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Monday, August 22, 2011

New Supreme People's Court judicial interpretation on the Marriage Law

The Supreme People's Court has just promulgated a new judicial interpretation of the Marriage Law. A large part of it is about how to deal with real property upon divorce. By and large the rules seem sensible to me as a matter of economic principles. For example, each party can keep assets that they brought into the marriage, as well as interest on those assets, but (at least as I read the interpretation) accretions to value attributable to the joint efforts of the partners (including one spouse's staying at home to look after the children while the other works to improve the asset's value) are subject to the rules on marital property.

Wang Yong, a professor at China University of Politics and Law, is not happy with Article 10 of the interpretation, and denounces it here as harmful to women and destructive of marital trust. Article 10 of the interpretation deals with the following kind of real property: one party (usually the husband - call it Party A) signs the purchase contract before the marriage, and makes the initial payment and has the property registered in his name. [NOTE (Sept. 4, 2011): The preceding sentence has been revised to correct a mistake in the original post.] During the marriage, the mortgage payments are made from marital property. Upon divorce, if the parties do not otherwise agree, the property stays in the name of Party A. That party assumes the remaining debt. The other party (call him or her Party B) gets a share of the value in the form of a debt owed to them by Party A.

Let me say first off that it's not completely clear to me that the interpretation calculates correctly the amount Party B should get. Assume for simplicity's sake that both parties contributed equally to the pre-marriage down payment. All post-marriage payments should be deemed to come from marital property, which is presumptively owned in equal shares by the parties. Let's assume that the down payment was 100,000 yuan on a sale price of 1 million yuan, so the couple borrowed 900,000. And further assume that in the course of the marriage the parties paid off 400,000 of the debt from marital earnings, so the remaining debt is 500,000. And finally, let's assume that the residence is now worth 2 million. If the principle is to give the house to Party A and give fair compensation to Party B, then we should give Party B half of the couple's equity in the house: (2,000,000 - 500,000) / 2 = 750,000. If Party A made the initial payment alone, then we must first subtract from 2,000,000, and return to Party A, an amount equal to the initial payment plus the opportunity cost of that payment, which could mean (a) a reasonable rate of interest or (b) a rate equal to the appreciation of the residence's value - this is a policy choice, not a self-evident economic one.

I'm not sure Article 10 does that. It says that Party B should get a share of the appreciation, but it also seems to say that Party B should get some compensation for her (it's most likely the wife) share of mortgage payments made during the marriage. This seems to me liable to lead to double counting.

This is not Prof. Wang's objection (it would work in Party B's favor, in any case). His objection is that this treats what ought to be marital property essentially the same way as property brought into the marriage by either spouse, thus rendering the marital property regime for the residence essentially meaningless. He doesn't quarrel with the economic calculation, but says that Party B is put in a disadvantageous position by having to be the plaintiff in requesting her fair share of the value: she has to pay the legal costs of defending her interests and she has to bear the burden of proof, while Party A can enjoy the benefits of passivity.

There is something to this, if the courts choose to deal with the issue that way.  I note, though, that the interpretation says that courts "may" (可) treat the residence in this way. I see nothing in the interpretation that would prevent the court from treating the issue of property division together with the issue of compensation - that is, telling Party A that he can get title to the residence provided, and not until, he gives appropriate compensation to Party B.

Prof. Wang makes a good point when he notes that despite the SPC's professed intention of bringing the Marriage Law into line with the Property Law, Article 10 is actually inconsistent with the Property Law's treatment of the division of jointly-owned property. According to Article 100 of the Property Law, where jointly-owned property can't be easily divided, or where doing so would impair the value (clearly conditions that apply to a jointly-owned apartment), it should be sold or auctioned, with the proceeds divided among the joint owners (each of whom could, of course, bid at the auction). This is an easy way of maximizing the value of jointly-owned property in a way that neither party can complain about (assuming they have easy access to credit, which might not be true).

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