the creation of new debt. The original main contract is extinguished upon repayment, and the original guarantor’s liability is, in principle, discharged—unless the guarantor knowingly consents to continue providing担保. The original mortgage right must be transferred to the new debt either through an agreement or by legal provision; otherwise, it will need to be re-established. Essentially, “borrowing new to repay old” extends the term for debt performance and carries certain potential risks. Therefore, regulatory authorities impose restrictions on commercial banks’ practice of borrowing new to repay old (e.g., requiring such transactions to be classified as non-performing loans).

• Debt waivers or partial reductions must be strictly approved by the bank in accordance with its authorization, as they involve a direct relinquishment of the bank’s claim. If, after such a waiver or reduction, the debtor or guarantor subsequently demonstrates repayment capacity, the bank will generally be unable to reclaim the waived or reduced portion. In such restructuring cases, attention should be paid to potential tax implications related to debt-waiver income and compliance issues concerning the write-off of bad debts.

• After third-party compensation (such as claims under guarantee insurance or compensation by a guarantor company), the bank’s claim is realized; however, the new creditor steps in to seek repayment from the debtor in place of the bank. The bank should cooperate with the procedures for transferring its rights. Typically, third-party compensation does not affect the amount of the principal claim or the calculation of interest—only the identity of the party involved changes.

• Methods such as debt-to-equity conversion, which involve changes in the company’s shareholders, are not the primary focus of this discussion. However, it is worth noting that once the debt-to-equity conversion is completed, the original creditor’s claim is extinguished, and any associated guarantee liabilities are also discharged—since the debt has been settled by replacing it with equity investment.

In short, during debt restructuring, banks must adhere to the principle of prudence and conduct a thorough assessment of the legal consequences. While safeguarding their civil recovery rights, they must also comply with regulatory requirements and refrain from any violations. Loan refinancing False restructuring masks underlying problems. Whenever a restructuring is reached, it is advisable to execute a written agreement specifying the changes in the rights and obligations of all parties involved, and to ensure that proper notification is delivered to all parties, including guarantors, so that everyone is “fully informed and has no objections” to the terms of the restructuring, thereby avoiding unnecessary disputes in the future.

A loan extension refers to the borrower’s request, with the lender’s consent, to postpone the repayment deadline before the original loan term has expired. The legal effect of an extension differs from that of “borrowing new to repay old.” An extension involves a modification of the original contract’s repayment deadline within the framework of the existing loan agreement, without creating a new creditor-debtor relationship. According to Article 202 of the Civil Code of the People’s Republic of China and related provisions, if a borrower is unable to repay the loan on time, they may apply to the lender for an extension prior to the due date. Upon the lender’s approval, the borrower can obtain a deferral of the repayment deadline. In practice, banks—out of consideration for risk mitigation—often grant borrowers who demonstrate willingness to repay but are temporarily facing cash-flow difficulties a grace period through loan extensions.

A renewal agreement typically involves either endorsing the original contract to indicate consent to the extension and affixing a seal, or executing a separate renewal agreement that specifies the extension period, interest rate during the extension period, and other relevant terms. Together with the original contract, the renewal agreement constitutes a new repayment arrangement. After the extension, as long as the debtor fulfills its repayment obligations within the extended period, the contract term is deemed to have been adjusted accordingly. If the debt remains unpaid upon expiration of the extension period, the debtor’s default liability shall be calculated from the date the extension period expires.

The impact of an extension on the guarantee depends on the specific circumstances: If the guarantor participates in and consents to the extension, their guarantee liability will undoubtedly remain valid for the new term. However, if the extension is carried out without the guarantor’s consent, it may give rise to inconsistencies in the guarantee arrangement. Article 30 of the former “Interpretation of the Guarantee Law” stipulated that if the creditor and debtor agree to extend the debt repayment period without obtaining the guarantor’s written consent, the guarantor shall be exempt from guarantee liability once the original term expires. This rule has been retained, albeit with some modifications, in Article 695 of the Civil Code of the People’s Republic of China: If the creditor and debtor modify the term for performing the principal obligation without obtaining the guarantor’s written consent, the guarantee period shall remain unaffected. To summarize: The extension does not affect the commencement or expiration of the original guarantee period; the guarantor can still calculate the six-month guarantee period based on the original term and will be exempt from liability upon its expiration. Although the Civil Code no longer explicitly states whether the guarantor is automatically exempted from guaranteeing the extended period, if the extension results in an increase in the debt amount, the guarantor will likely argue that they are not liable for the increased portion. Therefore, to ensure prudence, banks should notify the guarantor and obtain their written consent before agreeing to an extension—at a minimum, requiring the guarantor to issue a letter of consent or sign the extension agreement. Otherwise, should the guarantor later refuse to assume responsibility for interest accrued during the extended period or directly claim exemption from liability on the grounds of “not having been informed of the extension,” the bank could find itself in a highly disadvantageous position.

With regard to security interests in property, an extension itself does not result in the loss of the mortgaged property or the withdrawal of possession of the pledged item; therefore, the mortgage and pledge rights are not automatically extinguished. However, it is important to pay attention to the registration period for the continued existence of the mortgage right: some mortgage registrations may specify a term for the underlying claim. After an extension, you should go to the registration authority to update the mortgage term information, ensuring that the mortgage right remains valid until the end of the extended period. Similarly, if the right being pledged has an expiration date, you must properly handle the issue of the pledge’s effectiveness after the extension—where necessary, re-register or complete the required procedures.

In addition, loan extensions are often accompanied by renegotiation of extension interest rates and fees. Banks may adjust the interest rate for the extension period based on mutual agreement between the parties, or they may choose to maintain the original contract interest rate. Such adjustments should be clearly stated in the extension agreement; otherwise, disputes over interest calculations may arise. Generally, the extended interest rate should not exceed the original contract interest rate. If any fees are incurred due to the extension (such as extension handling fees or notarization fees), it is also essential to specify who will bear these costs.

In short, loan extensions can to some extent help both borrowers and lenders navigate difficult times. However, banks must pay close attention to compliance: they need to agree on the extension within the original contract term, obtain the guarantor’s consent, complete the necessary registration updates, and strictly limit the number and duration of extensions. At the same time, banks should carefully retain records of extension agreements and proof of delivery of notification letters, so as to have solid evidence in the future to demonstrate that the debt repayment period has been modified and the statute of limitations accordingly extended. Only by doing so can loan extensions truly serve as a “win-win” strategy—protecting creditors’ rights while supporting customers—without creating hidden risks.

For the purpose of credit asset management, financial institutions often transfer claims on non-performing loans to asset management companies or other assignees. This involves the assignment of rights under loan contracts and related ancillary rights, which, from a legal standpoint, must comply with the provisions of contract law regarding the assignment of claims.

The main requirements for the effectiveness of a debt transfer are twofold: First, the debt itself must be assignable and the assignment must be lawful; second, the debtor must be notified. According to Article 545 of the Civil Code of the People's Republic of China, when a creditor transfers its rights under a contract, it shall notify the debtor. Without such notification, the transfer shall not take effect against the debtor. In other words, the debt transfer agreement becomes effective between the assignor and the assignee from the moment the contract takes effect; however, prior to receiving notification, the debtor retains the right to continue making payments to the original creditor, and the assignee may not assert against the debtor that the debt has been transferred. Therefore, after signing the transfer contract with the assignee, the bank should promptly notify the borrower and any guarantors in writing of the fact of the transfer. The notification may be issued by the transferring bank or by the assignee; however, it is advisable to provide a summary of the debt transfer agreement or a notarized document to enhance its credibility. Once the notification is delivered, the debtor shall immediately fulfill its repayment obligations to the new creditor. Otherwise, if the debtor continues to make payments to the original bank, such payments will not have the effect of discharging the debtor’s liability.

In judicial practice, when banks transfer non-performing loan claims in bulk, these transfers are typically first acquired by one of the four major asset management companies or local AMCs, which then re-transfer them—either once or multiple times—to other institutions. As long as each transfer is lawful and valid and the debtor has been notified, the ultimate transferee can inherit the original creditor’s right to sue. In the Supreme People’s Court’s Guiding Case No. 249 mentioned earlier, a bank first transferred its claim to an asset management company, which in turn transferred it to an investment company; each transfer was accompanied by written notification to the debtor. Ultimately, the Supreme People’s Court recognized the latest transferee (the investment company) as the plaintiff, granting it the right to assert the rights under the original loan contract. Thus, it is evident that, provided the notification procedure is complete, a change in creditors does not affect the realization of the debt rights.

It is important to note that the assignment of a claim does not alter the content of the original contract. After the new creditor assumes the bank’s position, the rights and obligations under both the loan contract and the guarantee contract are transferred to the new creditor. The debtor and the guarantor may not refuse to perform their obligations on the ground that they did not consent to the assignment, since the law does not require obtaining the debtor’s consent. However, the assignee must accept the contract as it stands—this includes such factors as the interest rate stipulated in the original contract, whether any partial repayments have already been made, and whether the statute of limitations has expired. The assignee cannot assert any rights that are more favorable than those held by the original creditor. For example, if, at the time of the assignment, the interest rate had already exceeded the judicial protection ceiling or part of the claim had already fallen outside the statute of limitations, the assignee will also be subject to the same restrictions and cannot “whitewash” the claim simply because of the assignment. According to the Supreme People’s Court’s judicial stance, for claims that have exceeded the statute of limitations and were not previously asserted by the original creditor, even if the claim is assigned and a public notice is issued to collect the debt, this will not cause the statute of limitations to start anew.

Moreover, the principle that rights are transferred together with the underlying claim should also be given due attention. As a right subordinate to the principal claim, a security interest is transferred along with the claim itself without the need for a separate transfer procedure. However, in practice, registering changes to the mortgage registration can help the transferee effectively enforce its security rights. In relevant replies, the Supreme People’s Court has explicitly stated that when financial institutions transfer non-performing loans, the associated mortgage and pledge rights are transferred simultaneously. Therefore, upon exercising its claim, the new creditor can directly rely on the original mortgage registration or pledge certificate to assert its rights. Nevertheless, in practice, for greater certainty, asset management companies, after taking over bank loans, often re-sign debt restructuring agreements with the debtor and the mortgagor and then register the transfer of the mortgage rights, thereby avoiding potential defects. The assignment of guarantee claims, by contrast, is relatively smoother: the guarantor may not raise as a defense the fact that the guarantee contract was not signed with the new creditor, since the change in the subject of the guaranteed claim is expressly provided for by law. Nonetheless, it remains essential to notify the guarantor, so as to prevent confusion arising from the guarantor making payment to the original creditor or reaching a private settlement with the original creditor. It is recommended that banks, in their notification of assignment, simultaneously inform all guarantors of the transfer of the claim and require them to continue bearing their guarantee obligations.

Another issue is: What is the legal effect of a contract clause that prohibits or restricts the assignment of rights? If a loan contract explicitly stipulates that the creditor’s rights may not be transferred without the borrower’s consent, this constitutes an agreement between the parties regarding the assignment of creditor’s rights. In general, courts will respect such an agreement. Should the bank breach the contract and transfer the claim anyway, the debtor may refuse to make payment to the assignee on that ground and is entitled to hold the bank liable for breach of contract. However, according to relevant replies issued by the Supreme People’s Court, the bulk transfer of non-performing assets by financial institutions has a policy basis; thus, such contractual provisions may not prevent the external validity of the transfer itself—rather, they would only give rise to issues of breach of contract between the bank and the debtor. In practice, most transfers of non-performing loans by banks are carried out uniformly in accordance with regulatory policies, and the restrictive clauses contained in the contracts often prove difficult—if not impossible—to effectively block the transfer. Therefore, for banks, it is advisable to avoid including absolute prohibitions on assignment in the contract text or to obtain prior written consent from borrowers permitting such assignments, so as to avoid future restrictions on asset disposal.

In short, as a primary method for disposing of non-performing assets, the legal key to debt assignment lies in the word “notice.” As long as the notice is properly delivered and the handover between the old and new creditors is conducted smoothly, both the debtor and the guarantor must accept the change in the creditor entity. Bank legal departments should ensure that all relevant documents—such as the assignment agreement, the debtor’s notification letter, and the acknowledgment receipt—are fully archived to prepare for any potential disputes. In litigation practice, if an assignment has taken place but the debtor challenges the plaintiff’s standing, the plaintiff must provide evidence of the assignment contract and proof of delivery of the notice. To enhance litigation efficiency, many courts support the approach of having the original creditor and the assignee jointly apply for a change of party before filing a lawsuit, or alternatively, resolving the issue by adding the new party as a defendant during the course of the litigation. Change of entity Issue: In any event, after the creditor’s rights have been successfully transferred, the new creditor will stand in the same legal position as the bank and may assert all rights against the debtor based on the original contract.

Bank loan contracts often employ standardized contract forms, with the bank unilaterally drafting the terms in advance for the borrower to sign. According to Article 496 of the Civil Code of the People's Republic of China, the party providing standardized terms shall determine rights and obligations in accordance with the principle of fairness and shall, by reasonable means, draw the other party’s attention to clauses that exempt or reduce its liability—clauses that significantly affect the other party’s interests. Otherwise, such clauses may be deemed invalid. In financial loan disputes, courts will review certain standardized terms in the contract for legality and fairness, and if necessary, will impose restrictions on them or declare them invalid.

A typical case is the lawsuit brought by Wang Mucheng and others against the Qinghai Branch of the Construction Bank, as adjudicated by the Supreme People’s Court. In this case, the borrower entered into a mortgage loan agreement with the bank to purchase a commercial residential property. Later, due to the developer’s breach of contract, the housing contract was terminated, and the borrower argued that he should no longer be required to repay the outstanding loan balance. However, the standard terms of the contract stipulated: “In the event of contract termination, the borrower shall immediately repay the entire outstanding principal, interest, and fees.” The Supreme Court held that this clause was a standardized term drafted by the bank, imposing a strict obligation on the borrower to repay the remaining balance even before the borrower had taken possession of the property and while the loan funds were still being held by the developer—a provision that clearly imposed an undue burden on the borrower. Moreover, the Judicial Interpretation on Sales Contracts for Commercial Residential Properties already provides that, in the event of contract termination, the seller (developer) is responsible for repaying the principal and interest of the loan to the bank; the homebuyer bears no such liability. Based on these considerations, the court ruled under Article 40 of the former Contract Law that this standardized term was invalid and thus not binding on the borrower. As a result, the borrower was relieved of his obligation to repay the remaining loan balance, and the bank could only seek recovery from the developer. This case illustrates that when standardized terms drafted by banks conflict with mandatory legal provisions or clearly violate the principle of fairness, they run the risk of being declared invalid.

In addition to the cases mentioned above, other commonly encountered standard terms that easily give rise to disputes over invalidity include:

• Unilateral Amendment or Interpretation Rights Clause: If a contract stipulates that the bank has the right to unilaterally adjust interest rates, modify the repayment schedule, or hold final authority over the interpretation of contractual terms, such clauses—unless negotiated and agreed upon—will generally be deemed invalid or at least lacking absolute enforceability. Any adjustment to interest rates must comply with statutory procedures or be mutually agreed upon by both parties; banks cannot arbitrarily raise interest rates solely on the basis of standardized terms. For instance, the Shanghai Financial Court has issued a precedent rejecting a practice in a certain online loan contract whereby the bank unilaterally adjusted interest rates and recorded such adjustments via electronic data. The court ruled that the bank must bear responsibility for failing to clearly disclose these changes.

• Special clauses that impose greater responsibilities on borrowers: For example, if a clause providing for early maturity is not explicitly disclosed, the borrower might claim ignorance. However, as previously mentioned, such clauses are generally deemed valid—especially when the bank can prove that the borrower has personally handwritten or signed to confirm receipt of the disclosure. If the bank fails to fulfill its duty to provide adequate notice, the court may consider mitigating the borrower’s liability—for instance, by reducing the amount of excessive default penalties. Article 497 of the Civil Code of the People’s Republic of China stipulates that, with respect to standardized terms containing provisions that exempt the provider from liability, impose heavier obligations on the other party, or exclude the other party’s principal rights, the provider must clearly explain such terms; otherwise, the other party has the right to argue that these terms shall not become part of the contract. Banks should pay close attention during the signing of loan contracts to ensure that, through prominently displayed fonts and dedicated clauses, borrowers explicitly acknowledge and agree to terms that are unfavorable to them—such as “the guarantor waives the right of prior suit defense,” “the mortgage right can be enforced without going through litigation,” and “the borrower consents to pay a default penalty in the event of a breach.”

• Dispute Resolution and Service of Process Clauses: Some loan contracts stipulate that disputes shall be subject to the jurisdiction of the court in the lender’s location or specify a designated address for service of process. Once a dispute arises, borrowers may claim that they were unaware of such provisions or that they were not explicitly discussed. According to the Civil Procedure Law, standardized jurisdiction clauses are valid only if confirmed by the other party; otherwise, they may be deemed invalid. However, if the borrower has already signed and affixed their seal at the relevant clause when signing the contract, this is generally considered as acceptance. Similarly, service-of-process clauses that are voluntarily filled out or confirmed by the borrower are also enforceable. Henceforth, if the court serves legal documents at the address specified, the borrower may not subsequently argue that they were never served. Therefore, banks can reduce delays in litigation caused by difficulties in service of process by including in standard contracts clauses requiring confirmation of the service address and specifying electronic methods of service, and by drawing the borrower’s attention to these provisions.

• Other disclaimer clauses: For example, some loan contracts stipulate that the bank bears no supervisory responsibility for the intended use of the loan proceeds, and that in the event of a borrower’s default, the bank is entitled to directly debit the borrower’s deposits held with the bank. Such clauses do not, in themselves, violate the law; however, if they are not clearly disclosed, they may still give rise to disputes. Courts tend to require banks that provide standardized terms to assume an obligation to explain these clauses that involve unilateral rights and interests. Otherwise, even if the clauses themselves are not invalid, the court may rule that the borrower has the right to terminate the contract or refuse to comply with such clauses.

In summary, the court’s review of standardized contract terms used by banks is guided by considerations of substantive fairness. The mere fact that a clause is standard-form does not automatically invalidate it; most such clauses continue to be enforced according to the agreed terms. However, clauses that are severely unbalanced or blatantly conflict with the law will not be upheld or may be adjusted accordingly. Therefore, banks should proactively conduct self-checks on their standardized texts: Any key clauses that exempt the bank from liability or unduly burden the other party must be highlighted in bold type and accompanied by the borrower’s signature for confirmation. Moreover, any provisions that clearly contravene mandatory legal requirements should be promptly revised—for instance, removing phrases such as “The borrower waives any right to raise defenses” or “The bank reserves the right to interpret this contract”—to avoid increasing risks.

Finally, it’s worth noting that if a borrower claims the entire contract is invalid on the grounds of standardized terms, courts generally will not uphold such a claim. Even if certain clauses are deemed invalid, this does not affect the validity of other parts of the contract—unless the invalidity of the standardized terms renders the purpose of the contract unachievable; otherwise, the creditor-debtor relationship remains valid. Therefore, borrowers’ attempts to avoid repayment by citing issues with standardized terms are unlikely to succeed. All the bank needs to do in litigation is explain the circumstances surrounding the drafting and notice of the relevant clauses, and the court will render a fair judgment based on the principle of equity.

Obtaining a favorable judgment is only a phased victory in the bank’s efforts to protect its rights; the real challenge lies in enforcing the effective judgment. In financial loan contract disputes, the issue of “difficult enforcement” is particularly prominent. The main difficulties include: the judgment debtor having no assets available for enforcement, concealing or transferring assets to evade enforcement, obstacles in realizing security interests, and various uncertainties that may arise during the enforcement process. As the creditor who has won the lawsuit, the bank should fully anticipate enforcement risks, assist the court in taking effective measures, and do its utmost to ensure that the debt is ultimately collected.

Some borrowers themselves have weak creditworthiness, and by the time litigation concludes, they have either exhausted all their assets or gone missing altogether, making it extremely difficult to enforce court judgments. In such cases, even if the creditor’s legal rights are recognized, it may still be economically impossible to recover the debt in practice. What banks can do is, at the stage of initiating enforcement proceedings, request the court to conduct inquiries into the judgment debtor’s bank deposits, real estate, vehicles, and other assets, and, if necessary, apply for online asset investigation and control measures. Additionally, banks can petition the court to issue a property reporting order under the law, requiring the judgment debtor to declare all their assets. If the judgment debtor refuses to report or provides false information, the court may impose fines or detention sanctions in accordance with the Civil Procedure Law of the People’s Republic of China; in severe cases, the debtor may even be prosecuted for the crime of refusing to comply with court judgments and rulings. Since 2021, the Supreme People’s Court has been promoting a nationwide unified online asset investigation and control system that automatically conducts online inquiries and freezes the judgment debtor’s deposits, securities, real estate, and other assets, thereby alleviating, to some extent, the difficulties in locating both individuals and assets. However, if the debtor truly has no assets at all, the enforcement procedure may be terminated at this stage, which would mean actual losses for the bank. Under these circumstances, banks should carefully analyze and learn from past lending experiences, continuously monitor the debtor’s situation, and, once new clues about the debtor’s assets emerge, promptly refile an application for enforcement.

Some borrowers, after losing a lawsuit, transfer their assets to the names of relatives and friends or resort to concealment and violent resistance to enforcement. In response, the law provides certain measures to combat such behavior. Banks can assist courts in gathering evidence of asset transfers by debtors and file objections to enforcement proceedings as well as lawsuits challenging enforcement actions, thereby tracking down assets that have been transferred away. If there is evidence demonstrating that the debtor and the transferee colluded maliciously to transfer assets at an obviously unreasonable low price, the bank may request the court to declare the transfer invalid and recover the assets. For cases involving severe resistance to enforcement and suspected criminal activity, banks can petition the court to refer the matter to public security authorities for prosecution under the crime of refusing to comply with court orders. This “using criminal penalties to promote enforcement” approach has been increasingly employed in recent years. During the enforcement phase, banks should closely cooperate with the courts, providing clues about debtor asset transfers and reporting any signs of refusal to comply with court orders, thus helping to advance the enforcement process.

When a judgment confirms that the mortgage right can be enforced, the actual disposal of the mortgaged property may encounter certain obstacles. For example, the mortgaged property may be occupied by a preemptive purchaser or tenant; the land-use rights underlying the mortgage may be subject to planning restrictions; or pledged equity interests may be unable to be traded due to corporate governance issues. In such cases, it is essential to analyze each situation on a case-by-case basis. Before the court proceeds with the auction of the mortgaged property, it will, in accordance with the law, notify the relevant right holders and publicly announce auction details. If there is a holder of a prior right, their rights will be respected according to law, though they cannot prevent the auction itself. Rather, after the auction is completed, they will enjoy a preemptive right to purchase under the same terms within a specified period following the sale. What banks need to do is ensure that the enforcement procedure complies with applicable laws and regulations, and when necessary, proactively communicate with these stakeholders to obtain their cooperation. Another common scenario is that the mortgaged property has already been seized by other creditors—or even repeatedly placed under successive seizures—resulting in multiple ongoing cases during enforcement. To break this deadlock, courts typically adopt a method of conducting online auctions, with the auction proceeds distributed according to the priority order of debt repayment. As the mortgagee, the bank should actively participate in the coordination efforts, providing detailed information about its claims and calculation lists to ensure that it receives its rightful share in the distribution process. Should it happen that the value of the mortgaged property is insufficient to cover all debts, and creditors ranked lower in the priority order attempt to block the auction, the bank may petition the enforcing judge to carry out a compulsory auction in accordance with legal procedures, given that the mortgagee enjoys a statutory priority right.

During the enforcement phase, debtors often submit settlement requests, hoping to settle the case by paying in installments or having their interest reduced or waived. To some extent, enforcement settlements can help improve recovery rates; however, they also pose risks for banks. Once a debtor fails to comply with the settlement agreement, previous enforcement measures may become ineffective, necessitating a new enforcement application and incurring additional costs. Therefore, when deciding whether to accept a settlement, banks should carefully assess the other party’s ability to fulfill its obligations and strive to include security measures or clauses allowing for resumption of enforcement in the event of default in the settlement agreement. For example, the agreement could stipulate that if the debtor defaults on payment, the court may resume the compulsory auction of the debtor’s assets without having to wait for a new lawsuit. Moreover, according to regulations issued by the Supreme People’s Court, enforcement settlement agreements do not have mandatory enforcement power. If the debtor breaches the agreement, the bank will still need to resume the original enforcement proceedings based on the effective judgment, which could significantly delay the process. Thus, unless the other party provides reliable additional guarantees or immediately pays a substantial portion of the debt, banks should avoid making excessive concessions during the enforcement phase. Banks should also assert their rights to interest and penalty interest accrued during the enforcement phase in settlement negotiations, so as to prevent any potential loss of benefits.

In the event that a borrower goes bankrupt and enters liquidation proceedings, the case will be transferred to bankruptcy procedures. The bank should promptly file a claim for its debt and assert its right of priority over collateral. Furthermore, if the borrower’s whereabouts are unknown, the bank may apply to the court for service by public notice and for an investigation into the borrower’s assets. Depending on the circumstances, the bank may also request that the borrower be added to the list of discredited persons subject to enforcement, thereby imposing restrictions on high-end consumption and putting pressure on the borrower. With regard to the guarantor’s assets, during enforcement proceedings, measures can be taken to add the guarantor as a party to the enforcement process: If the judgment does not explicitly specify the guarantor’s liability but the guarantor has assumed joint and several liability in the litigation, the bank may petition the enforcing court to add the guarantor as a party to the enforcement proceedings and directly enforce execution against the guarantor’s assets.

Overall, although enforcement difficulties cannot be completely avoided, banks can mitigate these risks through their own preparatory measures: rigorously screening risks and securing adequate collateral before disbursing loans; preserving assets and uncovering relevant leads during litigation; closely monitoring progress and providing assistance throughout the enforcement process; and, when necessary, leveraging public authority to deter defaulters who fail to honor their obligations.