CNY 300,000 Loan Dispute Court Adjusts Excessive Penalty Rate

In a civil case heard in an Eastern China City court, a lender sought repayment of a 300,000 CNY loan together with interest and contractual penalties. The plaintiff, Mr. Li, claimed that the borrower, Mr. Zhao, and the guarantor, Mr. Liu, had failed to repay the loan by the agreed deadline. The court ruled in favor of Mr. Li on the principal and interest but reduced the daily penalty rate, finding it unlawfully excessive. The decision clarifies how Chinese courts enforce loan agreements while limiting punitive damages.

According to the facts, on April 8, 2011, Mr. Zhao borrowed 300,000 CNY from Mr. Li, with Mr. Liu acting as the guarantor. A promissory note was signed, stating that the loan would be repaid by April 18, 2011, with a monthly interest rate of 2 percent. If repayment was late, the borrower would pay a penalty of 5 per 1,000 of the principal per day. After the maturity date, Mr. Zhao and Mr. Liu did not repay the loan. Mr. Li then sued, demanding repayment of the principal plus 2,000 CNY in interest, as well as the daily penalty from April 18, 2011, until full payment.

At the court hearing, Mr. Li appeared in person and presented evidence, including the original promissory note and three bank withdrawal slips from Minsheng Commercial Bank. The defendants, Mr. Zhao and Mr. Liu, were properly notified of the hearing but did not attend and filed no defense. The court reviewed the documentary evidence and found that the facts matched what Mr. Li claimed. Because the defendants failed to appear, the court proceeded based on the evidence before it.

The court held that the promissory note constituted a valid civil surety loan contract. The parties had reached a mutual agreement, and the contract’s terms did not violate any mandatory legal prohibitions, except for the penalty clause. The court noted that Mr. Zhao had not repaid the loan on time, and Mr. Liu had not fulfilled his guarantee obligation. Both parties were therefore in breach of contract. The court found that Mr. Zhao must repay the principal and pay interest, as well as a penalty for late payment, but that the daily penalty of 5 per 1,000 was too high.

Under relevant Chinese contract and guarantee laws, a court may adjust a penalty that is clearly excessive compared to the actual loss. In this case, the court reduced the overdue penalty to the same rate as the agreed interest, namely 2 percent per month, computed from the loan’s start date. The court also ruled that Mr. Liu, as the guarantor, was jointly and severally liable for the entire amount, because the promissory note did not specify the type of guarantee. The court dismissed Mr. Li’s request for additional interest beyond the adjusted rate.

This case illustrates that Chinese courts will uphold loan agreements and guarantee obligations, but they will not enforce penalty clauses that are disproportionate. Lenders should be aware that excessive daily penalty rates may be reduced to a rate comparable to the contractual interest. Guarantors, even without a specified guarantee type, may face full joint liability. The ruling reinforces the principle that contractual freedom is balanced by statutory limits on punitive damages.

Disclaimer: This article is for informational purposes only and does not constitute legal advice.