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In recent years, with the rapid development of the private fund industry, against the current backdrop of growing economic fluctuations and increasing investment contingencies, disputes between investors and relevant parties including private fund managers have become increasingly frequent. In view of this, the author, from the perspective of investors, elaborates on the resolution strategies available to investors in the event of private fund disputes and the potential difficulties they may encounter.

I. Basic Concepts

(I) Private Investment Funds, Relevant Institutions and Practitioners

1. What is a private fund?

Private Investment Fund (hereinafter referred to as "Private Fund") refers to the investment fund established by raising capital from investors via non-public offerings within the territory of the People's Republic of China. It is mainly categorized into private securities investment funds, private equity investment funds, venture capital funds and other private investment funds.

2. Participating Parties in the Fundraising, Operation and Exit of Privately Offered Funds

The processes of fundraising, investment and operation of private funds involve the joint participation of a multitude of entities. The participation of multiple entities not only gives rise to multi-party collaboration as well as mutual checks and supervision among all parties, but also leads to complicated and diversified legal relations. A clear understanding of the definition, status and functions of each entity involved in private funds enables investors to accurately assert their rights against the actual liable party in the event of disputes related to private funds.

Private Fund Unit Holder: Refers to a person who becomes the capital contributor of a private fund, the owner of fund assets and the beneficiary of the fund's investment returns by purchasing private fund units. Pursuant to the contract and relevant laws and regulations, the holder enjoys rights in respect of the private fund including the right to proceeds from assets, the right to information, the right to participate in decision-making and the right of withdrawal, and assumes obligations such as making capital contributions and bearing risks on its own. Private fund unit holders shall be qualified investors.

Private Fund Manager refers to an institution that, by virtue of its specialized knowledge and experience, utilizes the assets of funds under its management, makes investment decisions in accordance with the principles of scientific portfolio investment pursuant to the provisions of laws, regulations, fund articles of association or fund contracts, seeks continuous appreciation of the fund assets under its management, and enables fund holders to obtain as much proceeds as possible. As the raiser and manager of fund products, it manages fund property under entrustment, shall perform its fiduciary duties in a diligent, loyal and prudent manner, and has the right to collect corresponding remuneration in accordance with the agreement.

Private Fund Custodian: refers to the party that, in accordance with the provisions of laws and regulations and the custodian agreement, performs duties including asset custody, transaction supervision, information disclosure, fund clearing and accounting during the operation of private funds. It is generally assumed by a commercial bank or any other financial institution approved by the China Securities Regulatory Commission (CSRC), and shall undertake duties such as asset custody and transaction supervision.

Fund Sales Agency: Refers to an institution that is registered with the China Securities Regulatory Commission or its local offices, obtains the qualification for fund sales business, accepts entrustment from fund managers, acts as an agent to sell fund products, and charges sales commissions.

Private Fund Practitioners Pursuant to the *Securities Investment Fund Law of the People's Republic of China*, fund practitioners shall possess fund practitioner qualifications, and the authority is delegated to the Asset Management Association of China to conduct qualification administration for fund practitioners. During the processes of private fund fundraising, investment, operation and other relevant links, all related activities are actually implemented by practitioners. The duty-related acts performed by the aforesaid practitioners constitute one of the important bases for imputing liability to relevant entities.

II. Analysis of the Right of Claim from the Perspective of Investors

When a dispute arising from a private equity fund occurs, the top priority for the parties concerned is to resolve the dispute. The methods and channels of dispute resolution shall be subject to specific analysis in light of the merits of each case, and the most appropriate dispute resolution method shall be selected according to the specific circumstances of individual cases.

(I) Right of Claim and Its Effects

1. Right of Claim Arising from a Contract

The core of a right of claim based on a contract is the contract itself. In disputes involving investors arising from private equity funds, such contractual rights of claim vary according to specific circumstances and different subjects.

(1) Scenario 1: Claim for Rescission of Contract

Right to Rescind a Contract by Agreement: Pursuant to Article 562 of the Civil Code of the People's Republic of China, "The parties may rescind a contract if they reach a consensus through consultation. The parties may agree on the grounds for rescission of the contract by one party. When such grounds occur, the party entitled to the right of rescission may rescind the contract."

Out of consideration for the stability and interests of the fund, the Fund Manager rarely sets out provisions on circumstances for termination by agreement in the *Fund Contract*, except that investors are entitled to a 24-hour investment cooling-off period after the signing of the *Fund Contract* and have the right to rescind the contract prior to the successful return visit confirmation by the fundraising institution.

Statutory Right of Rescission: Pursuant to Article 563 of the *Civil Code of the People's Republic of China*, a party may rescind the contract under any of the following circumstances: (1) The purpose of the contract cannot be realized due to force majeure; (2) Prior to the expiration of the performance term, one party explicitly states or indicates by its conduct that it will not perform its principal obligation; (3) One party delays performance of its principal obligation and still fails to perform within a reasonable period after being urged to perform; (4) One party delays performance of its obligation or commits other breach of contract, rendering the purpose of the contract unrealizable; (5) Other circumstances as prescribed by law. The core criterion for determining whether the statutory right of rescission is established lies in whether the purpose of the contract can be realized, for which relatively strict standards are adopted in China's judicial practice. For example, if a private fund manager fails to complete fund raising, resulting in the failure to realize the purpose of the contract, the investor may rescind the private fund contract by exercising the statutory right of rescission.

Legal Effects of Rescission of Contract: Pursuant to Article 566 of the Civil Code of the People's Republic of China, after a contract is rescinded, obligations that have not been performed shall cease to be performed; for obligations that have been performed, the parties may, in light of the performance circumstances and the nature of the contract, request restoration to the original status or adopt other remedial measures, and shall have the right to claim compensation for losses. Where a contract is rescinded due to breach of contract, the holder of the right of rescission may request the breaching party to bear liability for breach of contract, unless otherwise agreed by the parties. Accordingly, where a private fund contract is rescinded, the investor may request the fund manager to return the principal and interest of the investment.

(2) Scenario 2: An investor enters into the **** Private Fund Contract with a private fund manager. Where the private fund manager breaches the contractual provisions, it shall bear the liability for breach of contract.

As a party to the *Private Fund Contract*, the fund manager shall bear corresponding obligations pursuant to the contract. The specific obligations assumed by the fund manager may be stipulated and described differently in different fund contracts. However, in light of laws, regulations, judicial precedents and other relevant bases, the obligations of a private fund manager cover at least four categories, namely the suitability obligation, the obligation of good faith, the obligation of diligence and due performance of duties, and the obligation of information disclosure. In judicial proceedings, the specific obligations that the fund manager has violated shall be determined on a case-by-case basis in accordance with the fund contract and relevant facts.

Pursuant to Article 577 of the Civil Code of the People's Republic of China: "Where a party fails to perform its contractual obligations or the performance of its contractual obligations does not conform to the agreement, it shall bear liability for breach of contract such as continuing to perform the obligations, taking remedial measures, or compensating for losses." Where a fund manager commits a breach of contract, the investor may claim compensation for losses against the said fund manager. The adjudicating authority shall, in accordance with factual evidence, the breach of contract committed by the fund manager and the losses incurred by the investor, rule on the final proportion of liability to be borne by the fund manager, that is, liability for full or partial losses.

Under Scenario II, it shall be noted that the dispute resolution clause in the *Private Fund Contract* specifies the dispute resolution method, for example: "The parties hereto agree that for all disputes arising from or in connection with this Contract, the parties to the Contract shall... Where no settlement is reached through friendly consultation, the parties hereto agree that any dispute arising from or in connection with this Agreement shall be submitted to the [ ] Arbitration Commission for arbitration in accordance with the currently effective arbitration rules of the Commission as of the date of the arbitration application." Generally, private fund managers will stipulate dispute resolution by means of arbitration in the aforesaid contract. For private fund managers, arbitration has at least three advantages: 1. Arbitration is confidential. Even if such negative disputes between investors and managers befall the manager, such disputes will not be easily known to the public; 2. The cost of arbitration is higher than that of litigation, which constitutes another dilemma for investors who initiate litigation on their own initiative; 3. In terms of substantive hearing procedures, arbitration may attach less importance to the balance of social interests and the protection of vulnerable groups than people's courts.

(3) Scenario 3: Where an investor and a sales institution establish a legal relationship of entrusted wealth management contract, the sales institution that breaches the contractual stipulations shall bear the liability for breach of contract.

In actual judicial practice, investors often not only seek to hold the fund manager liable, but also pursue liability against the fund distribution institution that recommended the said investor to subscribe to the fund.

Holding sales institutions liable not only avoids the constraints of numerous terms unfavorable to investors in the fund contract, such as the arbitration clause agreed upon in the dispute resolution provisions; but also enables investors to independently select the party with higher solvency. Furthermore, it conforms to the natural perception of investors that the party introducing and promoting the said fund to them shall bear corresponding liabilities.

In the distribution of some privately offered funds, the fund manager generally entrusts a fund distribution institution to conduct agency sales of the funds. A principal-agent relationship exists between the fund manager and such agency distribution institution, while in most cases, there is no written legal document between the investor and the aforesaid distribution institution.

Pursuant to Article 178 of the *Civil Code of the People's Republic of China, where two or more persons bear joint and several liability in accordance with the law, the obligee shall have the right to request some or all of the persons subject to joint and several liability to assume such liability. Meanwhile, pursuant to Article 74 of the *Minutes of the 9th National Civil and Commercial Trial Work Conference of the Supreme People's Court, where the issuer and seller of a financial product fail to fulfill their suitability obligations, resulting in losses incurred by a financial consumer in the process of purchasing the financial product, the financial consumer may either request the issuer of the financial product to assume compensation liability, or request the seller of the financial product to assume compensation liability, and may also, in accordance with the provisions of Article 167 of the *General Provisions of the Civil Law of the People's Republic of China, request the issuer and seller of the financial product to assume joint and several compensation liability.

Although no written legal document exists to confirm the relationship between the investor and the fund sales institution, the fund sales institution has de facto established a legal relationship of entrusted wealth management with the investor through its fund promotion activities conducted to the investor. Pursuant to the aforesaid provisions, where a sales institution violates its due obligations, namely the suitability obligation to recommend fund products consistent with the risk appetite of qualified investors, the sales institution shall bear corresponding liabilities for its breach of contract.

2. Right of claim arising from culpa in contrahendo

Pursuant to the *Minutes of the National Conference on Civil and Commercial Trial Work of the People's Courts of China* (the "Nine Civil Conference Minutes") and relevant judicial interpretations, the suitability obligation is explicitly specified as a pre-contractual obligation. A breach of such pre-contractual obligation may give rise to a claim for negligence in contracting. According to the Nine Civil Conference Minutes, the liable subjects may cover financial institutions including fund managers, fund sales institutions and advisory institutions, which shall bear the liability for negligence in contracting.

However, in current academic theory, there remains certain controversy as to whether the suitability obligation is a statutory obligation, a pre-contractual obligation or a contractual obligation in nature. Divergent views also exist concerning the liability arising from the breach of the suitability obligation.

The suitability obligation, a key focus of current disputes over private investment funds in China, will be emphatically discussed by the author in the next chapter and will not be elaborated herein for the time being.

3. Right of Claim Arising from Tortious Acts

From the perspective of the standard order of right of claim retrieval, the priority ranking of the right of claim under tort actions is subordinate to that of the contractual right of claim. As evidenced by court judgment data, investors primarily file lawsuits with courts on the ground of breach of contract. However, the specific choice of right of claim for rights protection shall still be determined comprehensively in light of the actual situation and evidentiary materials. Therefore, it is still necessary to understand the action for tort damages involved in private fund disputes in this regard.

Pursuant to Article 1165 of the Civil Code of the People's Republic of China, where an actor infringes upon the civil rights and interests of another person due to fault and causes damage thereto, the actor shall bear tort liability.

An action for tort damages, as a type of tort action, shall comply with the provisions of tort law on the constituent elements of tort. The constituent elements of tort damages are as follows: unlawful act, fact of damage, causation, and subjective fault.

In an action for tort, the tortfeasors may include such parties as fund managers, fund distribution institutions, and even fund custodians.

As regards the aforesaid subjects, their tortious acts vary depending on the specific category of the subject concerned.

1. Tortious acts of the fund manager: such as negligence in investment, failure to perform information disclosure obligations, failure to complete filing formalities, etc.

2. Tortious acts of sales institutions: such as failure to perform the obligation of suitability, and sales personnel recommending fund products in violation of regulations.

3. Torts committed by the fund custodian: such as failure to perform supervisory duties, etc.

A comparison between an action in tort and an action for damages arising from breach of contract or culpa in contrahendo:

In terms of the scope of compensation, an obligation arising from tort usually only covers direct property damage and excludes indirect property damage (i.e. loss of expected interests), while an obligation arising from breach of contract covers all types of actual property losses. Multiple judgments have ruled that while fund managers shall compensate investors for their principal, they shall also pay contemporaneous bank deposit interest and even the expected returns stipulated in the fund contract.

From the perspective of burden of proof, pursuant to Article 75 of the *Minutes of the 9th National Work Conference on Civil and Commercial Adjudication of the People's Courts of China* (commonly known as the "Nine Civil Conference Minutes"), the burden of proof shall be reversed to be borne by financial institutions including asset managers and sales institutions. However, the aforesaid Minutes apply to disputes over entrusted wealth management contracts as the cause of action, and there are doubts as to its applicability in cases involving tort liability for damages. Some courts require asset managers to adduce evidence to prove their absence of fault, while other courts require investors to bear the burden of proving the existence of fault.

However, tort actions still have their unique advantages: parties such as fund custodians may be listed as joint tortfeasors and accordingly named as co-defendants.

(II) Summary

Different rights of claim are premised on different legal bases, impose varying degrees of legal requirements on investors, and produce distinct legal effects. When a party encounters a private equity fund dispute, the selection of the right of claim to exercise shall be made on the basis of facts and in light of actual circumstances. Through summarization and sorting, this paper has formulated a "Rights Protection Roadmap" applicable to investors dealing with private equity fund disputes, which can help investors select appropriate rights protection instruments under different circumstances.