An Initial Exploration of the Adjudication Approach for Entrusted Financial Management Contract Dispute Cases by the Chengdu-Chongqing Financial Court

Search with "Entrusted Financial Management" as the Keyword: An Analysis of the Judgments Published by the Chengdu-Chongqing Financial Court

By conducting a search with "entrusted financial management" as the keyword, a total of five judgment documents published by the Chengdu-Chongqing Financial Court were found, all of which were appeal cases. Among them, three cases involved disputes over private entrusted financial management contracts, while the other two cases were financial entrusted financial management contract disputes involving the same appellant (original defendant).

The Adjudication Approach of the Chengdu-Chongqing Financial Court on Entrusted Financial Management Contract Dispute Cases: An Initial Exploration

Below, the author attempts to explore the adjudication approach of the Chengdu-Chongqing Financial Court on entrusted financial management contract dispute cases from aspects such as the validity of guaranteed minimum return clauses, the distinction between entrusted financial management and private lending, and the suitability obligations of financial institutions, through these four cases.

Case of Entrusted Financial Management Contract Dispute between Ju Mouqiang and Zhou Mou, Liu Moubi

—(2023) Yu 87 Min Zhong 4394

Case One

Zhou Mou and Ju Mouqiang signed the "Entrusted Securities Investment Agreement," stipulating that Zhou Mou would fully entrust his securities account with his own funds of 4.5 million yuan to Ju Mouqiang for securities investment. Ju Mouqiang was responsible for buying and selling, while Zhou Mou did not participate in trading or offer suggestions. Ju Mouqiang undertook the responsibility of guaranteeing the principal of 4.5 million yuan for Zhou Mou and calculated the interest on the investment principal at an annualized rate of 6%. The investment returns from securities investment (the part exceeding the investment principal interest) were to be divided equally between the two parties. If the investment returns were negative at the time of settlement, Ju Mouqiang would make up for the principal and interest.

After the expiration of the entrusted period stipulated in the agreement, the investment suffered a huge loss, and Ju Mouqiang voluntarily issued a "Repayment Commitment Letter" to Zhou Mou, promising to repay 4.5 million yuan.

The first-instance court held that the "Repayment Commitment Letter" issued by Ju Mouqiang proved that Ju Mouqiang was willing to bear the compensation responsibility for the loss caused to the entruster Zhou Mou due to his own fault, which was his true intention and did not violate the prohibitive provisions of the law. Therefore, it supported the plaintiff Zhou Mou's claim for Ju Mouqiang to pay the compensation.

Case of Entrusted Financial Management Contract Dispute between Liang Mouhua and Zeng Mou, Yang Moufen

—(2023) Yu 87 Min Zhong 1666

Case Two

Liang Mouhua, introduced by Yang Moufen and Zeng Mou, invested in a certain investment and financial management platform and transferred a total of 66,600 yuan to the designated payee. Yang Moufen and Zeng Mou promoted and introduced the platform in a WeChat group and helped with recharging. Later, the platform was closed and funds could not be withdrawn.

The first-instance court held that Liang Mouhua's evidence could not prove that he had established an entrusted financial management contract relationship with Yang Moufen and Zeng Mou, and thus dismissed all his claims.

Case of Contract Dispute between Tang Mou and Fu Mouxiang, Xie Mouying, etc.

—(2023) Yu 87 Min Zhong 6935

Case Three

Fu Mouxiang and Tang Mou communicated via WeChat, and Tang Mou proposed that Fu Mouxiang contribute 200,000 yuan for stock trading, promising an annualized return of no less than 10%. Fu Mouxiang transferred 200,000 yuan to Yang Mou's account according to Tang Mou's instructions.

The first-instance court held that Fu Mouxiang and Tang Mou had established an entrusted financial management contract relationship, and thus ruled that Tang Mou should pay Fu Mouxiang the principal of the entrusted financial management funds of 170,000 yuan, a profit of 15,000 yuan, and corresponding fund occupation losses.

China Bank Branch vs. Zhu Mourong/Du Muyu

Financial Entrusted Financial Management Contract Dispute Case

—(2024) Yu 87 Min Zhong 942, (2024) Yu 87 Min Zhong 4986

Case Four

A certain trust company created a certain XX collective fund trust plan ("XX Collective Trust") and issued a corresponding prospectus. A bank signed a XX Collective Trust fund collection and payment agreement with the trust company, whereby the trust company entrusted the bank to collect the entrusted funds from the trust plan entrusters on behalf of the trust company during the issuance period of the trust plan. The bank recommended qualified investors to the trust company according to the content of the trust plan and related documents formulated by the trust company, and was not allowed to make any commitment to the minimum return. After the above agreements were signed, a staff member of the bank branch, You Moujing, promoted the XX Collective Trust to Zhu Mourong, Du Muyu, and others.

Zhu Mourong transferred 200,000 yuan to the account of a third party, Zhong Mouchun. Both parties signed a "Cooperative Investment Agreement." The latter, based on the entrustment of the former and several others, raised a total of 5.4 million yuan and, in his own name as the entruster of the trust product, signed a "Collective Fund Trust Contract" with the trust company (trustee), subscribing to the trust plan for 5.4 million yuan. Du Muyu transferred 300,000 yuan to the account of a third party, Zou Mou. Both parties signed a "Cooperative Investment Agreement." The latter, based on the entrustment of the former and several others, raised a total of 4.7 million yuan and, in his own name as the entruster of the trust product, signed a "Collective Fund Trust Contract" with the trust company (trustee), subscribing to the trust plan for 4.7 million yuan. Zhong Mouchun and Zou Mou both signed the "Investor Statement" as investors.

Later, the investors represented by Zhong Mouchun and Zou Mou could not recover their investments. After petitioning, the Chongqing Banking and Insurance Regulatory Bureau issued a written reply, determining that the XX Collective Trust was a trust product established in accordance with laws and regulations, and the bank, as the agency for the collection and payment of funds for the trust plan, was entrusted to promote the trust plan to qualified investors. It was found that the bank employees had collected customer funds to invest in the trust plan during the agency sale of the trust product, which violated the provision in the "Trust Company Collective Fund Trust Plan Management Measures" that "entrusters shall subscribe to trust units with their own legally owned funds and shall not illegally collect funds from others to participate in the trust plan."

The first-instance court ruled that the bank should compensate Zhu Mourong/Du Muyu for 70% of the investment principal and interest losses calculated according to the benchmark interest rate of the same period and type of deposit published by the People's Bank of China.

01.The determination and validity of the "minimum guarantee clause"
A guaranteed return clause refers to a provision that, regardless of whether the entrusted wealth management is profitable or not, the entrusting party can recover part or all of the investment principal or even obtain returns. The form is not limited to stipulating a guaranteed return clause in the entrusted wealth management contract, signing a separate guaranteed return agreement, or issuing a commitment letter, etc. The author believes that the essence of the guaranteed return clause is the redistribution of the risks arising from the possibility of investment results between the two parties of the entrusted wealth management contract.
Under the premise that a trust investment relationship exists between the two parties, in judicial practice, the guaranteed minimum return clause in the trust investment contract is generally held to be invalid. This is mainly due to the following three considerations:
The bottom-line clause stipulating that the trustee shall bear the losses not caused by its own fault is contrary to the principle of loss compensation in the entrusted contract relationship as prescribed in Article 929 of the Civil Code.
The guaranteed minimum clause relieves the principal of the investment risks they should bear themselves, imposing an unequal obligation on the trustee and thus violating the principle of fairness stipulated in Article 6 of the Civil Code.
The ban on "rigid redemption" is a requirement for financial institutions stipulated in regulatory documents such as the "New Rules for Asset Management", and the "Guiding Opinions on Several Issues Concerning the Trial of Civil and Commercial Cases Involving Financial Disputes" also gives a negative evaluation of such behavior by financial institutions. Although it cannot directly bind natural persons and non-financial institutions, it still has certain reference and guiding significance for them.
In Case One, the agreement that Ju Mouqiang was responsible for making up for the losses actually excluded Zhou Mou from all risks in the investment activities and unreasonably allocated all the investment risks in the financial market to the trustee Ju Mouqiang. This is a "guaranteed minimum return clause" in an investment and wealth management contract.
As this clause unreasonably allocates the investment risks in the financial market, misleads investors into misjudging the investment risks, and induces them to irrationally invest funds in the financial market, continuously accumulating and magnifying the investment risks, disrupting the order of the financial market, and ultimately harming the interests of the majority of investors, it violates public order and good morals. Therefore, this guaranteed minimum return clause should be deemed invalid.
Furthermore, when Ju Mouqiang issued the "Repayment Commitment Letter", the term of the "Entrusted Securities Investment Agreement" had already expired. He was fully aware of the fact of the loss. This is significantly different from his subjective cognition when signing the "Entrusted Securities Investment Agreement" that he could not judge the profit or loss but still promised a "minimum guarantee". It would not lead investors to misjudge or ignore investment risks, nor would it cause consequences that harm public interests. There were no other violations of prohibitive provisions of laws and regulations. It was his true expression of intention. Therefore, this "Repayment Commitment Letter" is legal and valid and should bind Ju Mouqiang.
The case was ultimately deliberated by the Judicial Committee of the Chengdu-Chongqing Financial Court, which ruled to dismiss the appeal and uphold the original judgment.
It can be seen that the "Repayment Commitment Letter" signed afterwards is not an allocation of the uncertainty of the investment outcome by both parties and does not fall under the category of a "guaranteed minimum return clause". It represents the true intentions of the parties and should be binding on them.
02.The distinction between entrusted wealth management contract relationships and private lending
Entrusted wealth management refers to the practice where the trustee manages the assets of the principal as agreed upon, thereby earning a certain remuneration or dividend. In contrast, private lending is a financial transaction between parties, with the mutual agreement being the lending and borrowing of funds. The essential difference between the two lies in the substantive purpose of the contract when it is established: if the substantive purpose of the contract is the lending and borrowing of funds, it falls under a private lending contract; if the substantive purpose is entrusted wealth management, it is classified as an entrusted wealth management contract.
Where the true intentions of both parties are not clearly expressed in the contract, it is necessary to investigate their objective manifestations in the performance of the contract, and to determine them in combination with their agreements, the provisions of laws and regulations, and common practices.
In Case Two, no written entrusted wealth management contract was signed between the two parties. Liang Mouhua could only provide evidence that Yang Moufen and Zeng Mou had promoted and introduced the investment platform and recharged on his behalf in WeChat. After receiving Liang Mouhua's funds, Yang Moufen and Zeng Mou recharged the investment platform according to the platform account and password provided by Liang Mouhua and as per his requirements. Liang Mouhua independently chose the so-called financial products recommended by the investment platform. The appellant Liang Mouhua could not provide evidence to prove that he had reached a consensus with Yang Moufen and Zeng Mou on entrusted wealth management.
Therefore, the Chengdu-Chongqing Financial Court ruled to dismiss the appeal and uphold the original judgment.
In Case Three, Tang proposed that Fu Xiang invest 200,000 yuan in stocks and promised an annualized return of no less than 10%. However, they did not specify the exact investment targets, the settlement method, whether Fu Xiang could participate in or supervise the investment activities, or the distribution of profits and the sharing of losses. The rights and obligations regarding the entrusted investment and financial management were not clearly defined between the two parties.
Through mutual consultation and performance, the actual legal relationship between Tang and Fu Xiang is that Tang requests Fu Xiang to deliver funds, which Tang fully disposes of independently. Fu Xiang does not participate in investment activities and has no rights over the use of funds. Ultimately, Tang repays the principal and interest. Although it is nominally a entrusted wealth management relationship, it is actually a loan contract relationship.
No entrustment and wealth management contract relationship was established between the two parties. Based on the legal logic of "no rights, no obligations", during the period when Tang held and used Fu's funds, Fu had no rights at all regarding the use of the funds. It is clearly inconsistent with the rights and obligations of both parties for Fu to bear the responsibility for the losses claimed by Tang. It is also inconsistent with Tang's repeated promises to return the principal and pay the returns. Therefore, the Chongqing-Chengdu Financial Court held that although the original judgment was in error in its application of the law, the judgment result was correct and should be maintained.
These two cases judged the true intention and purpose of the contract based on the objective evidence submitted by both parties. In Case Two, the appellant (the original plaintiff) failed to provide sufficient evidence to support his claim of a trust investment relationship. In Case Three, the essence of the matter was determined to be a loan through evidence analysis.
03.In disputes over financial entrusted wealth management contracts
The suitability obligation of financial institutions
In Case Four, the XX collective trust was a qualified trust product at the time of issuance, and the trust company also fulfilled its relevant obligations as stipulated in the trust contract. The current evidence cannot prove that the trust company was aware of the illegal pooling of funds during the sale of the XX collective trust. Therefore, the trust company should not bear the corresponding compensation liability.
The Xuefu Road Branch of a certain bank not only earns commissions through sales channels and sales outlets but also by selling its own credit and significant influence. If it completely shirks its responsibility to customers after earning profits, it would violate the principle of good faith.
In addition to the agency collection and payment relationship, the Xuefu Road Branch of a certain bank also deeply participated in the promotion and sales of a certain XX collective trust. As the agency sales institution of the XX collective trust, the Xuefu Road Branch of the bank was not merely providing a platform and channel for the buyers and sellers of the involved product, but also took advantage of the trust of investors such as Zhu Mourong and Du Mouyu in it, and actively promoted the purchase of the XX collective trust through marketing.
The obligation of suitability is a legal duty of the seller, which is not related to the sales method. Whoever is responsible for selling financial products shall bear the obligation of reasonable recommendation and appropriate sales. The Xuefu Road Branch of a certain bank cannot claim exemption from the requirements and responsibilities based on the obligation of suitability on the grounds that it is not the product manager or issuer.
The Chongqing-Chengdu Financial Court held that "seller's due diligence" is the prerequisite for "buyer's own risk". The Xuefu Road Branch of a certain bank knew that Zhu Moring, Du Yuyu and others were not qualified investors, but still illegally pooled funds to purchase financial products that were not commensurate with their risk-bearing capacity, which led the investors to make unreasonable investment decisions and resulted in financial losses. Therefore, the Xuefu Road Branch's fulfillment of the suitability obligation is the prerequisite for Zhu Moring, Du Yuyu and others to bear their own responsibilities. Its liability for compensation is to make up for the losses caused to Du Yuyu due to this fault, and has nothing to do with the rigid payment of principal and interest regardless of circumstances as stipulated.
On the other hand, trust plans are different from ordinary financial products. They offer higher investment returns but also carry greater investment risks. Zhu Mourong and Du Mouyu, as investors with years of experience in investment and financial management, were aware that they were not qualified investors for a certain XX collective trust. However, in pursuit of high returns, they pooled funds with other investors to purchase the XX collective trust. They themselves also bear certain responsibility (30%) for the losses of the involved product.
Therefore, the Chongqing-Chengdu Financial Court ultimately ruled to dismiss the appeal and uphold the original judgment.
04.Conclusion
There are not many case samples of disputes over entrusted wealth management contracts in the Chengdu-Chongqing Financial Court, but the few cases it has published also reflect the more typical points of contention in such cases.
Especially in Case One, the judgment was made after discussion by the judicial committee, which better reflects the official stance of the court. And in Case Four, it also involves the handling of multiple relationships such as the trust company, the agency bank, the principal (nominal investor), and the actual investor (the person holding the shares on behalf of others) in the issuance of collective fund trust plans. This is quite beneficial for us to accurately grasp similar cases in the future.