Determining validity of contracts against regulatory provisions

In the current backdrop of strong supervision on the financial sector, financial regulators are attaching increasing importance to punishing financial institutions for violations of laws or rules. These include violations of contracts, which are considered a basis for commercial transactions. One of the most discussed issues is about how to determine validity of contracts that only violate provisions of financial regulators. In particular, the issue attracts widespread interest from the legal community after the closing of the case involving business trust dispute between Fujian Weijie Investment, Fuzhou Tiance Industrial (the appellee), and June Life Insurance. a third party in the first instance (see [2017] Zui Gao Fa Min Zhong No 529, hereinafter, the case).

In consideration of the principles of encouraging transactions and protecting the related stability, courts are generally cautious about holding contracts invalid, determining validity strictly in accordance with Article 52 of the Contract Law. As far as the application of laws is concerned, the principle of allowing the “Party Autonomy in Private Law” with contracts is increasingly respected. Besides, Contract Law Interpretation I and Contract Law Interpretation II further clarify the basis on which contracts may be found invalid, stating that the findings shall be based on laws formulated by the National People’s Congress (NPC) or the NPC Standing Committee or regulations formulated by or on behalf of the State Council, but not any local rules or regulations. Clarifying that the mandatory provisions in Article 52 of the Contract Law are generally understood as being related to validity, the Interpretations are cautious about the impact of administrative mandatory provisions on contract validity.

The case involves a Shareholding Agreement via Trust, which violates the provisions of the Measures for the Administration of Equity of Insurance Companies (the measures) that prohibit nominee shareholding. Instead of the measures, which, as rules of government authorities, are generally called “departmental rules”, Article 52 (4) of the Contract Law, which prohibits contracts “detrimental to social or public interest” is cited by the Supreme People’s Court (SPC) to hold the contract invalid. At first glance, it seems that this case marks a breakthrough in existing legislation, comprising particularly Article 52 (5) of the Contract Law and relevant judicial interpretations, regarding restrictions on the levels in the legal hierarchy that may be cited to hold contracts invalid, as the contract involved is found invalid merely because of violation of departmental rules. However, it is still too early to conclude that all contracts that violate rules or guidelines of regulators are invalid.

Yao Xiaomin is a partner, and Lian Tianjiao is an associate at Lantai Partners