JC Master Information | Contract Validity and Liability Determination in Financing‑Based Trade
Release Date:
2026-05-27
In the adjudication of cases involving the determination of the validity of financing‑based trade contracts and the allocation of liability among the parties, if it is found that… 穿透式审查 If the transaction at issue is deemed to be, in substance, a financing‑type trade, the case shall be adjudicated pursuant to the legal relationship of private lending. Based on this characterization of the legal relationship, the focus of the proceedings naturally shifts to two core issues: the determination of the contract’s validity and the allocation of civil liabilities among the parties.
On the issue of the validity of contracts
Financing‑related trade is often outwardly manifested through sales contracts. Pursuant to Article 146 of the Civil Code, “A civil legal act conducted by a party and the other party through a false expression of intent is void. The validity of any civil legal act concealed by such a false expression of intent shall be determined in accordance with the relevant statutory provisions.” Accordingly, a sales contract entered into by the parties on the basis of a false expression of intent shall be deemed invalid; meanwhile, the validity of the loan‑contract relationship concealed by that false expression of intent must be assessed comprehensively in light of the applicable legal provisions.
The validity of such a concealed loan contract must be determined on a case-by-case basis, taking into account factors such as the parties’ qualifications, the source of funds, and the purpose of the loan. In judicial practice, the specific criteria for determination are as follows:
A loan contract is generally deemed valid if it satisfies the essential requirements, including the legal capacity of the parties, the lawful origin of the funds, and the legitimacy of the purpose.
Specifically, this is characterized by the following: both parties to the loan are market entities that are not financial institutions; the funds lent are the lender’s lawful, self‑owned capital; the borrower seeks temporary financing to meet production and operational needs; and the lender does not engage in the repeated, long‑term provision of financing to an indefinite pool of third parties.
If a loan contract involves unlawful sources of funds, the parties engage in illegal lending activities, or the purpose of the loan is unlawful, the court shall deem the contract invalid in accordance with the law and apply the legal consequences of contract invalidity.
According to Article 13 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, the following five categories of invalidity are specifically enumerated:
(1) Obtaining loans from financial institutions and then re-lending them. This refers to a lender who obtains credit funds from banks, online lending platforms, or other financial institutions and subsequently lends those funds to others. (2) Re-lending with non‑own funds for profit. This involves obtaining funds through borrowing from other for‑profit entities, raising capital from employees of one’s own organization, or illegally soliciting public deposits, and then re‑lending those funds. (3) Professional lending activities . Refers to a lender who, without legally obtaining the requisite license to engage in lending, provides loans to an indefinite group of persons for profit. (4) Knowing that the loan will be used for illegal or criminal activities—meaning the lender either knew or should have known that the borrower intended to use the funds for unlawful purposes yet still extended the loan. (5) Violation of mandatory provisions of laws or administrative regulations, or contravention of public order and good morals. If financing‑related trade involves the loss of state‑owned assets or malicious collusion that harms the legitimate rights and interests of third parties, such cases shall also be deemed invalid.
On the issue of determining civil liability among the various parties involved.
The following discussion focuses on the rules for allocating liability among the parties involved in a loan contract that is lawful and valid. Financing‑related trade typically involves multiple parties, with the key players being the lender (i.e., the party providing the funds), the borrower (i.e., the party seeking the funds), and an intermediary (i.e., the conduit party) that serves as a bridge or facilitator in the transaction.
On the Responsibilities of Both Parties in Financing
In financing‑related trade dispute cases, the funding provider and the funding recipient are the parties to the loan contract, bearing the corresponding rights and obligations. Once the funding recipient has actually received the funds, it incurs a contractual obligation to repay the principal and pay interest to the funding provider. The determination of the principal and interest is the central point of contention between the two parties; it should be assessed comprehensively, taking into account factors such as the funding recipient’s actual use of the funds, the degree of fault attributable to each party, and the circumstances under which the loan agreement was reached, in order to establish the principal amount and the applicable interest‑calculation standards. The funding provider is legally entitled to demand repayment of both principal and interest from the funding recipient; however, if the funding provider knowingly provided the loan despite being aware of the fictitious sales transaction at issue, or actively participated in, or even facilitated, the negotiation and conclusion of such a sham transaction, it shall bear corresponding liability based on its degree of fault, including, where appropriate, reducing or waiving part of the funding recipient’s obligation to pay interest.
On the Responsibilities of the Channel Party
Where the borrower fails to repay the principal and interest on time, and the lender brings a joint lawsuit against the conduit party, the conduit party’s liability shall be determined in light of the nature of its conduct and its subjective fault, as follows:
(1) The core function of the conduit party is to provide intermediary services to both the lender and the borrower; its position in the transaction, the role it plays, and the income it derives are relatively limited. Since it neither expresses an intention to lend nor to borrow, and is neither the actual source of funds nor the ultimate user of those funds, it generally should not bear the obligation to repay the principal and interest under the loan relationship.
(2) The mere participation of the conduit party in a financing transaction is insufficient to infer that it has expressed an intention to join the debt or to provide a guarantee. Both debt assumption and suretyship require an explicit expression of intent by the relevant party; absent such an explicit written or other form of declaration of intent to assume the debt or to act as a guarantor, the conduit party should generally not be deemed to have assumed the debt or to bear guarantee liability. Accordingly, in principle, the conduit party is not liable for joint and several repayment or for guarantee obligations with respect to the debt at issue.
(3) The conduit party establishes a channel for the flow of funds between the lender and the borrower and assists in the receipt and payment of principal and interest, thereby playing a role in structuring financing‑related transactions. If the conduit party, knowing that the parties are using a formal sales relationship to conceal an underlying loan relationship, nevertheless provides intermediary services and facilitates the circulation of funds, it will be deemed to have acted with fault in helping the parties circumvent corporate risk controls and financial regulations. In such cases, the court should, taking into account the degree of the conduit party’s fault, the proportion of its benefits, the causal link, and other relevant factors, hold the conduit party liable for supplementary compensation corresponding to the portion of the loan loss that the borrower is unable to repay.
(Author: Wang Dongjuan, Reposted from: Shanghai No. 2 Intermediate People’s Court)
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