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The most important feature of the so-called civil act of investment is that both parties should share risks and benefits for jointly invested projects. Combined with this case, although the words in the Film Investment Contract and the three supplementary agreements are investment funds rather than loans, the agreement on the rights and obligations of both parties is inconsistent with the nature of the investment, whether it is early stage R&D funds or later stages. The agreed-upon conversion of film investment funds cannot reflect the characteristics of investment risks. Lujiang Publishing House does not share the benefits and risks with the China Film Company for the investment project, so the two parties are called film investment, which is actually a legal relationship of lending.

Beijing Haidian District People's Court (2019) Jing 0108 Min Chu No. 24640

Introduction

On February 14, 2012, Lujiang Publishing House Meeting Minutes [2012] No. 2 stated: Our Publishing House plans to invest RMB 5 million, and enjoys the rights of partners: the return on December 31, 2012 shall not be less than 10 % and all R&D funds of 5 million yuan; the R&D funds will be valued at 7.5 million yuan to continue to invest in the filming of the film, and participate in the right to share 2.5% of the film's global distribution profit. On February 16, 2012, Lujiang Publishing House and China Film Company signed the "Film Investment Contract", stipulating:

1. Lujiang Publishing House invests RMB 5 million to become the founding partner of the film investment project. Lujiang Publishing House will remit 50% of the investment, that is, RMB 2.5 million, to China Film Company before February 20, 2012 For the account designated by the company, the remaining 50%, namely RMB 2.5 million, should be paid off before June 10, 2012. 

2. China Film Company promises that all the funds will be used for the preliminary research and development of the film, and since July 2012, it will provide Lujiang Publishing House with a report on the use of funds with the official seal of China Film Company.

3. On December 31, 2012, China Film Company will pay the R&D investment income of RMB 750,000 to Lujiang Publishing House. On December 31, 2012, Lujiang Publishing House has the right to fully recover the R&D funds invested in the research and development of the film.

4. As a founding partner, Lujiang Publishing House has the right to convert the R&D funds that have been invested into investment in the film. The R&D funds of RMB 5 million will be priced at US$1.25 million (or RMB 7.5 million) to receive 2.5% of the global profit of the film. rights, and the profit share will be obtained together with other developers and investors within 30 days after the film's global release.

5. The film fails to shoot or terminates the shooting for any reason. China Film Company will voluntarily compensate Lujiang Publishing House for the loss within 15 days, including the investment loss of Lujiang Publishing House of RMB 5 million and the loss of income from the investment amount. 20% standard payment. Lujiang Publishing House paid 5 million yuan to China Film Company as agreed. After China Film Company signed a supplementary agreement three times to amend the contract terms. Lujiang Publishing House fulfilled its investment obligations as agreed, but China Film Company failed to immediately inform Lujiang Publishing House of the company’s film progress, and also failed to perform its main obligations after being urged by a lawyer, resulting in Lujiang Publishing House’s contractual obligations not being fulfilled.

Claims

Lujiang Publishing House requests:

1. Cancel the film investment contract and three supplementary agreements;

2. China Film Company returns the investment of 7.5 million yuan;

3. China Film Company will compensate for the loss of the investment amount (based on 5 million yuan, calculated from February 17, 2012 until the date of payment at an annual interest rate of 20%).

Verdict

First instance:

1. The "Film Investment Agreement" and three "Supplementary Agreements" signed by Lujiang Publishing House and China Film Company were terminated on November 26, 2019;

2. China Film Company will pay Lujiang Publishing House 5 million yuan and losses within ten days from the date when this judgment takes effect (based on 2.5 million yuan, from February 17, 2012 to April 10, 2012, according to the annual calculation with an interest rate of 20%, a total of 73,980 yuan; with 5 million yuan as the base, from April 11, 2012 to the date of actual payment, calculated at an annual interest rate of 20%; the sum of the above counting results will be deducted by 750,000 yuan)

Defendant's Rebuttal

China Film Company argued that it agreed to rescind the "Contract" and three supplementary agreements. It disagreed with Lujiang Publishing House's claim that the investment amount is 7.5 million yuan. The two parties are not in an investment relationship. At the same time, the term "earnings from early development" is inappropriate. There is only investment in the early stage, and there is no agreed risk in the contract. However, film investment is risky, and so far, the project has not yielded any profits. If it is an investment relationship, there should be investment risks, and there may not be profits. Especially in the film market, the risks are extremely high, and only a few films can be profitable. Even if it is approved, the investment amount should be 5 million yuan. Lujiang Publishing House advocates that the loss of 20% annual interest is too high.

Case Study(Analysis)

The focus of the dispute in this case is: first, the legal relationship between Lujiang Publishing House and China Film Company; second, the specific amount that China Film Company should return and the legal nature of China Film Company’s payment of 7.5 million yuan to Lujiang Publishing House.

First of all, the main feature of the so-called civil act of investment is that both parties should share risks and benefits for jointly invested projects. Combined with this case, although the words in the Film Investment Contract and the three supplementary agreements are investment funds rather than loans, the agreement on the rights and obligations of both parties is inconsistent with the nature of the investment, whether it is the early stage R&D funds or the later stage. The agreed-upon conversion of film investment funds cannot reflect the characteristics of investment risks. On the contrary, in combination with the minutes of meeting [2012] No. 2 submitted by Lujiang Publishing House, as well as Article 5 of the Contract, Article 3 of Supplementary Agreement 1, and Articles 3 and 6 of Supplementary Agreement 3, it is clear that 5 million RMB was involved in the case. The capital preservation nature of Yuan. Lujiang Publishing House does not share profits and risks with China Film Company for the investment project, so the two parties are called film investment, which is actually a legal relationship of lending.

Secondly, under the premise that the above-mentioned legal relationship between the two parties is established and valid, all parties perform their respective obligations in accordance with the contract. As the lender, Lujiang Publishing House has fulfilled its obligation to deliver the loan. The failure of China Film Company to repay the loan has constituted a breach of contract. It should bear the corresponding liability for breach of contract, that is, to return the loan of 5 million yuan and compensate for the loss of interest. This court no longer fully supports the claim of Lujiang Publishing House for the return of the investment of 7.5 million yuan. As of the court hearing, the film involved has not yet started filming. According to the agreement, "If the filming fails or is terminated for any reason, Party B shall compensate for the loss within 15 days and the interest will be settled at the standard of 20% annual interest". The interest rate is 24%, so this court will not accept China FIlm Investment's argument that the losses are too high. As for the starting time of interest, this court will calculate the interest in stages in view of the different time of loan transfer. Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the "Contract Law of the People's Republic of China" (2) Article 21 stipulates that the debtor will pay interest and expenses in addition to the principal debt, and when the payment is insufficient to pay off all debts, and If the parties do not agree, the people's court will offset the charges in the following order: (1) relevant expenses for realizing the creditor's rights, (2) interest, and (3) principal debt. According to this regulation, the 750,000 yuan paid by China FIlm Company to Lujiang Publishing House should be interest, so the interest it should pay should be deducted.

Lawyer's Statement

The nature of the film and television drama investment agreement determines the legal basis applicable in the trial practice. The third volume of the Civil Code does not stipulate investment agreements as typical contracts. The nature of investment agreements for film and television dramas usually needs to be judged by comprehensively considering whether there are guaranteed minimum clauses, fixed returns, guaranteed principal and interest payment, etc. [1] Investment refers to the process in which civil subjects convert certain assets into capital in order to obtain expected and uncertain returns or social benefits,and shared benefits. In judicial practice, there are often cases where the name of investment is actually a loan, that is, the signing of an investment agreement as an external manifestation to cover up the legal relationship of the loan. How to distinguish between a loan relationship and an investment relationship needs to be distinguished from the following aspects:

First, the main body of the investment should generally make full capital contributions,  it can participate in the operation and management of the company's enterprise, has certain decision-making power over the company's affairs, and enjoy the right to distribute benefits. In the loan relationship, the borrower only has the right to require the lender to pay the interest on schedule and the principal when due.

Second, the entity implementing the investment not only enjoys the distribution of benefits, but also bears the company's losses; in the lending relationship, the borrower only needs to bear the risk of the lender failing to repay the principal and interest on time.

Third, the entity implementing the investment will not withdraw the capital contribution without going through legal procedures after investing the capital; and in the loan relationship, once the repayment period is exceeded, the borrower can request the other party to return the loan. [2]

In practice, although a small number of film and television drama investments are identified as joint ventures, most of the investment agreements with guaranteed minimum or guaranteed principal and interest payments are more likely to be handled by the court as a loan relationship. [3] The investment and financing of film and television dramas will continue to receive investment from the initial stage of script development until the film is released. The main investor (main controller) of a film and television drama will decide whether to negotiate with other film investors to increase the budget according to factors such as the film budget and the expected box office effect. Or the main controller may transfer the shares held by itself to a third party at a premium or at par according to its own circumstances to reduce risks. During this process, there will be cases where the main controller transfers 5% to 15% of the film shares it holds to the outside world. The transferee not only has a relatively small share, but also has no substantive rights in the production, distribution and intellectual property rights of the film. The transferee has no other rights except the right of authorship and the right to profit from the film. Even a strong main controller will require that it is limited to sharing the revenue from the distribution of theaters in the mainland region, and the revenue from other regions and distribution channels such as information network dissemination rights is not included. Of course, it is not ruled out that there are serious overruns in the production of the film, and in order to maintain the filming of the film, it has to cede its own share. However, in principle, the master controller will not hand over the control of the film (the copyright of the film) to the transferee. If the assignee is very optimistic about the future distribution income of film and television dramas, it may invest in accordance with normal investment rules, but in reality, more investors still hope to use fixed income as the main investment plan.

Based on the above reasons, the essence of the terms of capital guarantee, bottom guarantee, and principal and interest payment in the film and television drama investment agreement is mainly that the party receiving the share of the transfer hopes to reduce its own risks, so as to ensure maximum benefits. Therefore, in order to reduce the risk of the transferee (small-share investor), the final compromise is to set up an investment agreement of the nature of capital preservation. However, such investment terms with the nature of capital preservation are inconsistent with the nature of investment. As the court of first instance in this case pointed out, "The most important feature of investment behavior is that both parties share risks and benefits for jointly invested projects." In this case, Lujiang Publishing House used the signing of a film investment contract as a means to try to obtain capital and income by guaranteeing more return on investment, avoiding the risks that you should take. Therefore, Lujiang Publishing House failed to obtain the support of the court for the investment funds and interest claimed by Lujiang Publishing House. [4] The court finally made a judgment on the payment between the two parties based on the loan relationship. At the trial stage of this case, because the latest "Private Lending Judicial Interpretation" has not yet been implemented, the court's judgment that the 20% interest rate does not exceed 24% per annum is in line with the law. If this case is in accordance with Article 26 of the revised "Regulations of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases" (2020 Amendment), the interest claimed by Lujiang Publishing House should be limited to the "one-year loan at the time of the establishment of the contract",calculated within four times the quoted market rate. The newly revised "Private Lending Judicial Interpretation" (revised in 2020) has greatly reduced the interest rate of private lending, which to some extent will increase the difficulty for the main controller of film and television dramas to finance the film.

[1] Shenzhen Intermediate People’s Court of Guangdong Province (2019) Yue 03 Min Zhong No. 13509 Civil Judgment (Determining whether the two parties are an investment relationship or a loan relationship, the following aspects are mainly considered: First, whether to participate in the production management and operational decision-making. Second, whether to agree on fixed income. Revenue sharing and risk sharing are the essential characteristics of the investment relationship, and the agreement on fixed income between the two parties does not conform to the essential characteristics of investment with risks).

[2] The People's Court of Shenzhen Qianhai Cooperation Zone, Guangdong Province (2017) Yue 0391 Min Chu No. 475 Civil Judgment.

[3] Beijing Chaoyang District People’s Court (2018) Jing 0105 Min Chu No. 557 Civil Judgment; Beijing Chaoyang District People’s Court (2019) Jing 0105 Min Chu No. 23789 Civil Judgment (under this agreement, Kuncheng Company only It is responsible for investing funds and does not participate in the actual filming of the film, and the contract stipulates that Kuncheng Company will receive guaranteed principal and fixed income, and will not bear the risk of filming. Therefore, the agreement signed by the two parties is called cooperation, which is actually a loan. The legal relationship established between them is private lending).

[4] Wang Duo, “Investment <Tibetan Code> did not start filming as scheduled, investors sued for rescission of contract and did not receive full compensation”, Beijing Haidian Court WeChat public account, July 8, 2020

(https://mp.weixin.qq.com/s/aPuWoZoizPHUrBJsCkec1A, Last access date: 2020.11.18).

Claims:

This article was originally created by lawyers of JAVY Law Firm, and only represents the author's own views, and should not be regarded as a formal legal opinion or suggestion issued by JAVY Law Firm or its lawyers. If you need to reprint or quote any content of this article, please indicate the source.