Lawyer’s interpretation: In disputes over the sale of mining machines, what are the ways for buyers to protect their rights?

Author's note: There are many pitfalls and risks in virtual currency transactions, and the same is true for mining machine sales. How to avoid pitfalls and prevent risks is an issue that both mining machine buyers and sellers, especially buyers, need to pay special attention to.

The price of virtual currency fluctuates, and disputes over the sale of mining machines occur from time to time. Disputes and rights protection information related to the sale of mining machines appear in relevant court judgments and media reports from time to time. For example, the recent disputes over the purchase of mining machines between Huatie Hengan, a subsidiary of A-share listed company Huatie Technology, and Cailiang Technology, a subsidiary of Zhongying Internet, and related suppliers.

In the industry practice of "payment before delivery", it is not uncommon for sellers to delay delivery, deliver less than the amount, or not deliver the goods after the buyer has paid, and the mining machines that have been shipped may also have quality defects.

In the current judicial environment, what rights can buyers claim for the breach of contract by mining machine sellers, and which of these claims may be supported by Chinese courts? Based on current laws and regulations and some cases of mining machine sales disputes in some local courts since 2017, the author briefly summarizes and analyzes the following. Mining machine buyers may gain some experience and lessons in risk prevention and rights relief.

1. Issues regarding the validity of sales contracts

From the perspective of the functions and attributes of mining machines, it is generally believed that mining machines are a type of machinery and equipment specifically used to generate virtual currency and have property attributes. From the current precedents, the courts involved generally believe that contracts involving the sale and purchase of mining machines are valid.

For example, in the case of "Chen v. Zhejiang Communication Technology Co., Ltd. Online Shopping Contract Dispute", the Hangzhou Internet Court held that Bitcoin mining machines are machines and equipment specifically used to calculate and generate Bitcoins, which have property attributes in themselves. my country's laws and administrative regulations do not prohibit the production, holding and legal circulation of Bitcoins, nor do they prohibit the buying and selling of Bitcoin mining machines. Therefore, the contract for the sale of mining machines is established and valid in accordance with the law.

However, if the "Guidelines for Industrial Structure Adjustment" finally issued by the National Development and Reform Commission in the future is consistent with the "Draft for Comments" previously released, and virtual asset "mining" activities (the production process of virtual assets such as Bitcoin) are listed under "outdated production process equipment" in the "obsolete category", then the activities of producing virtual currency through mining will belong to the field where market entities are prohibited from entering. In this case, there is a question as to whether the contract between the two parties for the sale and purchase of machinery and equipment for the production of virtual currency for the purpose of mining is still valid.

2. Request for termination of contract

According to the Contract Law and other relevant regulations, if one party claims to terminate the contract, there must be an agreed or statutory reason for termination. In some mining machine sales disputes, the two parties did not clearly stipulate in the contract that the buyer could unilaterally terminate the contract. Once the seller breached the contract, the buyer could only request to terminate the contract based on statutory reasons (such as force majeure that made it impossible to achieve the purpose of the contract, etc.), the buyer to return the goods, and the seller to return the payment and interest already received.

According to Article 94 of the Contract Law, the circumstances under which a contract may be terminated by law are as follows: (1) the purpose of the contract cannot be achieved due to force majeure; (2) before the expiration of the performance period, one party clearly states or indicates by its own behavior that it will not perform the principal obligation; (3) one party delays the performance of the principal obligation and still fails to perform within a reasonable period after being reminded; (4) one party delays the performance of its obligations or has other breaches of contract, making it impossible to achieve the purpose of the contract; (5) other circumstances prescribed by law.

(1) Request for termination of contract on the grounds of force majeure

According to the General Principles of Civil Law and the Contract Law, force majeure refers to objective circumstances that cannot be foreseen, avoided or overcome. Natural disasters, wars, and abnormal social events (such as strikes, riots, etc.) are considered force majeure.

In the case of "Chen v. Zhejiang Communication Technology Co., Ltd. Online Shopping Contract Dispute", the buyer claimed that the "Notice on Preventing the Risks of Token Issuance and Financing" issued by the People's Bank of China, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission constituted force majeure, which made the purpose of the contract impossible to achieve, and requested to terminate the sales contract, but was not supported by the court. In this case, the mining machine sales contract between the two parties was signed on January 4, 2018, and the above announcement was issued on September 4, 2017. The announcement was an event that had occurred before the signing of the sales contract between the two parties, which did not meet the "unforeseeable" characteristics of force majeure, and therefore did not constitute a force majeure event.

Furthermore, even if the announcement time is later than the contract signing time, the introduction of laws and policies generally does not constitute force majeure, but rather a change of circumstances. If the buyer requests to terminate the contract on the grounds of a change of circumstances, the court shall determine the termination based on the principle of fairness and the actual circumstances of the case.

(2) Requesting to terminate the contract on the grounds of "seven-day unconditional return"

In a mining machine purchase and sales contract, the buyer usually purchases the mining machine in order to obtain virtual currency income through mining. In this case, the buyer's claim for the "seven-day no-reason return" system under the Consumer Rights Protection Law may be difficult to obtain support from the court.

According to the Consumer Rights Protection Law, consumers' rights and interests are protected by this law when they purchase, use goods or receive services for their daily consumption needs. If operators sell goods through the Internet, television, telephone, mail order, etc., consumers have the right to return the goods within seven days from the date of receipt without giving reasons (i.e., the "seven-day no-reason return" system). According to the above provisions, the consumer behavior protected by this law is the behavior of consumers purchasing goods or services for their daily consumption needs, which is the consumer's daily consumption behavior, not the producer's production consumption behavior.

As pointed out by the Hangzhou Internet Court in its judgment in the "Chen v. Zhejiang Communication Technology Co., Ltd. Online Shopping Contract Dispute Case", a bitcoin mining machine is a special machine used to generate bitcoins. The plaintiff purchased the mining machine specifically for the production of bitcoins. His behavior was to invest funds to purchase production tools, not for the needs of daily consumption. It does not fall within the scope of protection of the Consumer Rights Protection Law, and therefore the relevant provisions of "seven-day no-reason return" are not applicable.

(3) Requesting termination of the contract on the grounds of occurrence of other statutory matters

In a mining machine sales contract, if there are other statutory grounds for termination, the buyer may request to exercise the statutory right of termination.

For example, in the case of "Fu Lingling and Fan Cunyi Sales Contract Dispute", the buyer and seller reached an agreement to purchase mining machines, but the seller only delivered part of the mining machines within the agreed time, and the remaining mining machines have not been delivered, and there is no possibility of further delivery. The court held that such circumstances fall under the circumstances stipulated in Article 94 (4) of the Contract Law - the seller's delay in performing its debts has made it impossible to achieve the purpose of the contract, and the seller's behavior has constituted a fundamental breach of contract, and the buyer has the right to request the termination of the contract.

3. How to bear liability for breach of contract

According to the Contract Law and other regulations, if one party fails to perform its contractual obligations or performs its contractual obligations inconsistent with the agreement, the forms of breach of contract liability borne by that party mainly include continuing to perform, taking remedial measures, compensating for losses, deposit liability, and liquidated damages liability.

In disputes over the sale of mining machines, the buyer, as the party that abides by the contract, can require the seller to bear corresponding forms of liability for breach of contract based on the contractual agreement between the two parties and legal provisions.

(1) Request for continued performance

According to Article 110 of the Contract Law, if one party fails to perform a non-monetary debt or performs a non-monetary debt inconsistent with the agreement, the other party may request performance, except in one of the following circumstances: (1) it is impossible to perform legally or factually; (2) the subject matter of the debt is not suitable for compulsory performance or the cost of performance is too high; (3) the creditor has not requested performance within a reasonable period of time.

In a dispute over the sale of a mining machine, if the buyer has performed the contract but the seller fails to deliver the mining machine as agreed in the contract, the buyer may require the seller to continue to perform the contract, unless there are circumstances listed in the above provisions that make it impossible to continue to perform the contract.

For example, in the cases of "Fu Lingling and Fan Cunyi Sales Contract Dispute" and "Fu Lingling and Duan Xiaojie Sales Contract Dispute", within the time agreed by both parties, the defendant only delivered part of the mining machines to the plaintiff, and the remaining mining machines could not be delivered. In fact, the contract could not be continued to be performed, resulting in the failure to achieve the purpose of the contract. Therefore, the court, at the request of the plaintiff, ordered the termination of the contract.

(2) Take remedial measures

According to Article 110 of the Contract Law, if the quality does not meet the agreement, the party shall bear the liability for breach of contract in accordance with the agreement of the parties. If there is no agreement on the liability for breach of contract or the agreement is unclear, and it is still unclear in accordance with Article 61 of this Law (that is, after the contract takes effect, if the parties have no agreement or unclear agreement on the quality, price or remuneration, place of performance, etc., they can supplement it through agreement; if they cannot reach a supplementary agreement, it shall be determined in accordance with the relevant terms of the contract or trading practices), the injured party may reasonably choose to require the other party to bear the liability for breach of contract such as repair, replacement, re-work, return, reduction of price or remuneration based on the nature of the subject matter and the amount of loss.

In a mining machine sales contract, if the mining machine delivered by the seller has quality problems that do not meet the contractual agreement, and the two parties have not agreed on the liability for breach of contract or the agreement is unclear and no supplementary agreement has been reached, the buyer may reasonably choose to require the seller to bear the liability for breach of contract such as repair, replacement, re-work, return, reduction of price or remuneration.

(3) Compensation for losses

According to the first paragraph of Article 113 of the Contract Law, if one party fails to perform its contractual obligations or performs its contractual obligations inconsistent with the agreement, causing losses to the other party, the amount of compensation shall be equal to the losses caused by the breach of contract, including the profits that can be obtained after the performance of the contract, but shall not exceed the possible losses that the breaching party has foreseen or should have foreseen when entering into the contract.

According to the interpretation of the above clauses by the Legal Affairs Committee of the Standing Committee of the National People's Congress in the "Interpretation of the Contract Law" and judicial practice, in practice, the losses that the party in compliance can claim for compensation from the breaching party include direct losses and indirect losses, among which direct losses generally refer to direct reductions in property; indirect losses refer to the loss of expected benefits (i.e. loss of potential benefits).

According to Article 9 of the "Guiding Opinions of the Supreme People's Court on Several Issues Concerning the Trial of Civil and Commercial Contract Dispute Cases under the Current Situation", in the current situation where market entities' breach of contract is relatively prominent, breach of contract usually leads to loss of potential profit. According to factors such as the nature of the transaction and the purpose of the contract, the loss of potential profit is mainly divided into production profit loss, operating profit loss and resale profit loss. In the breach of contract for the sale of production equipment and raw materials, the loss of potential profit of the buyer caused by the seller's breach of contract usually belongs to production profit loss. In a series of successive sales contracts, the loss of potential profit of the seller of the subsequent resale contract caused by the breach of contract by the seller of the original contract usually belongs to resale profit loss.

(A) Interest loss

If the buyer has paid the full purchase price of the mining machine in accordance with the sales contract, but the seller has only delivered part of the mining machine, the buyer can require the seller to return the price corresponding to the part of the mining machine that has not been delivered, and pay the corresponding interest on the funds occupied until the date of full payment.

In the cases of "Qu Peng and Foshan Yupeng Feiyue Technology Co., Ltd. Sales Contract Dispute" and "Fu Lingling and Duan Xiaojie Sales Contract Dispute", the plaintiffs had paid the full purchase price of the machines in full, but the defendants failed to deliver all the mining machines as agreed in the contract. The court ordered the defendants to pay interest from the date of filing the lawsuit or the date of termination of the contract to the date when the defendant actually returned the corresponding payment for the undelivered part (the interest was calculated based on the loan interest rate of the People's Bank of China during the same period).

(B) Loss of virtual currency income

After the mining machine purchase and sale contract is signed, if the seller fails to deliver the goods in full and on time as agreed in the contract, the buyer may not be able to obtain the mining machine in time for mining, thereby missing out on virtual currency earnings.

As to whether the loss of virtual currency earnings in such circumstances constitutes loss of potential profits, based on current case law, it is difficult for the buyer to obtain support from the court if he claims such indirect losses.

For example, in the case of "Fan Cunyi and Chen Xi Sales Contract Dispute", the Intermediate People's Court of Zhumadian City, Henan Province, did not support the plaintiff's claim for loss of Bitcoin income due to the defendant's inability to deliver mining machines based on the following two reasons: (a) it is uncertain whether the mining machines generated the amount of income claimed by the plaintiff, and the mining income calculation table and Bitcoin price screenshots submitted by the plaintiff could not prove the loss, and (b) according to the "Notice on Preventing Bitcoin Risks" jointly issued by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission on December 3, 2013, Bitcoin is a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market. Therefore, the plaintiff's request is insufficient in evidence and violates the provisions of laws and regulations, and is not supported.

From the above discussion of the court, it can be seen that the reason why the plaintiff's claim was not supported by the court in this case is not only that the evidence provided by the plaintiff is insufficient to prove whether the mining machine can generate the amount of income claimed by the plaintiff, but also that his claim violates the law. Based on this, further, even if the buyer can provide sufficient evidence to prove the loss of Bitcoin income caused by the seller's failure to deliver the goods according to the contract, and even the defendant recognizes such losses, the court may not support the plaintiff's claim because of the negative evaluation of the currency attributes of Bitcoin by the current regulatory policy.

(C) Losses from mining machine price increases

The price of mining machines usually changes with the price trend of virtual currencies and changes in supply and demand. After the mining machine sales contract is signed, if the market price of the mining machine rises sharply and the seller is unwilling to continue to perform the contract, the buyer can consider asking the seller to compensate for the loss of the mining machine price increase, but there is uncertainty whether it can be supported by the court.

In the case of "Fan Cunyi and Chen Xi Sales Contract Dispute", the seller (defendant) failed to deliver the mining machine to the buyer (plaintiff) as agreed. The buyer claimed that he suffered losses due to the increase in the price of the mining machine and provided WeChat chat records and recordings between him and the seller. However, the Intermediate People's Court of Zhumadian City, Henan Province believed that the evidence was only a unilateral statement of the plaintiff. At the same time, the loan note involved in the lawsuit did not clearly indicate the amount of losses caused by the increase in the price of the mining machine and the basis for calculation. The defendant did not recognize it, and the plaintiff did not provide other evidence to confirm his claim. Therefore, the court did not support the plaintiff's claims.

Judging from the court's verdict, if the plaintiff can prove the amount of loss caused by the price increase of mining machines and the basis for calculation, and the defendant also recognizes it, then the plaintiff's claim may be supported by the court. However, in actual disputes, it is unlikely that the defendant will recognize the plaintiff's losses, and it may be difficult for the plaintiff's claim to be supported by the court.

The author noticed that the buyer's claim for price increase loss in a mining machine sales contract is somewhat similar to the buyer's claim for house price increase loss in a second-hand house sales contract. After the house sales contract is signed, if the seller breaches the contract and refuses to perform the obligation to deliver the house due to the high market price of the house, the buyer will often ask the seller to compensate for the house price increase loss. In general judicial practice, if the two parties fail to negotiate and determine the house price increase loss, the court will often consider the performance of the party who abides by the contract, the amount of the deposit paid, the house price increase and the reasonable expectations of both parties, and determine it at its discretion. However, in mining machine sales disputes, there is no precedent as to whether the court will compare and refer to the principles for determining price increase losses in house sales when the buyer claims mining machine price increase losses.

(D) Losses caused by the seller's failure to deliver the goods and the buyer's purchase of the machine at a high price in order to fulfill the resale contract

In a general legal relationship of the sale of goods, if, when the two parties enter into the contract, the seller knows or can foresee that the buyer's purpose of purchasing the goods is not for his own use but for resale to a related third party to earn the difference in price, and the seller delays delivery or fails to deliver, causing the buyer to suffer loss of potential profits under the resale contract, the buyer can usually require the seller to compensate for such losses.

In disputes over the sale of mining machines, if the seller already knew at the time of signing the contract with the buyer that the buyer would resell the machine to a specific third party to obtain the difference in price, but the seller still fails to deliver the goods as agreed, resulting in the buyer being unable to obtain the profits that could be obtained if the resale contract was performed as agreed, it is still uncertain whether the court will support the buyer's claim, and under what circumstances and to what extent it will support the buyer's claim.

In the "Sales Contract Dispute between Fu Lingling and Duan Xiaojie", the buyer had paid the full contract price according to the sales contract, but the seller only delivered part of the mining machines. The buyer had previously reached a mining machine resale agreement with the relevant third party and had received the third party's pre-order payment. In order not to constitute a breach of contract with the third party, the buyer purchased the corresponding mining machine on the market at the then market price (higher than the price the buyer purchased the mining machine from the seller) and delivered it to the third party. The buyer had requested compensation from the seller for the losses caused by the seller's failure to deliver the goods in time and the buyer's high-priced purchase of the machine to fulfill the resale contract, but later the buyer voluntarily gave up this claim in the lawsuit.

(4) Deposit Penalty

According to Article 115 of the Contract Law, the parties may agree that one party shall pay the other party a deposit as a guarantee in accordance with the People's Republic of China. After the debt is fulfilled, the deposit shall be used as payment or recovered. If the party paying the deposit fails to perform the agreed debt, it has no right to demand the return of the deposit; if the party receiving the deposit fails to perform the agreed debt, it shall return the deposit in double.

If there is an agreement on a deposit in the mining machine sales contract and the buyer has paid the deposit, if the seller fails to deliver the goods or only delivers part of the mining machine, it will be considered as an act of non-performance or incomplete performance of the contract, constituting a breach of contract. The buyer has the right to require the seller to return the deposit in double.

In the case of "Qu Peng and Foshan Yupeng Feiyue Technology Co., Ltd. Sales Contract Dispute", in response to the defendant's behavior of only partially delivering the goods, the Intermediate People's Court of Foshan City, Guangdong Province applied the penalty of double return of the deposit to the defendant in proportion to the unfulfilled part of the contract.

(5) Penalty for breach of contract

Article 114 of the Contract Law provides that the parties may agree that when one party breaches a contract, it shall pay a certain amount of liquidated damages to the other party according to the circumstances of the breach, or may agree on the calculation method of the amount of compensation for losses caused by the breach. If the agreed liquidated damages are lower than the losses caused, the parties may request the people's court or arbitration institution to increase them; if the agreed liquidated damages are excessively higher than the losses caused, the parties may request the people's court or arbitration institution to appropriately reduce them. Article 116 of the Contract Law provides that if the parties agree on both liquidated damages and deposits, when one party breaches the contract, the other party may choose to apply the liquidated damages or deposit clause.

If there is a liquidated damages agreement in the sales contract, if the seller breaches the contract, the buyer can ask the seller to pay the agreed liquidated damages. However, liquidated damages and deposits cannot be applied at the same time, and the seller has the right to choose to apply one or the other. In addition, if the amount of liquidated damages is excessively higher than the loss suffered by the buyer, the seller can ask the arbitration body to reduce the amount of compensation; otherwise, the buyer can ask for an increase in the amount of compensation.

Even for disputes over sales contracts of ordinary goods, there are still many ambiguities and disputes in theory and judicial practice on how to deal with related claims. When the subject goods of the sale are virtual currency mining machines, there will inevitably be more problems in the understanding and application of the law, such as the validity of the mining machine sales contract under the legal change environment, whether the buyer is a consumer or a producer, and whether the claim for related losses (especially loss of profit) can be supported.

There are many pitfalls and risks in virtual currency transactions, and the same is true for mining machine sales. How to avoid pitfalls and prevent risks is an issue that both mining machine buyers and sellers, especially buyers, need to pay special attention to. In order to reduce the possibility of risks and reduce losses, mining machine buyers first need to care about and understand the relevant policy guidelines; secondly, when signing a sales contract, clearly stipulate the quantity, price, quality standards, delivery and payment terms of the subject matter, unilateral termination of the contract and liability for breach of contract; finally, in the event that a dispute has occurred, actively collect evidence and seek the help of professional lawyers.

Author: Zhang Ling, Partner at Hanyi Law Firm