Editor’s Note: This paper analyzes the legal application of Article 524 of the Civil Code of People’s Republic of China (PRC) with a case of a house sales contract dispute. It is now published for research and exchange.
I. Basic information
Final judgment document: (2019) Jing 03 Min Zhong No.13802.
Cause of action: commercial housing pre-sale contract dispute.
Plaintiffs (Appellees): Cheng and Yang.
Defendant (Appellant): A real estate company.
Defendant (defendant in the original trial): Ye.
Second, the basic case
On September 21st, 2009, a real estate company (seller) and Ye Mou (buyer) signed the Commodity House Pre-sale Contract, which stipulated that the commodity house involved was located at Room 3-401, a residential building in Huoxian County, Tongzhou District, Beijing, and the buyer paid the total house price of 738,090 yuan to the seller in a lump sum on September 21st, 2009. Article 10 "Liability for Late Payment" of the contract also stipulates that the seller has the right to terminate the contract after the overdue period exceeds 30 days. The contract also stipulated other contents. On September 21st, 2009, both parties completed the online registration of the pre-sale contract of commercial housing.
On December 30, 2009, Yemou (the seller) and Chengmou and Yangmou (the buyer) signed the Beijing Stock House Purchase and Sales Contract (self-transaction version), stipulating that the house sold by the seller is a building located at 3-401, a residential building in Huoxian County, Tongzhou District, Beijing, and the transaction price is 749,204 yuan. Within 90 days after signing this contract, the buyer. The contract also stipulated other contents. On February 12, 2010, Yemou issued a receipt stating that he received the house payment of RMB 520,000 from Cheng.
In addition, on February 12, 2010, Cheng and Yang (buyers) signed the House Exchange Agreement with Ye (former owner) and Zhu (developer), the current legal representative of a real estate company. The agreement stipulated that the original owner and the developer agreed to exchange the 401 house purchased by the buyer for the 201 house. After the online signing of the 201 house in the name of the buyer was completed, the buyer returned the contract and keys of the 401 house. A real estate company does not recognize the relevance of the above-mentioned House Exchange Agreement, claiming that Zhu was the legal representative after 2012 and had nothing to do with the company when signing the agreement. After the signing of the above-mentioned House Exchange Agreement, the two parties did not actually perform it. In 2011, Cheng and Yang renovated the houses involved and lived there ever since. Later, due to the failure to apply for the ownership certificate of the house involved, the contract between Cheng, Yang and Ye failed to go through the online signing and the transfer procedures.
On December 22, 2017, a real estate company issued a Notice of Termination of Contract to Ye, informing Ye that: 1. The Commodity House Pre-sale Contract signed between you and our company on September 21, 2009 will be terminated from now on; 2. Please cooperate with our company to handle relevant cancellation procedures such as cancellation of contract filing and registration within 3 days from the date of receiving this notice; 3. According to Item (2) of Point 1 of Article 10 of the Contract, you should pay our company a penalty of RMB 22,142.7. 4. Our company has the right to sell the subject house separately from the date when the notice of rescission is served. If the registration procedures for canceling the contract are not completed as scheduled, the subject house cannot be sold separately, and you will bear the indirect losses caused to our company. The Notice of Termination of Contract was signed by Ye’s family on December 25, 2017.
On February 27, 2018, a real estate company took Ye as the defendant and sued the court, demanding confirmation that the "Beijing Commercial Housing Pre-sale Contract" signed by both parties was terminated on December 25, 2017. When the case was tried, the court heard it in absentia because Yemou failed to appear in court after being legally summoned. During the trial, the court asked "who controls the house now", and a real estate company said that "Yemou has given the house to her"; The court asked "why the house was handed over without payment", and a real estate company said that "the defendant may be related to the original company, and the specific situation is unclear". After trial, the court held that the parties may agree on the conditions for one party to terminate the contract. When the conditions for terminating the contract are met, the obligee may terminate the contract. If one party claims to terminate the contract, it shall notify the other party. The contract is terminated when the notice reaches the other party. Accordingly, on May 15, 2018, the court made a civil judgment (2018) No.5665 at the beginning of the Republic of China: the Pre-sale Contract of Commercial Housing signed by a real estate company and Yemou was terminated on December 25, 2017. After the judgment, neither party appealed, and the civil judgment has now taken legal effect.
In January 2019, Cheng and Yang inquired about the above judgment through the Internet and filed a lawsuit in this case, demanding that the above civil judgment be revoked. In the lawsuit, Cheng and Yang made it clear that if Yemou did not pay the house payment, he agreed to fulfill the obligation to pay the house payment to a real estate company on behalf of Yemou. After trial, the court of first instance held that Ye and a real estate company did not truthfully state the facts of house resale to the court, which violated the principle of good faith, resulting in Cheng Lan and Yang Guihua not participating in the lawsuit because of reasons that could not be attributed to them; Cheng and Yang have a legitimate expectation interest in Yemou’s performance of payment obligations to a real estate company, and then obtaining the ownership of the house; (2018) The civil judgment No.5665 at the beginning of the Republic of China in Beijing 0112 damaged the expected interests of Cheng and Yang. Accordingly, the court of first instance ruled on August 16, 2019 that the civil judgment No.5665 of (2018) Jing 0112 Minchu was revoked. After the verdict, a real estate company refused to accept it and appealed. After hearing the case, the court of second instance ruled that the appeal was dismissed and the original judgment was upheld.
Third, the focus of controversy
When the buyer of commercial housing resells the house and the developer should know about it, and the developer asks to cancel the commercial housing sales contract signed by both parties on the grounds that the buyer fails to fulfill the payment obligation as agreed, does the sub-buyer have a legitimate interest in the performance of the above debts and has the right to perform it for the developer?
Fourth, the gist of the referee
If the debtor fails to perform the debt and a third party has a legitimate interest in performing the debt, the third party has the right to perform it on behalf of the creditor. If the buyer of the commercial house resells the house, the sub-buyer shall enjoy the expected benefits for the buyer to fulfill the payment obligation to the seller and then obtain the ownership of the commercial house. When the buyer fails to perform the payment obligation, the sub-buyer has the right to perform it for the seller. If the seller and the buyer violate the principle of good faith and fail to truthfully state the resale of the house to the court, which leads to errors in the court judgment documents and damages the sub-buyer’s "performance right", the sub-buyer has the right to request the cancellation of the judgment documents.
V. Analysis of application
Article 524th of the Civil Code of People’s Republic of China (PRC) (hereinafter referred to as "the Civil Code") is a new provision. The first paragraph of this article stipulates that if the debtor fails to perform the debt and a third party has a legitimate interest in performing the debt, the third party has the right to perform it on behalf of the creditor; However, unless it can only be performed by the debtor according to the nature of the debt, according to the agreement of the parties or according to the law. The above provisions are the rules for the third party to perform on behalf of the creditor, which gives the third party the right to perform on behalf of the creditor, which is called "the right to perform on behalf of the creditor" in this paper. The application of this provision is analyzed in combination with this case.
1. The third party to perform and performed by the third party.
To understand the significance of the third party’s performance of the rules, we first need to understand the difference between the rules and the rules performed by the third party. Article 65 of People’s Republic of China (PRC) Contract Law (hereinafter referred to as "Contract Law") promulgated and implemented in 1999 stipulated that the third party should perform the rule. Article 523 of the Civil Code adopted the content of this article in the original text, and only modified some words. Article 523 of the Civil Code stipulates that if the parties agree that the third party shall perform the debt to the creditor, and the third party fails to perform the debt or the performance of the debt does not conform to the agreement, the debtor shall bear the liability for breach of contract to the creditor. It can be seen that the performance by a third party means that both parties agree that the debt shall be performed by a third party, and the reason why the parties agree to be performed by a third party is that the third party is liable to the debtor, and the agreement to directly perform by a third party "can save the trouble of multi-ring performance" [1]. Judging from the content of this article, its main normative purpose is to solve the subject of liability for breach of contract. The third party’s performance on behalf of the debtor refers to "when a debt has expired and the debtor fails to perform the debt, which may harm the interests of the third party, the third party may perform the debt on behalf of the debtor to the creditor, so as to preserve its legitimate interests" [2].
It can be seen that in the rule of performance by a third party, although the third party is not a party to the contract, its performance matters are agreed by the parties and become one of the terms of the contract. However, in the new rules of performance by the third party in the Civil Code, the third party is neither a party to the contract, nor is its performance an agreement of the parties to the contract. The third party’s performance to the creditor is a right means to protect its own legitimate rights and interests based on its legitimate interests in the performance and the debtor’s non-performance. Take this case as an example. In the case that Yemou resold the house involved and has not fully fulfilled the obligation to pay the house price, if Yemou agreed with a real estate company that the remaining house price would be paid by Cheng and Yang, it would be a third party to perform the contract. The actual situation of this case is that Yemou and a real estate company did not agree that "the remaining house payment will be paid by Cheng and Yang", but because Cheng and Yang have legitimate interests in Yemou’s performance of their debts, Cheng and Yang have the right to perform it for the real estate company. If Yemou and a real estate company know that the house has been resold, but without consulting the sub-buyers, Cheng Mou and Yang Mou, whether they agree to perform the debt to the real estate company on behalf of Yemou, and terminate the contract through litigation or negotiation on the grounds that Yemou has not fulfilled the obligation to pay the house payment, it will infringe on the "right to perform on behalf of Cheng Mou and Yang Mou". This is the third party to perform the rules.
2. About "the third party has a legitimate interest in performing the debt"
According to the provisions of Article 524 of the Civil Code, one of the requirements for a third party to enjoy the right to perform on his behalf is that "the third party has a legitimate interest in performing the debt". Although in real life, the performance of contract debts involves many interests, such as Zhang San buying an air conditioner from Li Si, not only Zhang San benefits, but also his family and even his guests, but it cannot be considered that the guests have legitimate interests in Li Si’s performance of his debt to pay for air conditioners. Because, according to the basic principle of debt law, contracts are relative and creditor’s rights belong to relative rights. However, with the development of society, the relativity of contract has been gradually broken through in many fields, thus affirming the legitimate interests of the third party outside the contract for the performance of contractual debts. The expansion of the protection scope of this kind of interest should be affirmed and properly restricted, otherwise it will bring endless obligations to the market participants and thus hinder the development of the market economy. Whether the third party has a legitimate interest in the performance of the debt shall be judged on the basis of the nature of the interest. Only when this interest is important enough to break through the relativity of contracts can it be given special legal protection to ensure the normal operation of the market economy.
Before the introduction of the Civil Code, the stipulation that the third party has legitimate interests in performing the contractual debts and then has the right to perform on behalf of the creditors appeared in the field of urban housing lease contracts. Article 17 of the Supreme People’s Court’s Interpretation on Several Issues Concerning the Specific Application of Law in the Trial of Disputes over Urban Housing Lease Contracts (hereinafter referred to as "Judicial Interpretation of Housing Lease Contracts") stipulates that if the lessor requests to terminate the contract due to the lessee’s arrears of rent, the people’s court shall support the sub-lessee’s request to pay the unpaid rent and liquidated damages on behalf of the lessee to defend the lessor’s right to terminate the contract. Except that the sublease contract is invalid. If the rent and liquidated damages paid by the sub-lessee exceed the amount of rent payable, the sub-lessee may offset the rent or recover from the lessee. The above provisions are based on the protection of the interests of the sub-lessee’s housing right, and affirm the legitimate expected interests of the sub-lessee for the normal performance of the debts of the previous lease contract. In other words, the judicial interpretation of the above-mentioned housing lease contract gives the sub-lessee the right to claim compensation because the legal lease right of the sub-lessee is an important legal interest. Protecting this legal interest is in line with the rule of "buying and selling does not break the lease". On this basis, Article 524 of the Civil Code establishes the rule that the third party performs on its behalf. Although its proviso only excludes the situation that "it can only be performed by the debtor according to the nature of the debt, according to the agreement of the parties or according to the law", as mentioned above, the application of this rule should focus on the importance of legal interests, and the judicial interpretation of the above-mentioned housing lease contract can be used as a reference.
3. The application of law in this case
With the development of commercial housing market, the phenomenon of resale of commercial housing is becoming more and more common, and how to protect the rights and interests of sub-buyers has become an important topic in judicial practice. Under normal circumstances, sub-buyers can protect their rights and interests by asking the buyers to transfer their ownership in time. However, in practice, due to the nonstandard operation of developers, they failed to handle housing property certificate for a long time, resulting in a large number of unlicensed housing transfers. Take the jurisdiction of the court where the author is located as an example, there are not a few cases in which developers delay to apply for accreditation, and some communities have not handled housing property certificate for community owners for more than ten years. In this case, if the buyer has not fully fulfilled the obligation to pay the house price, we will face how to solve the conflict between the developer’s right to terminate the contract and the sub-buyer’s right to expect. According to the principle of freedom of contract and relativity of contract, the parties to a contract have both the freedom to conclude a contract and the freedom to terminate it. An agreement between a party to a contract and a third party cannot bind the other party to the contract. Therefore, when the debtor of the contract fails to perform the debt, the creditor has the right to exercise the right of rescission according to the law. No matter what agreement exists between the debtor and the third party, the agreement cannot bind the creditor. But in real life, if the above principles are applied to machinery, it will cause unfair situation. For example, in this case, after a real estate company sells a commercial house to Yemou, if the real estate company completely ignores the fact that the commercial house involved has been resold to Cheng and Yang, it will greatly damage the expected interests of Cheng and Yang by negotiating with Yemou or canceling the contract through litigation.
In fact, when the buyer fails to perform the debt and the seller claims to exercise the right to terminate the contract, we are faced with a dilemma. Because, we can’t allow one party to maliciously default on the house payment and breach the contract at will, but prevent the other party from canceling the contract and taking back the house on the grounds that the house has been resold, resulting in the party’s house and money being empty. At the same time, we can’t let it go: after the developer sold the house to the buyer and the buyer resold it to the sub-buyer for many years, the developer and the buyer suddenly claimed that the buyer had already breached the contract for many years, the contract should be terminated and the house should be recovered. Because the contract between the developer and the buyer is fulfilled, usually only the parties themselves know, and outsiders have no way of knowing. If the above termination situation is allowed to happen at will, it will lead to the secondary buyer being in an unstable state forever. Therefore, the expectation right of the sub-buyer to obtain ownership according to the sales contract should be protected by law.
For the above dilemma, the third party’s performance rule established in Article 524 of the Civil Code gives a clear answer. The equilibrium point of the rights conflict between the two parties is that the sub-buyer can claim to exercise the right of performance on behalf of the seller. In this way, it not only protects the seller’s right to get the price, but also protects the expected interests of the sub-buyer. However, at the time of the judgment of this case, the civil code had not yet been promulgated, and only the provisions of the judicial interpretation of the aforementioned housing lease contract on the sub-lessee’s right to claim compensation could be referenced. This provision provides an important basis for the application of the law in this case: since the judicial interpretation of the house lease contract is to protect the sub-lessee’s right to lease and give the sub-lessee the right to compensate for the claim, as the sub-buyers of the house, Cheng and Yang, after purchasing the house involved, decorate the house involved and live for many years, their right to live should be protected. In the case that Cheng and Yang clearly agree to fulfill the obligation of housing payment to a real estate company on behalf of Ye, their expectation right to obtain housing ownership should also be protected. When a real estate company demands to terminate the contract on the grounds that Yemou has not fulfilled the obligation to pay the house price while knowing that the house is resold, it should ask the sub-buyers, Cheng Mou and Yang Mou, whether to exercise their performance rights. If the previous sales contract is dissolved without consulting the sub-buyer, and confirmed through litigation, if the sub-buyer fails to participate in the litigation due to reasons not attributable to him, the sub-buyer whose rights and interests are damaged has the right to request the court to cancel the effective judgment document.
[1] Law Press Regulations Center: Annotated Edition of People’s Republic of China (PRC) Contract Law, Law Press, 2017, p. 56.
[2] China Legal Publishing House: People’s Republic of China (PRC) Civil Code (Practical Edition), China Legal Publishing House, 2020, p. 354.
Source: Tongzhou court served a soldier in Beijing for trial.
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