SPC Interpretation on Prepaid Consumer Contracts – Overview and Key Implications for Businesses

A consumer signing a digital payment terminal, reflecting upfront payment for services. The SPC’s new interpretation addresses legal issues in such prepaid consumption models.

Prepaid consumption has become a widespread business model across China’s consumer industries – from gyms and salons to retail and education – allowing businesses to secure upfront capital and build customer loyalty. However, this model carries significant risks: many consumers have paid large sums in advance (often lured by discounts) only to see the business abruptly shut down and disappear with unused balances. In response to rising disputes and public concern, the Supreme People’s Court (“SPC”) issued a judicial interpretation on 13 March 2025 to clarify the legal framework for prepaid consumer transactions, effective 1 May 2025. This Interpretation – spanning 27 articles – aims to protect consumer rights and deter malpractices (like refusal to refund and malicious business shutdowns) in the advance payment model. Given its broad scope and strict provisions, businesses operating prepaid models must understand the new rules and ensure compliance.

Scope of Applicability

The Interpretation applies to civil disputes arising from prepaid consumer transactions in daily consumption sectors. It explicitly covers industries such as retail, hospitality, catering, fitness, transportation, hairdressing, beauty services, training (education), elder care, tourism, and similar services where consumers pay in advance for goods or services to be provided repeatedly or continuously in the future. In essence, any consumer-facing business model involving prepayment for ongoing or multi-session use of services (e.g. gym memberships, prepaid salon packages, tutoring classes, stored-value cards at shops) falls under this judicial guidance. Businesses in these sectors should note that the Interpretation sets uniform legal standards for resolving disputes over prepaid agreements.

Notably, the Interpretation also makes clear who qualifies as a consumer-claimant in such disputes. Even holders of anonymous or unregistered prepaid cards – common in gift cards or generic membership cards – are allowed to sue the business operator for enforcement of their rights. Courts must accept cases brought by anonymous card holders or by individuals who are not the named registrant on a card, as long as they can show prima facie evidence of lawful ownership or a prepaid transaction relationship. In other words, a business cannot evade liability simply because a prepaid card was not registered to the user’s name – any consumer who can prove they paid in advance for promised services can bring a claim. This inclusive standing is intended to close loopholes where operators previously argued non-registered cardholders had no privity to sue.

Liability of Operators, Franchisors, and Landlords

A core focus of the Interpretation is clarifying who can be held liable in common prepaid business arrangements, particularly when the contracting entity differs from the actual operator. It addresses scenarios such as third-party license use, franchise networks, and even shopping mall landlords:

• Business License Lending: If a company (Operator A) allows another party to use its business license, trade name, or brand to sell prepaid packages to consumers, then Operator A will bear corresponding liability for those prepaid contracts. Even if Operator A did not sign the contract itself, by permitting use of its credentials or name it becomes answerable by law for consumer losses. This prevents shadow arrangements where an unlicensed entity takes payments under the guise of a licensed business.

• Franchise Arrangements: In franchised businesses operating under a unified brand or trademark, the Interpretation allocates responsibility between franchisor and franchisee. If the franchisor (head office) directly entered into the prepaid contract with a consumer, the local franchisee can still be held liable if certain conditions are met, such as: the franchisee consented in advance to perform the contract, ratified the contract afterward, if the franchise agreement allows consumers to demand performance from the franchisee, or if the franchisee’s conduct led the consumer to reasonably believe the franchisee was also bound by the membership contract. Conversely, if a consumer contracts with a franchisee outlet and the consumer’s rights are harmed, the franchisor can similarly be held liable under those conditions by analogy. Practical impact: Franchisors cannot wash their hands of prepaid obligations at franchise stores, and franchisees may be on the hook for head office sales if they behaved as part of a unified scheme. Both sides of a franchise should review how prepaid deals are offered and ensure clarity on who is undertaking the obligation, as courts may impose liability on whichever party (or both) is necessary to make the consumer whole.

• Commercial Landlords: In a striking extension of liability, shopping mall owners or landlords renting space to businesses can be held liable in certain cases. If a landlord leases premises to an unqualified operator (for example, a tenant lacking a valid business license or required permit) and that tenant collects prepaid fees from consumers and then causes consumer losses (e.g. by absconding or defaulting), consumers may claim damages from the landlord on the basis of the landlord’s fault. The logic is that the landlord had a duty to exercise basic due diligence in verifying the tenant’s qualifications. Failing to do so and thereby facilitating an illegitimate business exposes the landlord to joint liability for the harm. The landlord, in turn, is entitled to seek indemnity (recourse) from the tenant afterward. High-level implication: landlords of malls, commercial buildings, or incubator spaces must now vet their tenants’ credentials (business license, permits) when those tenants engage in prepaid consumer businesses. Landlords should incorporate warranty and indemnity clauses in leases and conduct periodic checks, as the law will not allow a “hands-off” approach if an unscrupulous tenant defrauds consumers on their premises.

These liability provisions expand the range of defendants that consumers can target to recover prepaid losses. Corporate groups should be mindful that nominal distinctions (franchisor vs franchisee, licensor vs licensee) will not shield them if they enable the transaction, and even third parties like property owners might be dragged into litigation for failing to prevent illegal operations.

Invalidation of Unfair Terms and Key Consumer Rights

The SPC Interpretation takes aim at standard contract clauses in prepaid agreements that have historically undermined consumer rights. It declares a number of common provisions invalid as unfair, meaning courts will not enforce them and will support consumers who challenge them. Businesses must remove or revise such terms from their contracts. Examples of invalid clauses include:

• “No Refund” or “No Cancellation” Clauses: Any term that purports to waive the consumer’s right to unilaterally terminate the contract or to request a refund of remaining balance is invalid. Consumers cannot be locked in irrevocably; they retain a statutory right to exit the contract under certain conditions (detailed below), regardless of boilerplate language to the contrary.

• Non-Transferability of Credits: Clauses that unreasonably restrict the consumer’s right to transfer their prepaid balance or membership to others are void. Businesses often forbid transfer of prepaid cards or memberships, but the Interpretation protects consumers’ ability to assign their rights (for instance, giving a remaining balance or sessions to a friend or buyer) as a normal contract right. We discuss assignment rules shortly.

• “Card Loss = Loss of Funds”: Any term stating that a lost prepaid card will not be replaced and the balance is forfeited is invalid. For registered cards especially, operators must provide replacement mechanisms. Consumers should not be penalized for the physical loss of a card if they can prove their identity or purchase.

• One-Sided Change Clauses: Provisions allowing the operator to unilaterally alter key terms (such as raising prices, changing service types/quality, or reducing the quantity of goods/services) without consumer consent are void. The business cannot reserve an open-ended right to change the deal after taking the customer’s money. If attempted, consumers can insist on the originally agreed performance and claim breach of contract.

• Liability Waivers for the Business: Clauses that exempt the operator from liability for providing defective goods or causing harm are invalid. A merchant can’t contract out of basic obligations like quality and safety – consumer protection law forbids it.

• Unreasonable Dispute Resolution Costs: Any term that imposes undue burdens on the consumer in dispute resolution – for example, requiring arbitration fees or legal costs far exceeding the prepaid amount – is invalid as it excessively increases the cost for the consumer to seek relief. Contracts must not discourage consumers from pursuing their rights by making the process onerous or expensive.

• Other Overreaching Clauses: A catch-all provision invalidates any term that unfairly restricts consumer rights, reduces or waives the operator’s statutory responsibilities, or increases the consumer’s burdens beyond what is reasonable. This mirrors the general protections of China’s Consumer Rights Protection Law (Article 26) and Civil Code (Article 497) which void unfair standard-form clauses.

Beyond striking down unfair terms, the Interpretation affirms several consumer rights in prepaid dealings. One notable rule facilitates the transfer of prepaid services: consumers are expressly allowed to assign their rights under a prepaid contract to a third party, and such assignment is effective against the business once written notice is given. The original purchaser (assignor) can ask the operator to assist with formalities like changing the name on an account or reissuing a card/password to the new holder. This means membership credits or gift card balances can be legally transferred or resold by consumers, notwithstanding any contract language to the contrary. (The Interpretation does caution that if a membership was for “unlimited” services for a term, a consumer cannot maliciously split and sell portions to profit – doing so in bad faith allows the operator to challenge the transfer’s validity.)

The Interpretation also codifies that operators have certain service obligations to card holders. For instance, if a prepaid card is registered, the operator must provide loss-reporting and reissuance services (so a lost card can be replaced). Consumers can require the business to activate a card, replace a damaged card, or merge balances, etc., for any remaining prepaid value. These measures ensure consumers can fully utilize their prepaid funds without unreasonable hindrance.

Consumer Termination Rights and Refund Standards

Perhaps the most critical aspect for businesses is the set of rules governing when consumers can terminate a prepaid contract and what refunds they are entitled to. Chinese law, as clarified by this Interpretation, provides consumers several grounds to cancel contracts and claim back unused funds, as well as guidelines for calculating refund amounts.

Termination Grounds: Consumers are entitled to unilaterally terminate a prepaid consumer contract (and demand a refund of the remaining balance) under specific circumstances enumerated by the SPC. Key grounds include:

• Material Change of Business Location: If the operator relocates or changes its business premises in a way that materially impedes the consumer’s access to the goods or services, the consumer may cancel the contract. For example, if a gym moves to a faraway district making it impractical for the member to use, the member can terminate and get a refund for the unused portion.

• Unauthorized Transfer of Business: If the operator assigns or transfers the contract obligations to a third party (e.g. selling the business or outsourcing the service) without the consumer’s consent, the consumer can terminate. Consumers sign up expecting a certain provider; if a new entity takes over without agreement, they need not be bound.

• Failure to Provide “Unlimited” Services as Promised: Many prepaid deals offer “unlimited” usage within a period (unlimited classes, unlimited car washes, etc.). If the operator fails to deliver the promised unlimited services during the contract term – for instance by imposing restrictions or shutting down early – the consumer can cancel the contract. Essentially, if the reality falls short of the advertised unlimited access, it’s a breach allowing exit.

• Unforeseen Change of Circumstances: In line with the Civil Code’s general principle of changed circumstances, if after purchase a material change in the consumer’s situation occurs that was unforeseeable and not a normal commercial risk (and continuing the contract would be grossly unfair to the consumer), they may negotiate to modify or terminate the contract. If negotiation fails, the consumer can ask the court to judicially terminate or adjust the contract. The Interpretation specifically cites examples like health issues – e.g. the consumer develops a medical condition that makes it impossible or unreasonable to use the prepaid service. A person who becomes seriously ill, disabled, or (as given in SPC’s press remarks) someone who loses their hair and thus no longer needs a hairdressing service, can seek to cancel and refund on humanitarian grounds. This provision prevents rigidly locking consumers into long-term packages when life circumstances change beyond their control. It’s limited to truly unforeseen, substantial changes (not mere inconvenience).

• Other Statutory or Agreed Grounds: The Interpretation allows termination in any other situations where law or the contract itself provides a right to terminate. This catch-all acknowledges that other laws (or the contract terms) might grant a cancellation right (for example, perhaps a contract says the consumer can cancel anytime with notice – which must be honored).

Apart from these substantive grounds, the SPC has introduced a powerful “cooling-off” period protection. Consumers have a short window after making a prepayment in which they can change their mind for any reason (or no reason) and obtain a full refund. Specifically, within seven days from the date of payment, the consumer may unconditionally cancel the prepaid contract and get their money back, no questions asked. The only exceptions are if the consumer has already started using the service or obtained the same goods/services either from that operator or via another provider by the time of contracting. For instance, if a customer already utilized some sessions in the first week, or if they purchased a second identical membership elsewhere, the operator may deny a no-fault refund. The cooling-off rule essentially gives a one-week remorse period to back out of impulsive or pressured purchases, aligning with broader consumer protection trends. Importantly, if a refund is given under the seven-day rule, it covers the principal amount paid only – no interest can be demanded for that brief period. Businesses should be prepared to honor this 7-day refund right by setting up internal processes to handle immediate cancellations. (If the business wishes to offer an even more generous refund policy, any contract terms more favorable to the consumer will prevail over the baseline law.)

Refund Calculations: When a prepaid contract is terminated or otherwise ended, the Interpretation prescribes how to calculate the refundable amount and any interest. The general principle is that the consumer is entitled to a refund of the unused portion of their prepayment plus applicable interest, after accounting for the value of goods/services actually received. Several detailed rules ensure fairness in these calculations:

• If the termination/refund is not due to the consumer’s fault (i.e. the business breached, or a statutory ground like those above was invoked), then any used services that were provided at a discount should be valued at the discounted rate when deducting from the prepaid amount. Similarly, if the deal included bonus credits (e.g. pay $100, get $120 value), the effective discount ratio should be used. And if the contract had an agreed formula for pricing the used portion upon early termination, that agreed method prevails. These rules prevent operators from retroactively negating the benefit of any discounts the consumer obtained upfront. In short, when the business is at fault, it can’t penalize the consumer by valuing consumed services at full price – the promised deal must be honored in the refund.

• If the refund is due to the consumer’s own reasons (for example, the consumer simply no longer wants to continue, absent any breach by the operator), the used services are valued at the original, non-discounted price. This means a customer who enjoyed discounted services but then opts to terminate may have their usage recalculated at standard rates before refunding the remainder, which is fair since the discount was premised on full commitment. However, if the consumer argues that the standard price used is unreasonable and the operator cannot produce evidence of actual transactions at that price, the court can substitute the prevailing market price at the time of contracting. This guards against fictitious “original prices” being set just to reduce refunds. Additionally, the Interpretation explicitly forbids the operator from demanding any extra payment from the consumer in cases where, by recalculating used services at a higher price, the value of consumed services exceeds what the consumer originally paid. In other words, a terminating consumer will never be asked to pay more money due to a revaluation; the worst-case scenario is they simply get no refund if their usage already equaled or exceeded their payment.

• If a prepaid contract is rescinded, void, or revoked (for legal reasons), similar refund principles apply (return unused portion with interest). Moreover, either party may claim compensation for reasonable costs or losses incurred in reliance on the contract, per Civil Code Articles 157 and 566, which the court should uphold. This might cover things like the cost of materials prepared by the operator or special expenses by the consumer, but no such compensation is allowed if the termination was due to force majeure or a qualified change of circumstances (since those are nobody’s fault).

• For “unlimited service” packages (where the consumer pays a flat fee for unlimited use during a period), the Interpretation sets a special refund method. The refund should be pro-rated according to the remaining time in the service period. For example, if a one-year unlimited membership is terminated after 3 months, roughly 75% of the fee might be refundable (assuming equal distribution over time). If the operator had already stopped providing the service before the contract ended (e.g. closed shop 2 months into the year), then the refund is calculated from the date the service stopped. However, if the consumer simply failed to make use of the service when it was available (e.g. never attended the unlimited classes they paid for, by their own choice), that is not grounds for a refund for the unused period. Non-use by choice doesn’t entitle the consumer to money back once the period expires.

• Interest on Refunds: If the contract or terms specified an interest rate or standard for the funds, that agreement is honored; otherwise the Interpretation provides a default rule. When a refund is due to the operator’s fault (business-caused termination), interest on the refunded principal is calculated at the one-year Loan Prime Rate (LPR) as of the contract’s formation. If the refund is due to the consumer’s reason, interest is calculated at the one-year benchmark deposit rate set by the PBOC (which is typically lower than LPR). Interest accrues from the date the contract ends (termination or judgment date) unless a more favorable date was agreed or provided by law. These interest rules incentivize businesses to avoid being the cause of termination (since they’d owe higher interest), and they standardize compensation for the time the business held the consumer’s money.

Overall, the termination and refund framework is quite consumer-friendly and detailed. Businesses should expect that courts will closely scrutinize their fulfillment of prepaid contracts and will readily permit consumers to exit and recoup funds when justified. Companies must therefore deliver on promised services, avoid unilateral changes, and handle any terminations in strict accordance with these calculation rules.

Enforcement Mechanisms and Legal Remedies

To ensure these rules have teeth, the SPC Interpretation also strengthens enforcement and remedies against operators who misuse the prepaid model. Several provisions directly address the problem of merchants absconding with consumer funds and the evidentiary challenges in these cases:

• Mandatory Liquidation for Business Closures: If a business encounters operational difficulties and can no longer honor prepaid obligations, it is required to promptly carry out liquidation procedures according to law. This implies that struggling companies should formally liquidate or declare bankruptcy, which includes notifying and repaying creditors (including customers with prepaid balances) to the extent possible. If an operator fails to liquidate in a timely manner and consumers suffer losses as a result, consumers can sue the party responsible for the liquidation (e.g. the owner or de facto controller who should have organized the wind-down), and courts will uphold the claim. This provision prevents owners from simply walking away without sorting out the debts – doing so can result in personal liability. Businesses should heed this by having an orderly plan to refund or settle prepaid accounts if they must shut down.

• Punitive Damages for Malicious Evasion: The Interpretation takes a hard line on merchants who maliciously evade refunds by ceasing operations after taking prepayments. If an operator closes shop, fails to deliver the paid-for goods/services, and ignores or avoids consumer refund requests, the court may award punitive damages to the consumer on top of the actual loss. This is a significant deterrent – it means the business might have to pay a multiple of the consumer’s loss as punishment. The aim is to curb the rampant issue of “merchant absconding with prepayments” by making it financially disastrous for the culprits. Additionally, if such behavior appears to constitute a crime (for example, fraud), courts are obligated to refer the case to public security (police) for criminal investigation. The involvement of law enforcement underscores that egregious cases are more than civil breaches – they may be treated as criminal scams. Legitimate businesses will want to avoid even the appearance of evading refunds, as the consequences now include punitive fines and potential prosecution.

• Burden of Proof Reversal: A common hurdle for consumers suing over prepaid contracts has been proving the terms of the deal and how much is unused, because usually the operator controls all the records (the contract, payment receipts, usage logs, etc.). To correct this imbalance, Article 25 of the Interpretation introduces a burden-shifting mechanism. If the business possesses the relevant evidence – such as the text of the contract, transaction history, remaining balance – and unreasonably refuses to provide it to the court, the court is empowered to accept the consumer’s claims as fact. In other words, if the consumer alleges they paid a certain amount or that a certain unfair clause was present, and the company withholds the evidence that could confirm or refute it, the court can presume the consumer’s allegation is true. This puts pressure on businesses to be transparent and cooperative in litigation. Practically, companies should maintain organized records of all prepaid accounts and be prepared to disclose them in court – stonewalling or “losing” the evidence will likely result in losing the case by default. The burden of proof rule significantly bolsters enforcement, as it prevents a dishonest operator from benefiting by simply hiding the paperwork.

These legal tools signal that Chinese courts will actively intervene to protect consumers in the prepaid context. In fact, the SPC simultaneously released six guiding cases illustrating how disputes should be handled under the new rules. The court has also announced coordination with government regulators to police prepaid consumption schemes and “crack down on companies that lure customers into prepaid purchases without delivering services”. This multi-pronged approach – judicial interpretation, guiding cases, administrative oversight, and potential criminal charges – forms a robust enforcement environment.

For businesses, the message is clear: integrity and compliance in prepaid operations are not optional. Those who attempt to exploit upfront payments and then evade their obligations will face severe legal repercussions, while those who follow the rules will contribute to a healthier market with restored consumer confidence.

Practical Implications for Businesses Using Prepaid Models

The new SPC Interpretation has far-reaching implications for companies across consumer sectors that utilize prepaid membership or prepayment models. Corporate clients should treat this as a call to audit and adjust their current practices:

• Review and Revise Contracts: All standard form contracts, membership terms, and user agreements should be reviewed for any clauses that the Interpretation deems invalid. Businesses need to remove or rewrite “no-refund” clauses, non-transferability provisions, loss-of-card waivers, unilateral change clauses, or any broad disclaimers of liability. Continuing to use such clauses not only risks them being struck down in court, but also could attract regulatory scrutiny for consumer rights violations. Instead, contracts should affirm compliant terms – for example, clearly informing consumers of their rights to refunds and termination under the law, and specifying fair dispute resolution processes (with reasonable costs). Companies may also want to include the seven-day cooling-off refund right prominently in their sales contracts or receipts, to demonstrate transparency.

• Implement Compliance with Refund Rights: Operationally, businesses must be prepared to honor the 7-day cooling-off period refunds and the various termination scenarios. This means establishing customer service protocols to handle refund requests promptly and training staff that customers do have the right to cancel in the enumerated situations. For instance, if a customer cites a qualifying reason (like a relocation or a health issue), frontline managers should know that under the law, they likely must process a pro-rata refund. A failure to cooperate could end up in court with the company losing and possibly paying extra damages. It’s advisable to create internal guidelines or standard operating procedures for evaluating refund requests in light of the SPC’s criteria.

• Financial Planning and Segregation of Funds: One practical effect of easier termination and refund rights is that businesses can’t assume all prepaid revenue is “locked in.” Companies should budget for potential refunds and perhaps avoid spending all prepaid funds immediately. In some industries, we may see a move toward escrow or reserve funds for prepayments, to ensure money is available to cover refunds if needed. At minimum, the risk of punitive damages for mishandling prepayments and the requirement to liquidate if insolvent suggest that treating consumer prepayments as a short-term interest-free loan or operating capital is dangerous. Sound financial management (such as insurance or bonding against prepaid liabilities) will be increasingly important.

• Franchise System Oversight: Franchisors should re-examine how prepaid packages are sold across their network. If the franchisor is directly selling memberships that franchisees are expected to honor, the franchisor should obtain franchisee consent and clearly document each party’s responsibilities – otherwise franchisees might later claim they never agreed, yet still be held liable by law. Likewise, franchisors might consider monitoring franchisee-run prepaid promotions, since a franchisee’s misconduct could implicate the franchisor under the mutatis mutandis application of these rules. Uniform refund policies and a centralized system for handling consumer complaints in a franchise network could help mitigate disputes. In essence, franchisors and franchisees need to cooperate closely to ensure compliance, as neither can entirely escape liability when one of them deals with consumer prepayments.

• Landlord Due Diligence: Commercial landlords leasing to high-risk sectors (gymnasiums, spas, training centers, etc.) should start treating consumer protection as part of their vetting process. Verifying tenants’ business licenses and qualifications is now a must. It would be prudent to keep copies of tenant licenses on file and maybe even monitor if a tenant’s license expires or is revoked during the lease term. Lease agreements might be updated to include representations from the tenant that they will comply with consumer protection laws (including handling of prepayments), and an indemnity if the landlord is sued due to the tenant’s fault. Landlords may also consider requiring a form of security or deposit from such tenants that could cover consumer refunds in the event of sudden closure. This new risk exposure means property owners cannot be passive – they should actively avoid harboring fly-by-night operators on their premises.

• Record-Keeping and Evidence: In anticipation of the burden of proof rules, businesses should maintain thorough records of each prepaid transaction, all contract versions, and usage logs. Implement robust IT systems or backup processes to ensure that if a dispute arises, the company can readily produce the evidence (receipts, signed contracts, communication of terms, etc.). Should a dispute go to court, having clear evidence to counter any unfounded claims is crucial – and conversely, refusing to disclose records will likely result in a legal presumption against the business. Transparency can save companies from adverse judgments.

• Plan for Lawful Exit: If a company using the prepaid model finds itself in financial trouble, it must remember its legal obligation to liquidate properly rather than simply locking the doors. Directors or owners should engage legal counsel for a wind-down strategy that prioritizes notifying consumers and refunding as much as possible, to avoid personal liability. Regulators and courts are now on high alert for “midnight runs” by business owners with prepaid money – such antics could lead not only to civil penalties but also criminal charges of fraud. It’s better to handle closures in an orderly, lawful manner, even if that means publicly admitting insolvency, rather than trying to quietly vanish.

• Building Consumer Trust: On a more positive note, companies that comply with the new rules can use it to build trust. Embracing fair refund policies, providing transparent terms, and promptly honoring customer rights will distinguish reputable businesses from the bad actors who caused this crackdown. Over time, a compliant prepaid business may find that consumers are less hesitant to pay upfront because they know their money is safer under the new legal framework. Thus, a short-term adjustment in practices could yield long-term goodwill and a more sustainable customer base.

In conclusion, China’s SPC Interpretation on prepaid consumption contracts represents a significant development in consumer law, directly impacting any business that takes advance payments for future services. It standardizes protections nationwide, making clear that consumer prepayments remain the consumer’s money until actually earned by performance. Corporate clients in the affected sectors should proactively align their contract terms and operations with these requirements. By doing so, businesses not only avoid legal pitfalls – such as invalid clauses, litigation losses, or punitive damages – but also contribute to a more trustworthy market environment. The SPC’s move signals that the era of easy profits from prepaid schemes without accountability is over; going forward, prepaid models must be managed with legal diligence and respect for consumer rights. Companies that adapt to these higher standards will be better positioned to thrive in an environment of greater consumer confidence and regulatory oversight