Supreme Court Interpretation on Prepaid Contracts: Implications for Consumer-Facing Businesses

Prepaid consumption has become a widespread business model across various industries in China, offering businesses a way to secure upfront capital and build long-term customer engagement. However, it also carries inherent risks—both for consumers and operators. Nearly everbody living in China has come across gyms or hairdressers that granted impressive discounts on memberships in return for substantial advance payments, but closed down and disappeared after only a few months with a large amount of the balance still unused. In response to the rising number of disputes and public concerns, the Supreme People’s Court (“SPC”) has issued an important judicial interpretation aimed at resolving the frequently occurring disputes in the practice of prepaid consumption.

On 13 March 2025, the SPC released the Interpretation on Several Issues Concerning the Application of Law in the Trial of Civil Disputes Arising from Prepaid Consumer Transactions (the “Interpretation”), which will come into effect on 1 May 2025.

With 27 detailed provisions, the Prepaid Consumption aims to clarify the rights and obligations of both consumers and businesses in prepaid transactions and address common challenges such as refund refusals, and malicious shutdowns. For companies operating in consumer-facing sectors, understanding and complying with this Interpretation is critical. Also landlords renting out premises to business operators in the above areas can be subject to liability under the Interpretation.

Key Highlights

Scope of Applicability

The Interpretation applies to disputes in daily consumption sectors such as retail, hospitality, catering, fitness, transportation, hairdressing, beauty services, training, elderly care, tourism, etc., where operators receive prepayments and subsequently deliver goods or services either repeatedly or continuously.

Eligible Claimant

Under the Interpretation, holders of anonymous prepaid cards are expressly granted the right to bring civil claims against operators, and courts are required to accept such cases in accordance with the law.

In addition, where the actual user of a registered prepaid card differs from the name recorded on the card—but can provide preliminary evidence of lawful possession or entitlement—they too may initiate legal proceedings.

Even in the absence of a physical card or formal registration, consumers who can provide prima facie evidence of a prepaid contractual relationship with the operator may pursue civil liability through the courts.

Determination of Liable Operators

The Interpretation clarifies the attribution of liability under common models of prepaid consumer transactions, addressing issues arising from inconsistencies between nominal and actual business operators.

Use of Another Party’s Name or Licence

If an operator has not executed a prepaid consumer contract but permits another party to use its business licence or otherwise permits another party to use its name to conclude prepaid consumer contracts with consumers, such operator shall bear corresponding liability in accordance with the law.

Franchisor and Franchisee Relationships

In the context of commercial franchising under a unified brand or trademark, where the franchisor enters into a prepaid consumer contract with a consumer, the franchisee may bear civil liability if any of the following conditions are met:

• The franchisee has given prior consent to perform obligations under the prepaid contract;
• The franchisee has ratified the prepaid contract after its conclusion;
• The franchise agreement stipulates that the consumer may directly request the franchisee to perform obligations; or
• The franchisee’s conduct gives the consumer reasonable grounds to believe it is bound by the prepaid contract.

Where a consumer has entered into a prepaid contract with a franchisee and seeks to hold the franchisor liable due to infringement of rights, the preceding provisions shall apply mutatis mutandis.

Commercial Landlord Liability for Unqualified Tenants

Where a commercial landlord fails to require the tenant to produce a business licence or proof of qualification, resulting in an unqualified operator collecting prepayments and causing consumer losses, the consumer shall have the right to claim damages against the landlord based on its fault. The landlord may thereafter exercise the right of recourse against the tenant. The extension to landlords is a remarkable liability outreach under the new Interpretation, making it essential for all of them to increas scrutiny over their tenants active in the relevant consumer businesses to prevent misuse.

Invalid Standard Clauses in Prepaid Contracts

The Interpretation invalidates several commonly used contractual terms that unfairly limit consumer rights. Courts will uphold claims where consumers challenge the validity of such clauses, with reference to Article 26 of the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests and Article 497 of the PRC Civil Code:

• Clauses excluding the consumer’s right to unilaterally terminate the contract or to request a refund;
• Clauses that unreasonably restrict the consumer’s right to transfer claims under the prepaid contract;
• Clauses stipulating no replacement in the event of loss of a registered prepaid card;
• Clauses granting the operator the right to unilaterally alter essential terms such as price, type, quality, or quantity of goods or services;
• Clauses exempting the operator from liability for defects or damages;
• Clauses that unreasonably increase the cost of dispute resolution for the consumer;
• Other clauses that unfairly restrict consumer rights, reduce or exempt operator obligations, or increase consumer burdens.

Assignment of Rights

The consumer may assign rights under a prepaid consumer contract. Such assignment shall become effective against the operator upon receipt of written notice. The assignor may request the operator to provide corresponding services such as name change or password modification. This means that a consumer is entitled to assign not only anonymous prepaid cards but also those originally tied to a specific individual. The Interpretation do not further deal with the situation that a certain qualification of the consumer (such as age, gender, physical fitness, etc.) was required to receive the goods or services, and whether or not the same qualification has to be met by the assignee. This will remain a matter of judicial practice. It has to be assumed that the qualification of the assignor must be identical with that of the assignee if the performance of the prepaid consumer contract is subject to specific eligibility requirements due to its nature or if the transfer is prohibited by law.

However, if the prepaid contract stipulates unlimited services during a specified term, and the consumer, in violation of the principle of good faith, maliciously divides and transfers benefits under the guise of assignment for profit, the operator may assert invalidity of the assignment.

Prohibition on Unilateral Modification

Operators must not unilaterally increase prices or reduce service quality without consumer consent. In such instances, the consumer may request continued performance and claim breach of contract liability.

Termination by Consumer

Consumers are entitled to terminate prepaid contracts and seek refunds under the following circumstances:

• A change of business premises materially impedes access to goods or services;
• Obligations under the prepaid contract are assigned to a third party without the consumer’s consent;
• The operator fails to deliver promised unlimited services during the contract term;
• Unforeseen changes: If, following the formation of the contract, there is a material change in circumstances (e.g., consumer’s health) unforeseeable at the time of contracting and not a commercial risk, rendering continued performance manifestly unfair, the consumer may negotiate modification or termination. Failing agreement within a reasonable time, the consumer may petition the court for adjustment or termination;
• Other circumstances under which termination rights are granted by law or contract.

Refund Calculation

In cases where the contract is rescinded, invalidated, revoked, or otherwise rendered ineffective, consumers may request a refund of the remaining prepaid amount plus interest. The refundable principal is calculated as the original prepayment minus the value of fulfilled goods/services.

If the refund is not due to consumer fault, the following rules apply:

• Fulfilled items or services provided at a discount are calculated based on the discounted price;
• Where bonus value is added, the effective discount ratio is calculated based on the ratio of actual payment to the total amount (including bonuses);
• Where a more favourable pricing method is agreed, such method shall prevail.

If the refund is due to the consumer’s reason, the value of fulfilled goods or services shall be calculated based on the original (pre-discount) price. If the consumer claims that such pricing is unreasonable and the operator cannot provide records of transactions at that price, the court may use the prevailing market price at the time and place of contract formation.

If the value of fulfilled goods/services, when calculated at the discounted price, does not exceed the prepaid amount, but exceeds it when calculated at the original price, the operator may not demand the excess from the consumer.

Additionally, where a prepaid consumption contract is rescinded, invalidated, revoked, or otherwise deemed ineffective, and a party seeks compensation for reasonable expenses or other losses pursuant to Article 157 or Article 566 of the Civil Code -concerning the legal effects of invalid, revoked, or ineffective civil legal acts, and the remedial measures for contract termination - the People’s Court shall uphold such claims. However, this does not apply where the contract was terminated due to force majeure or a change of circumstances.

Interest Standards for Refunds

Where the parties have agreed upon an interest calculation standard, such agreement shall apply. In the absence of such an agreement, or where the agreed standard is unclear, the following rules apply:

• If the refund is due to the operator’s fault, interest is calculated based on the one-year Loan Prime Rate (LPR) at the time of contract formation;
• If due to the consumer’s fault, interest is based on the one-year benchmark deposit rate published by the People’s Bank of China.

Interest accrues from the date of contract termination, invalidation, revocation, or ineffectiveness. Where the parties have agreed on a more favorable commencement date or laws provide otherwise, such terms apply.

Refunds for “Unlimited Services”

Where the contract provides unlimited services during its term, the refund shall be calculated in proportion to the remaining performance period after contract termination.

If the operator ceased providing services before termination, the refund is calculated based on the period remaining after the operator stopped service.

If the consumer, for personal reasons, fails to request services within the agreed period, no refund shall be granted.

Seven-Day Cooling-off Period

Consumers may request unconditional refunds within a seven-day cooling-off period after payment unless:

• The consumer had already obtained the same goods or services from the operator;
• The consumer had obtained the same goods or services from another operator at the time of contracting.

Where the parties have stipulated more favorable refund rights, such stipulation shall prevail.

Obligations for Prepaid Card Services

It should be noted that under the cooling-off period, only the principal amount can be refunded, and interest cannot be claimed.

Consumers are entitled to request activation, card replacement, and similar services for prepaid cards with remaining balances. For registered cards, operators must provide loss reporting and reissuance services.

Punitive Damages for Malicious Evasion & Mandatory Liquidation Obligations

To address cases where businesses face operational difficulties and are no longer able to fulfill prepaid obligations, Article 7 of the Interpretation mandates that businesses shall promptly conduct liquidation procedures in accordance with law. If an operator fails to carry out such liquidation in a timely manner, resulting in consumer losses, and the consumer files a claim against the party responsible for liquidation, courts will uphold the consumer’s claim for civil liability.

Given that malicious evasion is a frequent and harmful occurrence in prepaid consumption, Article 23 of the Interpretation provides strong consumer protections. Specifically, if an operator ceases operations after receiving prepayments, fails to deliver goods/services, and maliciously evades refund requests, the consumer is entitled to claim punitive damages. Moreover, where such conduct is suspected to constitute a criminal offense, the court is required to refer the matter to public security authorities for investigation.

Burden of Proof Reversal

A recurring challenge in prepaid consumption disputes has been the consumer’s difficulty in providing evidence. In practice, crucial evidence such as contract terms, transaction records, usage frequency, payment amounts, and remaining balances are almost held by the operator.

To address this imbalance, Article 25 of the Interpretation introduces a burden of proof reversal mechanism. Where the operator controls the contract or relevant records (e.g., consumption history, balance), and unreasonably refuses to submit them, the court may accept the consumer’s claims and deem the facts asserted by the consumer as established.

In tandem with the Interpretation, the SPC has released six representative cases that provide practical guidance on the adjudication of prepaid consumer disputes. Going forward, the Interpretation will serve as a key judicial reference for courts handling such cases. We recommend that business operators engaged in prepaid consumption models across relevant industries, and their landlords, conduct a thorough review of the Interpretation, evaluate existing contractual terms, and strengthen internal compliance mechanisms.

For full text of the Interpretation, please refer to the following link (Chinese only):

https://flk.npc.gov.cn/detail2.html?ZmY4MDgxODE5MjdmMGU3YjAxOTVkMWExYzUyZDAyODc%3D