Abstract
The acquirer, as a licensed third-party payment institution, is legally obliged to ensure the transaction and financial security for merchants. The acquirer is liable for compensation commensurate with its fault if a merchant suffers financial losses because of its failure to reasonably perform its obligation to review merchant onboarding documents and its failure to create settlement account as required.
Basic Facts
In January 2018, Qiu X, a sales manager at a real estate company, applied for bank card acquiring services to a payment network service provider (the “service provider”) in the name of the company using a forged common seal, and set up the POS settlement account as his/her personal account. From January 2018 to February 2019, Qiu X, via the POS machine, raked in a total of more than RMB 142 million from homebuyers intended for the real estate company. After the event, the real estate company either fulfilled its obligation to deliver house or refunded the purchase price to buyers. Then the real estate company sued the service provider for compensating the losses caused by its illegal opening of POS account and argued that the service provider’s parent, a bankcard information service company, should be jointly and severally liable therefor citing confusion of corporate personality. In response, the service provider contended that it provided the POS settlement services as agreed at no subjective fault, thus not committing a tort; that the plaintiff has no standing to sue, as the real estate company was not the direct victim of Qiu X’s illegal act, whereby Qiu defrauded and misappropriated payments from homebuyers, and the tort liability is not eligible for transfer; and that the real estate company should be solely liable for its losses, as it knowingly disregarded Qiu X’s collection of payments using his/her personal account.
Holding
On October 28, 2021, the Shanghai Financial Court (the “Court”) issued a civil judgment ((2019) Hu 74 Min Chu No. 3047): (1) ordering the defendant service provider to pay RMB 61,293,562 in damages to the real estate company; (2) dismissing the remaining claims of the plaintiff real estate company. After pronouncement of this judgment, both the real estate company and the service provider appealed. On May 23, 2023, the Shanghai High People’s Court issued a civil judgment ((2021) Hu Min Zhong No. 1287), dismissing the appeal and affirming the original judgment.
Reasoning
The Court opined that the existing evidence did not suffice to prove the real estate company’s authorization to Qiu X for applying for relevant payment services and collecting payments on its behalf. Although the POS machine concerned was applied in the name of the real estate company, the application, being not the company’s true intent, is not legally binding on the company.
Regarding whether the service provider should be liable for tort damages. First, the service provider processed the payment services application in question in violation of regulations, constituting a tort. According to the Measures for the Administration of Bank Card Acquiring Services, the service provider is obliged to review a merchant’s application information, conduct an on-site inspection, and set up a settlement account as required when the merchant applies for POS acquiring and payment services. But in this case, the service provider failed fulfil the above obligations, including: (1) it failed to properly verify Qiu's scope of authorization, instead setting both the merchant contact and financial contact for the real estate company as employees of the above bankcard information service company; (2) it failed to conduct an on-site inspection of the real estate company, uploading photos to its information system that are not the real estate company's true business premises; and (3) it illegally created the settlement account as Qiu X’s personal account and subsequently changed the account twice as per Qiu’s directions. Second, as the service provider's illegal processing and failure to exercise duty of reasonable care facilitated Qiu’s misappropriating payments from homebuyers by virtue of its business loopholes, resulting in severe consequences, it should be deemed grossly negligent. Third, the real estate company, though not received the payments made via the POS machine, either delivered houses to buyers or refunded purchase price to them pursuant to relevant settlement agreements or judgments. Therefore, the company had already sustained losses and is a direct victim of the service provider’s illegal act. Qiu refunded part of the house payments to the real estate company. According to an audit, the company’s actual losses amounted to RMB 102,155,937. Fourth, although Qiu’s misappropriation was the root cause of the real estate company’s losses, the service provider’s illegal act served as a necessary condition for this misappropriation. Therefore, it followed that a direct causation exists between the company’s tort and the real estate company’s financial losses. In view of the above, the service provider should be liable for damages in tort as its illegal processing of payment services application caused harm to the real estate company’s lawful interests.
Regarding the scope of the service provider’s compensatory liability. To determine the scope, a comprehensive consideration should be given to the fault (if any) on the part of the real estate company, the degree of fault from the parties, and their causative potency in causing the damage. The real estate company was also at fault for causing the damage, which is mainly reflected as follows: (1) the company failed to properly manage the custody and use of its licenses, permits and other documents, as evidenced when Qiu applied for the POS machine using its business license, legal representative’s passport, and account opening license; (2) the company failed to duly manage its housing contract system and to promptly notice overdue payments though the payment schedule and the liability for overdue payment are stipulated in its preliminary housing purchase contracts and housing sale contracts with several buyers. As a result, it failed to identify Qiu’s suspected crime in a timely manner, leading to expanded scope of losses; and (3) the company fails to appropriately manage UnionPay POS transactions, including the use of POS machine and verification of payer identities, which exposed deficiencies in the payment process and facilitated Qiu’s suspected crime. By contrast, the service provider failed to duly review account-opening materials and enforce the regulatory requirement of on-site inspection, and most vitally, created the settlement account in violation of regulation. These acts were the main reason why Qiu could misappropriate the funds and caused losses to the real estate company. The real estate company, due to its mismanagement, is also at certain fault for causing the damage and hence should be partly liable for its losses. To conclude, considering the parties’ degree of fault and causative potency in causing the damage, the Court decided in discretion that the service provider should be liable for 60% of the damages to the real estate company.
Significance
This case concerns a dispute where an acquirer activates POS acquiring services for a merchant without requesting authorization documents and illegally creates the settlement account as the suspect’s personal account, leading to financial losses for the merchant. The Court ruled that the acquirer, as a licensed third-party payment institution, is legally obliged to ensure the transaction and financial security for merchants. Specifically, the acquirer should be primarily liable for the losses caused by its failure to perform its obligation to review merchant onboarding documents and illegal creation of the settlement account; while the merchant should be partly liable for the losses based on its degree of fault. This judgment addresses a rule-absent aspect of bank card acquiring legal relation, namely illegal funds settlement between acquires and merchants (i.e., at the payee side). It can serve as a model for determining the apportionment of liability between third-party payment institutions and users.
Copyright (c) 2018 Shanghai Financial Court China Disclaimer
