On 4 Jan. 2021, Shanghai Financial Court, for the first time, applied the Civil Code in a case concerning financial loan contract disputes.
On 4 Jan. 2021, Shanghai Financial Court, for the first time, applied the Civil Code to conclude a case concerning financial loan contract disputes in the second instance, ruling that the lending institution has an obligation to clearly disclose the actual interest rate in the loan contract and that due to its failure to disclose, the lending institution shall return the interest charged over the interest rate agreed in the contract.
In September 2017, the plaintiff and the defendant signed the loan contract, agreeing that the specific loan interest rate shall be subject to the repayment schedule, with an average annual interest rate of 11.88%
Thereafter, the plaintiff refunded 15 installments of principal and the interest on schedule according to the contract. Based on the actual amount of principal and interest, the plaintiff believed that the actual borrowing rate was 20.94%, far higher than 11.88% agreed in the contract, and the defendant never disclosed the actual interest rate during the performance of the loan contract. So the plaintiff filed a lawsuit in court, requesting the defendant to return the overcharged interest of over CNY 880,000 and the interest loss for use of funds.
After hearing, the first-instance court held that the repayment schedule set out the total amount of principal and interest of each installment and the remaining principal amount, which was signed by the borrower for confirmation, so there was no concealment of the interest rate and the plaintiff's claims were dismissed.
Shanghai Financial Court, after trial, held that pursuant to the relevant provisions of the Civil Code, the provider of the format clause shall take reasonable measures to remind the other party of the clauses containing a significant interest and to clarify the legal consequences in case of failure to perform the obligations. In this case, the repayment schedule concluded by the parties only states the amount of principal and interest of each installment and the remaining amount of principal, without mentioning the actual interest rate, the total amount of interest or the calculation method thereof. The repayment schedule is not sufficient to reveal the actual interest rate on the loan contract. The first part of the loan contract states that the average annual interest rate is 11.88% and that the repayment method is repayment by installments. If the borrower requests to calculate the interest at the interest rate of 11.88% and with the remaining principal as the base, which conforms to the common understanding of ordinary reasonable persons as well as transaction practice and the principle of good faith, such requests should be supported.
Shanghai Financial Court made the final judgment, quashing the original judgment and ordering the defendant to return the overcharged interest of over CNY 840,000 to the plaintiff.
Contributors: CJO Staff Contributors Team
