China: Financial Leasing Contracts In China – An Update

Last Updated: 4 June 2014
Article by Andrew Rourke and Chris Qian

The Interpretation on Issues of Application of Laws with respect to Disputes on Financial Leasing Contracts (the "Interpretation") published by the Supreme Court of China came into force on 1 March 2014. The Interpretation consists of 26 provisions addressing the issues of the validity, performance, termination and liability for breach of financial leasing contracts as well as issues on litigation involving financial leasing contractual disputes.

Identifying Financial Leasing Contract

In practice, there has always been controversy surrounding the nature and validity of financial leasing contracts. For example, in some cases financial leasing contracts were identified as loan agreements and the business carried out by financial leasing companies was considered to be "shadow banking". This was particularly the case when the framework of a financial lease adopted the "leaseback model", as the nature of the contract could be mistaken for a mortgage contract in practice.

Article 1 of the Interpretation provides that, when identifying the financial leasing contractual relationship, the courts shall, in accordance with Article 237 of Contract Law of China, take into account (1) the characteristic and value of the subject matter, (2) the composition of rent, and (3) the specific rights and the obligations under the contract.  It is the terms of the contract itself that are instrumental in defining the nature of the contract. Contracts which bear the name of "Financial Leasing Contract" but do not accurately reflect the nature of financial leasing will be interpreted as establishing such other legal relationship as the courts deem fit.  Such provision shows that, in identifying financial leasing contractual relationship, the Supreme Court of China strictly abides by the principle that a financial leasing shall be characterized by the combination of a "financing fund" and "financing assets".

It is also worth noting that the legitimacy of a financial leasing contract adopting a "leaseback model", which is typical in ship financial leasing schemes, is acknowledged in the Interpretation. The reason, as explained by the Judge of the Supreme Court in a recent interview, is that the leaseback model is not contrary to the definition of financial leasing contracts made in Article 237 of Contract Law of China which provides:

"A financial leasing contract is a contract whereby the lessor, upon purchase of the lessee-selected lease item from a lessee-selected seller, provides the lease item to the lessee for its use, and the lessee pays the rent."

Such definition does not preclude the possibility that the lessee and the seller could be the same party. However, where borrowing and lending contracts assume the form of financial leasing of the courts have discretion to resort to the principle of "substance over form". It may be, for example, that in the absence of an actual object to the leased, the parties enter into a financial leasing contract  rent will none the less be payable. Alternatively the parties may manipulate the price of the subject matter leased to a grossly inflated level such that part of the purchase price (i.e. the inflated part) paid by the lessor to the lessee is actually in the nature of a loan. In such circumstances the court would treat such transactions as a contractual relationship, for the borrowing and lending of money.

Impact Of Lessor's Operating License/Qualification On Validity Of Financial Leasing Contract

Prior to the enactment of the Interpretation, it was debatable whether a financial leasing contract would be valid if a financial lessor had not been granted the specific license/qualification required to manage or operate the subject matter leased (see, for example as the Water Transportation Business License in the case of financial leasing of ships flying state flags of China).

Article 3 of the Interpretation makes clear that the court will not rule the financial leasing contract to be invalid solely on the ground that the lessor lacks the specific license/qualification for management/operation of the subject matter. The rationale behind this, as explained by the Judge of the Supreme Court of China, is that the purpose of the lessor to purchasing the subject matter leased is to provide it to the lessee for their operation and to alleviate the capital shortage of the lessee. The lessor will not possess and operate the subject matter themselves. As such, financial leasing, by its very nature, should not require the lessor to have the necessary license/qualification required to operate the leased subject matter.

Notwithstanding the above, the financial lessor must be licensed to engage in financial leasing activities themselves (such activities being regulated as a form of finance which can only be carried out by financing institutions under Chinese law). It should also be noted that the relevant business license/qualification of the lessee who will actually operate the leased subject matter is still required under Chinese law.

With respect to the financial leasing of ships in China, attention should be drawn to the Notice on Regulating the Administration of Domestic Ship Financial Lease published by the Ministry of Communications of China on 10 April 2008 ("Notice"). In that Notice, the Ministry of Communications requires that, for ships which are the subject of financial leasing to carry out domestic water transportation, where the lessor is a Chinese-foreign joint venture, the proportion of foreign investment must be less than 50% of total shares. That is to say, wholly foreign owned financial leasing companies will not be permitted to enter into the domestic market of ship financial leasing in China.

Relationships Among Contracts And Parties In Financial Leasing Transaction

A typical financial leasing transaction usually entails a sale/purchase contract and a lease contract, with reference to each other. Furthermore, usually more than two parties are involved in such transaction. Chinese law was previously unclear about the relationships between the contracts as well as the parties, as the financial leasing contract under Chapter 14 of Chinese Contract Law only refers to the lease contract in a financial leasing.

In this regard, the Interpretation makes significant explorations in three directions:

  1. Article 11 of the Interpretation provides that either the lessor or the lessee is entitled to terminate the lease contract if the sale/purchase contract between lessor and seller is terminated, rescinded or invalidated as this would result in the frustration of the purpose of the lease contract.
  2. Article 16 of the Interpretation provides that if pursuant to Article 11 (see above), the lessor may, in accordance with the provisions of the lease contract, or in the absence of such provisions, in accordance with the principle that the subject matter was selected/appointed by the lessee, claim losses against the lessee.
  3. Article 24 of the Interpretation provides in the event that the lessee directly seeks compensation from the seller on grounds of termination of the sale/purchase contract and lease contract, the court must notify the lessor and add the lessor in the legal action as a third party.  The Judge of the Supreme Court of China further explains that such provision to some extent breaks the privity of contract (i.e. the privity of the sale/purchase contract) by allowing the lessee to directly file an action against the seller.  The Judge also believes such an arrangement reflects the nature of financial leasing whereby the role of the lessor is to finance the subject matter and thus it is proper for the lessee who selects the subject matter to directly claim against the seller under the sale/purchase contract (especially quality warranty claims).

Remedies For Lessor After Termination

Under Chinese Contract law, the remedy available for the lessor in the event of breach by the lessee is to claim for the unpaid rent or repossess the subject matter leased. Prior to the enactment of the Interpretation, it was a debatable issue whether the lessor would be entitled to resort to the two remedies simultaneously. The Interpretation has clarified that the lessor has to make a decision on which remedy they are going to choose in a legal action.  The reason for such provision is that, theoretically, a claim for unpaid rents is tantamount to a request for specific performance in that payment of rents presupposes continued use of the subject matter by the lessee, however, a claim for repossessing the subject matter is tantamount to requiring termination of the contract. As the two remedies are conflicting, the lessor is required to make a choice between them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions