Editor's Note:

 

Applicants often apply to the court for property preservation before or during litigation, and take property preservation measures such as freezing and sealing up the relevant property of the protected person to ensure smooth implementation after obtaining effective judicial documents in the future. However, in practice, the outcome of the case may not be consistent with the expected outcome of the applicant, and its claims may have only received partial support, or even all claims may have been rejected. So, in this case, can it be directly determined that the applicant's property preservation of the insured is wrong? Should the applicant be liable for compensation to the insured? The following will attempt to analyze and answer the above questions through a Supreme Court case.

The principle of liability fixation for damages caused by property preservation applications should apply to the principle of fault liability, with the subjective fault of the applicant as the prerequisite for assuming civil liability, that is, the applicant should only bear civil liability in the case of fault. The insured shall bear the burden of proof for the subjective fault of the applicant in property preservation. The court cannot simply rely on whether the applicant's claim can be supported by the court's effective judgment as the basis for determining whether there is a mistake in property preservation.

 

Basic Case

 

Civil Judgment of the Second Instance on the Dispute over Liability for Property Preservation Damage Caused by the Application of the Straits Petrochemical Industry and Trade Co., Ltd. and Xinjiang Investment and Development (Group) Co., Ltd. [Case No.: (2020) Supreme Law and People's Republic of China No. 590].

 

1、 On September 7, 2016, the New Investment Company sued the Straits Company, Jinshi Company, and Ye Chengguang to the Xinjiang High Court on the grounds of a contract dispute. The request for the lawsuit was to require Jinshi Company to pay its equity buyback amount of 105000000 yuan and the Straits Company, and Ye Chengguang to bear joint and several liability for the debts that Jinshi Company could not repay. Hereinafter referred to as "(2016) Xinminchu No. 81 Case".

 

2、 On October 24, 2016, during the trial of the (2016) Xinminchu No. 81 case, the New Investment Company submitted an application for property preservation to the Xinjiang High Court, applying for the preservation of the assets of the Straits Company, Jinshi Company, and Ye Chengguang with a value of 105000000 yuan, and providing property preservation guarantees with five properties under their names.

 

3、 On October 25, 2016, the Xinjiang High Court made a civil ruling (2016) Xinminchu No. 81, ruling as follows: "Freeze 105000000 yuan of bank deposits of Jinshi Company, Ye Chengguang, and Straits Company, and seal up and seize other properties of corresponding value for the insufficient part...". The property preservation measures actually taken by the Xinjiang High Court are as follows: 1. Freeze the bank account deposit of 1393200 yuan of the Straits Company (the term is from December 5, 2016 to December 22, 2018); 2. Freeze the 51% equity of Shanghai Guoxin Company held by Straits Company (the period is from December 6, 2016 to December 5, 2018); 3. Freeze the 100% equity of Shanghai Jingang Company held by Straits Company (the period is from December 6, 2016 to December 5, 2018).

 

4、 On October 8, 2018, the Xinjiang High Court issued one of the civil rulings (2016) Xinminchu No. 81, which stated that, based on the application submitted by the New Investment Company, it ruled to lift the sealing up and freezing of the property of the Straits Company.

 

5、 On September 27, 2017, the Xinjiang High Court issued a civil judgment (2016) Xinminchu No. 81: (1) Jinshi Company paid 105000000 yuan of equity repurchase price to Xintou Company; （2） Reject other litigation claims of the new investment company. After that, the new investment company refused to accept and appealed to the Supreme Court.

 

6、 On June 29, 2018, the Supreme Court issued the (2018) Supreme Court Civil Judgment No. 54: (1) uphold the first item of (2016) Xinminchu Civil Judgment No. 81; （2） The second item of the revised judgment (2016) Xinminchu No. 81 civil judgment is: Ye Chengguang shall bear supplementary compensation liability to the New Investment Company for the above debts that he cannot repay to Jinshi Company to the extent of his false contribution; （3） Reject the appeal request of Jinshi Company; （4） Reject other litigation claims of the new investment company. The new investment company still refuses to accept and applies to the Supreme Court for a retrial.

 

7、 On May 27, 2019, the Supreme Court made a ruling (2019) No. 1656, rejecting the retrial application of the new investment company.

 

8、 The Straits Company filed a lawsuit to the Xinjiang High Court: 1. Xintou Company compensated for the economic losses caused to the Straits Company by mistakenly sealing up the Straits Company's bank account due to the (2016) Xinminchu No. 81 civil case, amounting to 187373.06 yuan; 2. Order the new investment company to mistakenly seal up 51% of the equity held by the Straits Company in Shanghai Guoxin Company (with a capital contribution of 6120000 yuan), resulting in an economic loss of 589475 yuan to the Straits Company; 3. Order the New Investment Company to wrongly seal up 100% of the equity of Shanghai Jingang Company held by the Straits Company, resulting in an economic loss of 1200000 yuan to the Straits Company; 4. Order the New Investment Company to compensate the Straits Company for the travel expenses paid in the (2016) Xinminchu No. 81 civil case and this case by 42875.03 yuan. The legal costs shall be borne by the new investment company. Hereinafter referred to as "(2019) Xinminchu No. 19 Case".

 

9、 The Xinjiang High Court held that some of the litigation claims of the Straits Company were established and issued a civil judgment (2019) Xinminchu No. 19: 1. Xintou Company paid 114428.16 yuan to the Straits Company due to the property preservation of the civil case (2016) Xinminchu No. 81 within 15 days from the effective date of the judgment; 2. The new investment company shall pay the travel expenses of 19990 yuan to the Straits Company within 15 days from the effective date of the judgment; 3. Reject other litigation claims of Straits Company.

 

10、 Both the New Investment Company and the Straits Company refused to accept the Xinjiang High Court's (2019) Xinminchu No. 19 civil judgment, and both filed appeals to the Supreme Court.

 

11、 On July 24, 2020, the Supreme Court issued the (2020) Supreme Court Civil Judgment No. 590: 1. Revoking the (2019) Xinminchu Civil Judgment No. 19 of the Higher People's Court of the Xinjiang Uygur Autonomous Region; 2. Reject the lawsuit request of Straits Petrochemical Industry and Trade Co., Ltd.

 

[Key Points of Judgment]

 

The Supreme Court believes that this case is a dispute over liability for damages arising from the application for property preservation. To determine whether the litigation preservation actions of the new investment company are incorrect and whether it should bear the liability for damages to the Straits Company, comprehensive consideration should be given not only to whether the new investment company subjectively has intentional or negligent fault situations, but also to whether the Straits Company has timely avoided relevant losses.

 

1、 According to Article 105 of the Civil Procedure Law, if there is an error in the application for property preservation, the applicant shall compensate the respondent for the losses incurred by the preservation. Therefore, the principle of liability fixation for property preservation damages should be applied to the principle of fault liability, with the subjective fault of the applicant as the prerequisite for assuming civil liability, that is, the applicant only bears civil liability in the case of fault. In this case, the applicant has no subjective fault for the error in applying for property preservation.

 

（1） The main purpose of the new investment company's application for property preservation measures in accordance with the law is to safeguard the realization of its interests under the contract after the judgment takes effect, and the application for property preservation by the new investment company does not exceed the scope of its litigation claims.

 

（2） There is a reasonable basis and appropriateness for a new investment company to apply for property preservation. Subjectively, there is no malicious intent to restrict the Straits Company from disposing of property or causing unnecessary losses to the other party through property preservation actions.

 

（3） The exercise of the applicant's right to preserve a new investment company cannot simply be judged on the basis of whether its claim can be supported by an effective judgment of the people's court. Property preservation is a basic litigation right that parties enjoy in accordance with the law when filing a lawsuit with the court. The purpose is to ensure that effective judgments can be effectively enforced. According to the application of the parties or the court's ex officio decision, a system of temporary coercive measures is adopted against the relevant property disputed by the parties. The judgment of the parties on the facts of the disputed case in the litigation and the judgment on whether the litigation claim can be realized are not necessarily consistent with the final judgment of the court. Therefore, it is not consistent with the legislative purpose of the Civil Procedure Law on the preservation system to judge whether the exercise of the preservation rights of the new investment company can be supported by the effective judgment of the people's court, There is also a violation of the institutional function of preservation as a temporary coercive measure against the relevant property disputed by the parties.

 

2、 To determine whether the civil liability for damage caused by property preservation is established, there must be a causal relationship between the loss and property preservation. The Supreme Court held that the losses claimed by Straits Corporation, including losses from frozen deposits, frozen shares, and travel expenses, cannot or are insufficient to prove the causal relationship between these losses and the property preservation actions of the new investment company.

 

In addition, the Straits Company failed to file a reconsideration of its decision against property preservation with the court of first instance in accordance with the law, and after the Xinjiang High Court issued a civil judgment of (2016) Xinmin Chu No. 81 on September 27, 2017 and the Supreme Court issued a civil judgment of (2018) Supreme Law Min Zhong No. 54 on June 29, 2018, the Straits Company also failed to notify the court and raise objections regarding the above-mentioned shareholder changes. Therefore, the Strait Company shall be responsible for its actions.

 

To sum up, the Supreme Court corrected the first instance judgment of the Xinjiang High Court and held that the appeal request of the New Investment Company was established and should be supported; The appeal request of the Straits Company cannot be established and should be rejected.

 

[Case Analysis]

 

First, regarding the principle of liability fixation.

 

Property preservation damage liability disputes belong to a type of tort liability disputes. The attribution of liability for tort disputes shall be based on the principle of fault liability, with the exception of fault presumption and non fault liability. Both fault presumption and non fault liability must be clearly stipulated by law. According to Article 105 of the Civil Procedure Law, if there is an error in the application for property preservation, the applicant shall compensate the respondent for the losses incurred by the preservation. Therefore, the principle of attribution of liability for damage to property preservation should apply to the principle of fault liability. That is, the application for preservation errors must be premised on the applicant's subjective fault. Whether there is a fault in the property preservation applied for by the applicant for preservation cannot only be determined by whether his claim is ultimately supported by an effective judgment, but also by whether he has intentional or gross negligence. "For intentional or gross negligence, it is necessary to examine whether the litigation filed by the applicant is reasonable based on the applicant's claim, the facts and reasons on which it is based, evidence, and relevant legal provisions. It is also necessary to examine whether the property preservation applied for is appropriate based on the amount, object, and method of property preservation, rather than simply relying on whether the claim can be supported by an effective judgment of the court.".

 

Secondly, on the relationship between loss and causality.

 

Under the premise of determining the existence of subjective fault in property preservation damage liability disputes, judging whether the civil liability for property preservation damage is established also requires the existence of a causal relationship between the loss and property preservation behavior, and the loss should be a direct loss. In this case, according to the judgment of the Supreme Court of the Court of Second Instance, whether it is the loss of frozen deposits, the loss of frozen equity, or the loss of travel expenses, Straits Corporation cannot or is insufficient to prove the causal relationship between these losses and the property preservation behavior of the New Investment Corporation. While the court of first instance supported the loss of interest margin on loan funds and travel expenses of the Straits Company, it did not support the loss of equity freezing claimed by the Straits Company. The reason is that the court of first instance believed that the freezing of equity was a safeguard measure to limit equity changes within a certain period of time, and its legal consequences were that the blocked equity was restricted during the registration of equity changes, but it did not affect the enjoyment and exercise of its shareholders' rights. It can be seen that even if the court of first instance determines that the applicant has subjective fault, it only awards compensation for the direct loss of interest margin and actual expenses, and does not support losses that are not necessarily related to the claimed losses. Of course, the Xinjiang High Court of the Court of First Instance decided to support compensation for direct losses based on its erroneous determination of the applicant's subjective fault, which has been corrected by the Supreme Court of the Court of Second Instance.

 

[Summary of Practical Experience]

 

Based on this case and other relevant cases retrieved by the author, the author summarizes the following practical experience and suggestions for reference.

 

First, for property preservation applicants, they need to do their homework before filing a property preservation application.

 

Firstly, the applicant's litigation claims and property preservation applications should have a reasonable basis and appropriateness. Especially for litigation claims, sufficient evidence should be prepared to consolidate the factual basis, and there should be corresponding legal basis to ensure it.

 

Secondly, when filing an application for property preservation, there should be no obvious malice. For example, the amount of the object of the application for property preservation should not significantly exceed the amount of the litigation claim, and the object and method of property preservation should be reasonable and appropriate.

 

Thirdly, try not to use your own assets as property preservation guarantees, but instead provide property preservation guarantees through insurance or guarantee companies. This is because there may be a certain gap, or even a diametrically opposite, between the expected outcome of the judgment by the applicant and the outcome determined by the final effective judgment, which may expose the applicant to the risk of compensating the protected person for property preservation errors. In this case, if self owned assets are used for compensation, there may be significant losses, while using insurance companies or guarantee companies can largely transfer or reduce the risk of loss.

 

Secondly, for the protected person, after the property preservation has been executed, it should be reflected immediately. If you believe that property preservation is improper or there are errors, you should promptly communicate with the judge and take remedial measures such as filing a reconsideration and objection in accordance with the law. Otherwise, it may be considered as a waiver or indulgence of your rights, and you may incur certain losses and responsibilities due to your own fault.

 

[Extended Reading]

 

Based on the analysis of the aforementioned cases, it can be seen that in property preservation damage liability disputes, whether the litigation request of the preservation applicant is supported by an effective judgment is not the only basis for determining whether there is a fault in the application for preservation. The Supreme Court also held this view in its classic retrial case - Beijing Dongfang Dadi Foundation Technology Development Co., Ltd. and Bazhou Junfa Real Estate Development Co., Ltd. Dispute over Liability for Damage to Property Preservation before Application for Litigation (Case No. (2019) Supreme People's Court No. 252).

 

In its judgment, the Supreme Court held that the outcome of the case should only serve as a reference factor rather than the sole factor in examining the "fault" situation. The parties to a dispute in a case have different legal knowledge, legal analysis, and legal judgment abilities, as well as their ability to predict the outcome of the case decision at the time of filing a lawsuit. The parties' judgments of the facts, rights, and obligations in dispute may not necessarily be consistent with the final outcome of the court decision. If the only basis for determining whether there is a fault in the application for preservation is whether the litigation request of the applicant for preservation has been supported by the court, and the difference between the litigation request and the effective judgment of the people's court is used to determine the existence and extent of the fault of the applicant for property preservation, in fact, it negates the investigation of the subjective factors of the applicant, which can easily lead to the final judgment result to determine whether the applicant for preservation constitutes an infringement. The original judgment, in the absence of sufficient evidence from Junfa Company to prove that Dongfang Dadi Company had intentional or negligent actions, relied on the effective court judgment to support only a portion of Dongfang Dadi Company's litigation claims as the main basis for determining the error in its pre litigation property preservation application, and imposed overly strict duty of care on the preservation applicant, which was inconsistent with the legislative purpose of the Civil Procedure Law for the preservation system, It is also not conducive to achieving the institutional function of the litigation preservation system to ensure the execution of future effective judicial documents. In addition, Junfa Company claims that there is a fault in applying for pre litigation property preservation and should bear the burden of proof. However, the behavior of "repeatedly changing and increasing litigation claims" by Oriental Land Company as evidenced by Junfa Company, as well as the fact that the court's effective judgment only supports a portion of the litigation claims of Oriental Land Company, cannot be used as the main basis for determining whether Oriental Land Company has intentional or negligent actions, so Junfa Company's compensation claim is not supported.

 

(This article is translated by software translator for reference only.)