Dai Xuefei v Huaxin Co., Ltd.
(Case on Dispute over Earnest Money for Subscription Agreement on Commercial Houses)

Plaintiff: Dai Xuefei, female, 34 years old, a Hong Kong resident, dwelling in Gubei New District, Shanghai
Defendant: Huaxin International Urban Development Co., Ltd., Suzhou Industrial Park, Jiangshu Province, domiciled in Urban Garden, Suzhou Industrial Park
Legal Representative: Xi Zhenggang, director of the board of directors of the Company

Dai Xuefei had a dispute over earnest money for subscription agreement on Commercial Houses with Huaxin International Urban Development Co., Ltd. (hereinafter referred to as Huaxin Co., Ltd.), Suzhou Industrial Park, Jiangshu Province and filed an action with the People’s Court of Suzhou Industrial Park, Jiangshu Province.

Dai alleged that: On April 18, 2004, she concluded an agreement with Huaxin Co., Ltd., stipulating that she shall pay 50, 000 yuan of earnest money to subscribe to an apartment as developed by the defendant. If the plaintiff fails to conclude a formal contract on the advance sale of commercial houses within the time limit as notified by the defendant, the 50, 000 yuan of earnest money shall not be refunded. If the defendant sells the apartment within the time limit to someone else, it shall repay at double amount of the earnest money. The plaintiff, upon receiving a notice on contract conclusion from the defendant, went to the defendant on April 25 and negotiated with it about concluding a contract after her husband comes back from Hong Kong. On May 7 when the plaintiff went to the defendant to conclude a contract, she had a demurral over the clause of the standard form contract as produced by the defendant that the sample apartment is just for reference and reached no consent with the defendant, so she rendered her opinions in written form “I cannot make a clear reply and believe that another appointment shall be made for contract conclusion.” in the hope that she can continue the negotiation with the defendant and the work staff of the latter agreed to this suggestion. However, the defendant notified Dai that her earnest money would be confiscated and the apartment would be sold to someone else. The plaintiff pleaded the court to adjudicate that the defendant shall repay at double amount of the earnest money and bear the cost of action.

Huaxin Co., Ltd. argued that: The agreement as concluded on April 18 is a true expression of intent by both parties concerned. The purpose of concluding this agreement is to restrict both parties concerned to concluding a formal advance sale contract on commercial houses. Both parties concerned should have concluded a formal advance sale contract on commercial houses on April 25. Yet by that day, Dai had not made any negotiation with Huaxin Co., Ltd. for contract conclusion. As Dai breached the contract in the first place, Huaxin Co., Ltd. decided not to conclude any agreement with her. As to the “Client’s Opinion” rendered by the plaintiff, the work staff of Huaxin Co., Ltd. just “received it”. The allegation of the plaintiff that both parties concerned failed to reach a consensus on the clause of decoration of the sample house in the contract is not the reason why they failed to conclude a contract, so Dai’s litigation claim shall be rejected.

The People’s Court of Suzhou Industrial Park found through hearing that:

On April 18, 2004, Dai Xuefei, together with her husband, Qiu Rong, as Party B, concluded with Party A, HuaxinCo., Ltd., a Subscription Agreement on Residential Houses in Urban Garden·Heaven (Red Form) (hereinafter referred to as the Subscription Agreement), stipulating that: Party B shall pay to Party A 50, 000 yuan of earnest money so as to subscribe to the apartment of Room 203, Building No. 2, Urban Garden·Heaven, No. 189, Xinghan Street, Suzhou Industrial Park, with an area of 248. 26 sq meters, at a sales price of 7, 720 yuan/sq meters. Where Party B chooses to give up the premise purchase right that she has obtained before the day of contract conclusion notified by Party A or fails to conclude a contract upon expiration, her earnest money of 50, 000 yuan shall not be refunded. Where Party A re-sells the apartment to any other person before the day of contract conclusion, it shall repay the earnest money at double amount. On that very day, Huaxin Co., Ltd. produced a receipt, claiming that it has received 50, 000 yuan of earnest money from Dai and Qiu and notified Dai to go to Huaxin Co., Ltd. on April 25 to conclude an formal advance sale contract on commercial houses. On May 7, Dai submitted her written opinion to Huaxin Co., Ltd., indicating that: “When I concluded a contract with Huaxin Co., Ltd. on May 7, 2004, I requested that the standards for decoration of the purchased house shall be the same as that of the sample house and thus the description “The sample house is only for reference and Huaxin Co., Ltd. has the power to give a final explanation” in attachment II of the contract shall be deleted. However, Huaxin Co., Ltd. failed to give a clear reply to me. So, another appointment shall be made for contract conclusion.” Liao Qing, deputy director of the sales department of Huaxin Co., Ltd., remarked in the written opinion that: “The client’s opinion has been received.” On May 9, Huaxin Co., Ltd. notified Dai that, as she failed to conclude an advance sale contact on commercial houses with Huaxin Co., Ltd. on April 25, which is already a breach of the subscription agreement, Huaxin Co., Ltd. will confiscate the earnest money under the original contract. Both parties concerned had tried to reach a consensus through negotiations, yet failed, thus Dai filed an action.

The People’s Court of Suzhou Industrial Park held that: Article 89 of the Guaranty Law of the People’s Republic of China prescribes: “The parties can agree to the arrangement that one party provides the other party deposits as the creditor's guarantee. After the debtor repays its debts, the deposits shall become the purchase fund or be returned. If the party that provides the deposit fails to pay off the contracted debts, the deposit shall not be refunded; if the party that receives the deposit fails to pay off the contracted debts, the deposits shall be refunded at double amount.” The subscription is the true expression of intent by both parties concerned and thus shall be legally effective and have a legal binding force on both parties concerned. According to the stipulation of the subscription agreement, both parties concerned committed to conclude an advance sale contract on commercial houses in future, for which 50, 000 yuan of earnest money shall function as a guaranty. Dai should have concluded an advance sale contract on commercial houses with Huaxin Co., Ltd. on April 25, 2004, as it is the day Huaxin Co., Ltd. had notified her. Where Huaxin Co., Ltd. denied that Dai concluded any contract on the day and indicted that Dai thus breached the contract, Dai failed to prove that she had performed her commitment of concluding a contract on the very day. Dai alleged, on the basis of the testimony of a witness named Hu Yongming, that she had postponed the date of concluding a contract to May 7. Hu is a relative of Dai, so his testimony lacks the power of proof. Dai cannot prove the authenticity of Hu’s testimony by any other evidence, so his testimony shall not be accepted and thus Dai’s allegation that the date of concluding a contact had been postponed cannot be established. According to the stipulation of the subscription agreement, since Dai failed to conclude a contract with Huaxin Co., Ltd. on April 45 through negotiation, she shall be subject to civil liabilities of breach of the contract, therefore, she has no right to request for the refunding of the earnest money she had submitted, let alone a refunding of the earnest money at double amount. Therefore, the People’s Court of Suzhou Industrial Park adjudicated on September 10, 2004 that:

Dai’s litigation claim shall be rejected.
The case acceptance fee of 3, 510 yuan shall be borne by Dai.

After the judgment of the first instance was announced, Dai was dissatisfied with it and filed an appeal with the Intermediate People’s Court of Suzhou City, Jiangshu Province, on the following ground that: On April 25, 2004, Dai went to Huaxin Co., Ltd., as to which the appellee did not deny, yet it merely believed that Dai failed to conclude an agreement with it through negotiations on that very day. It is a big issue for a family to purchase a commercial house. Dai expressed her wish to conclude a contract after her husband came back from Hong Kong, and the staff member of Huaxin Co., Ltd. showed his understanding in her thought. Therefore, on April 25, the said staff member did not show the appellant the text of Advance Sale Contract on Commercial Houses. The appellant did not see the contract text until May 7 when she went to the appelle again. Hence, it was May 7 that both parties concerned negotiated about concluding an advance sale contract on commercial houses. The court of the first instance overlooked this important fact and mis-confirmed that the appellant failed to perform her commitment of concluding a contract on April 25 and thus breached the contract, which is not true to the fact. On May 7 when both parties concerned negotiated to conclude an advance sale contract on commercial houses, the appellant had a different opinion on the standard clause that “The sample house is only for reference and the power to final interpretation is reserved by Huaxin Co., Ltd.” which the appellee added as attachment II to the standard form contract on advance sale of commercial houses, and believed that the standard clause violated the principle of equal negotiation and thus requested to delete it. Where the staff member of the appellee told her that he could not give a clear reply instantly, the appellant wrote down her opinions and emphasized her willingness for further negotiation. Whereas the appellee turned a deaf ear to the justifiable claim of the appellant and notified to confiscate the earnest money paid by the appellant on May 9 and intended to sell the apartment to someone else, which is absolutely an arbitrary act. Dai pleaded the court to revoke the judgment of the first instance and rule that the appellee shall repay the earnest money at double amount and bear the case acceptance fees of the first and second instances.

Huaxin Co., Ltd. argued that: On April 25, 2004, although Dai went to the appellee, she just meant to bargain the price and was refused by the appellant. According to the stipulation of the subscription agreement, that day shall be deemed as the date when both parties concerned shall have concluded an formal advance sale contract on commercial houses. Whether the appellant came to bargain the price or requested to extend the term, it is an alteration of the subscription agreement and thus breach of the stipulations therein. In such a case, it is justifiable and legal for the appellee to confiscate the earnest money of the appellant. The confirmation made by the court of the first instance that the appellant breached the subscription agreement and shall thus be subject to the liabilities of breach of the contract according to the penalty provisions on the earnest money is clear in facts and correct in the application of law. Huaxin Co., Ltd. pleaded the court of the second instance to reject the appeal and sustain the original judgment.

The Intermediate People’s Court of Suzhou City found through hearing that:

On April 25, 2004, Dai went to the sales department of Huaxin Co., Ltd. and negotiated with Huaxin Co., Ltd. according to schedule. The descriptions of the parties concerned are inconsistent with each other regarding the contents of negotiation. Dai alleged that, she requested to conclude a contract after her husband came back from Hong Kong, yet failed to be consistent in whether Huaxin Co., Ltd. agreed to her requirement for postponement in her description. Huaxin Co., Ltd. alleged that Dai came to bargain the house price but was refused and thereby a contract was not concluded finally. Neither party was able to substantiate their allegation by any evidence. Except for this, the court of the second instance confirmed the other facts as found out by the court of the first instance.

The focus of dispute in the second instance is: why both parties failed to conclude an advance sale contract on commercial houses on April 25 and whether both parties concerned have any act of breaching the subscription agreement.
The Intermediate People’s Court of Suzhou held that:

In the Contract Law of the People’s Republic of China (hereinafter referred to as the Contract Law), Article 3 prescribes: “The parties to a contract shall have equal legal status. No party may impose its will on the other party.” Article 5 prescribes: “The parties shall abide by the principle of fairness in defining the rights and obligations of each party.” Article 6 prescribes: “The parties must act in accordance with the principle of good faith, no matter in exercising rights or in performing obligations.” Article 4 of the Interpretation of the Supreme People’s Court on the Relevant Issues concerning the Application of Law in Trying the Cases Involving Dispute over Sales Contract on Commercial Houses prescribes: “Where a seller receives any earnest money from a buyer by way of subscription, order or reservation, etc. as a guaranty for concluding a sales contract on commercial houses, the provisions on earnest money in law shall be abided by if the sales contract on commercial houses fails to be concluded due to any reason of one party; or the seller shall refund the earnest to the buyer if the sales contract on commercial houses fails to be concluded due to any reason that shall not be attributable to either party.” As to an advance sale contract on commercial houses, a subscription agreement is an advance contract as concluded in advance for the purpose of concluding a formal contract. The purpose of concluding an advance contract is to clarify some articles before a formal agreement is concluded so as to fix the consented expression of intent of both parties concerned in the form of contractual clauses and stipulate the other clauses on follow-up negotiation until a formal contract is established. The significance of an advance contract is to ensure a further negotiation under the principle of being fair and creditworthy, which may lead to a formal contract with complete clauses. Therefore, in the further negotiations, if any party violates the principle of fairness and good faith or denies any settled clause in the advance contract therein or sets forth any unreasonable condition which the opposite party cannot accept or based on which the opposite party refuses to conclude a formal agreement through negotiation, a breach of the contract is constituted and the party in default shall bear the liabilities of breach of the contract as stipulated in the advance contract. Otherwise, if both parties make negotiation out of their own interests only by upholding the principle of being fair and creditworthy yet fail to reach a consensus regarding the other clauses so that a formal contract cannot be concluded, it shall not be subject to the doctrine of liability fixation for it does not fall under the circumstance of breach of the contract as prescribed in the advance contract. Under such a circumstance, an advance contract shall be rescinded and the paid earnest money shall be refunded.

The dispute in this case is triggered out of that Huaxin Co., Ltd. confiscated the earnest money paid by Dai. The ground of Huaxin Co., Ltd. in confiscating Dai’s earnest money is that it believes that Dai failed to conclude an advance sale contract on commercial houses on April 25 and thus constituted a breach of the subscription agreement. The full text of the subscription agreement goes as follows: “If Party B (Dai) chooses to give up the logistic purchase right she has acquired before the day of contract conclusion as notified by Party A (Huaxin Co., Ltd.) or fails to conclude an agreement upon expiration of the schedule, her 50, 000 yuan of earnest money shall not be refunded.” So it can be inferred from it that there are two circumstances wherein Huaxin Co., Ltd. does not have to refund the earnest money. The first is where Dai gives up the right to house purchase before the day of contract conclusion. The facts in this case prove that, by May 7, Dai had expressed her wish to “make another appointment to conclude the contract” in her written opinion, which shows that she never meant to give up the right to house purchase. So such a circumstance does not fit into this case. The other circumstance is where Dai fails to conclude an advance sale contract on commercial houses within the time limit, Huaxin Co., Ltd. is not obligated to refund the earnest money. April 25 is the deadline to conclude an advance sale contract on commercial house. On the very day, Dai once went to HuaxinCo., Ltd. for negotiations. This fact was confirmed by both parties concerned. So neither is this case under the second circumstance where the refunding of the earnest money is not required. Where it comes to the contents of negotiation on that day, the parties concerned had different descriptions thereon, which leads to different views on whether there is any breach of the contract. Dai said that she requested the postponement of concluding a contract until her husband returns, and Huaxin Co., Ltd. showed its consent thereon, and did not show her the text of advance sale contract on commercial houses, thus the plan of concluding a contract on that day was canceled and there is no breach of the contract. Huaxin Co., Ltd. held that Dai went to it on the day to bargain the price, and was refused, so they did not conclude a contract. Huaxin Co., Ltd. held that what is stipulated in the subscription agreement shall be “If Party B fails to conclude a contract within the time limit, the 50, 000 yuan of earnest money shall not be refunded. The subscription agreement will be altered no matter Dai came to bargain the price or to request for postponement, which goes against the stipulation of the subscription agreement. Obviously, both parties concerned had different opinions on whether the term “fails to conclude a contract upon expiration” can be taken as “it is a breach of the contract if a contract is not concluded under whatever case”.

Article 41 of the Contract Law prescribes: “If a dispute over the understanding of the standard terms occurs, it shall be interpreted according to general understanding. Where there are two or more interpretations, an interpretation unfavorable to the party supplying the standard terms shall prevail. Where the standard terms are inconsistent with non-standard terms, the latter shall be adopted.” Paragraph 1, Article 125 prescribes: “With regard to disputes between the parties to a contract arising from the understanding of any clause of the contract, the true intention of such clause shall be determined according to the terms and expressions used in the contract, the contents of the relevant clauses of the contract, the purpose for concluding the contract, the transaction practices and the principle of good faith.” Where both parties concerned conclude a subscription agreement or an advance sale contract on commercial houses, it is the Huaxin Co., Ltd. that provides the standard form contract. In case there are two or more explanations on the standard form clauses, the one that gives less weight to Huaxin Co., Ltd. shall prevail. The function of the advance contact is to pave the way for concluding a formal contract under the principle of fairness and good faith. The term “fail to conclude a contract according to the schedule” in the subscription agreement cannot be understood, based thereon, as the circumstance wherein both parties concerned fail to conclude a contract for any reason that could not be attributable to either party concerned. Where the buyer only saw the sample house provided by the seller yet did not see the text of the advance sale contract on commercial house, if it is taken as a breach of contract when the buyer failed to conclude an formal contract within the time limit for whatever reason, the buyer will be definitely put into such a dilemma where she either suffers a loss of the earnest money or has to unconditionally accept the standard form contract on advance sale of commercial houses, therefore, the seller may make profits from it. The two parities were unequal in concluding the formal agreement, so it obviously goes against the principle of fairness and good faith.

As to this case, although both parties concerned had different descriptions on the negotiation on April 25, the fact that Dai went to Huaxin Co., Ltd. to make negotiation with it on the very day can be confirmed. This circumstance also proves that Dai did not refuse to conclude a contract on purpose beyond the deadline. Secondly, Dai did not have any clear act of refusing to conclude an advance sale contract on commercial houses based on the circumstances that Dai still negotiated with Huaxin Co., Ltd. on May 7. Thirdly, although both parties concerned had different descriptions on the negotiation on April 25, they failed to prove that the authentication of their descriptions by any evidence, it shall be reasonably inferred as a failure to reach consent through negotiations. Fourthly, according to Dai’s description, she meant to wait for her husband before any contract is concluded and thus she did not conclude a contract on April 25, because the purchase of a commercial house is a big family issue, which shall be determined by all the family members. As Dai merely saw the sample house and had no idea of the content of the advance sale contract on commercial houses, her request to wait for her husband comes back before any contract is concluded is reasonable and does not go against the purpose of concluding an advance contract to create equal conditions for fair negotiation. Huaxin Co., Ltd. should have, after accepting the earnest money submitted by Dai and Qiu, fully understood Dai’s request that a contract shall be concluded after her husband comes back. Fifthly, according to the description of Huaxin Co., Ltd., Dai went to it for the purpose of bargaining the price on April 25. The house price is a clause that had been set in the subscription agreement, if Dai wanted to drive the price down through negotiation, Huaxin Co., Ltd. had the right to refuse it. In case Dai was willing to continue the negotiation, Huaxin Co., Ltd. could not refuse to negotiate with her about the contract nor could it impose the liability of failing to conclude a contract on April 25 on Dai. Sixthly, on May 7, Dai wrote down her opinions on a piece of paper after seeing the advance sale contract on commercial houses and the staff member of Huaxin Co., Ltd. make a remark “the client’s opinion has been received” in the written opinion. The signature of Huaxin Co., Ltd. could not prove its acceptance of Dai’s opinion yet it could certify that Dai negotiated with Huaxin Co., Ltd. about concluding a contact on the very day. She saw the text of the standard form contract on advance sale of commercial houses and wished to continue the negotiation with Huaxin Co., Ltd.. After Huaxin Co., Ltd. made the buyer contented with its sample house, for which an advance contact was concluded, it added a standard form clause in the attachment of the contract that the sample house is just for reference and the power to interpret the contract shall remain with Huaxin Co., Ltd., which is unfair to the house buyer. It is reasonable for Dai to have a different opinion on the unfair standard form clause. That Dai set forth a different opinion indirectly proves that, by May 7, both parties concerned had still been on the way of negotiation with no consensus reached, so the allegation of Huaxin Co., Ltd. that it decided to refuse to conclude an agreement with Dai cannot be established. It could also be disproved that even if Dai had not requested to wait for her husband, she would have not approved or signed the advance sale contract on commercial houses with such an unfair standard form clause. Therefore, under the circumstance where neither parties concerned had any evidences to prove the authenticity of their descriptions, it shall be deemed that a contract was concluded due to the failure of both parties concerned to reach consent through negotiations rather than any unreasonable going back on his or her words by either party concerned on the subscription agreement.

In conclusion, the real reason for both parties concerned not to conclude an advance sale contract on commercial houses is the failure of negotiation. The 50, 000 yuan of earnest money that Dai submitted to Huaxin Co., Ltd. shall be refunded by Huaxin Co., Ltd. according to law. Therefore, the appellant claims of Dai that Huaxin Co., Ltd. shall refund the 50, 000 yuan of earnest money shall be supported, yet her appellant claim that Huaxin Co., Ltd. shall refund the earnest money at double amount for its malicious breach of the contract shall not be supported. The defense of Huaxin Co., Ltd. that Dai breached the contract in bargaining the house price and it is thus impossible to conclude a contract shall not be supported for lack of evidence. The nature of this case was wrongly determined by the court of the first instance and thus shall be corrected. Therefore, the Intermediate People’s Court of Suzhou City adjudicated on May 18, 2005 according to item (2), paragraph 1, Article 153 of the Civil Litigation Law of the People’s Republic of China that:

1. The civil judgment of the first instance shall be revoked;
2. Huaxin Co., Ltd. shall, within 3 days as of the day when this judgment comes into force, refund 50, 000 yuan of earnest money to Dai.
The case acceptance fees of the first and second instances are 3, 510 yuan respectively, and shall be borne by both parties concerned on a 50%-50% basis.

This judgment shall be final.