Legal Applications of “Clean Hands Rule” to Shareholder Brought Actions

(By Bai Lituan)

What is “clean hands rule”?

The “clean hands rule” that came from the UK equity law deprives a person acting in an improper way of the right to seek remedies for their acts. A person acting in a way that violates the principles of “justice, conscientiousness, fairness, etc.” in equity law cannot seek remedies in a court under an equity law jurisdiction. The clean hands rule is generally accepted in international business arbitration and reflected by provisions of the Chinese Civil Code. For example, Article 591 provides that if a party violates the contract, the other party should take appropriate action to prevent loss increase or otherwise could not claim for the loss increase. Based on this provision, if a party does nothing to prevent the increase in damages caused by the other party breaching the contract, the non-breaching party will have no right to win the action for the loss increase with its hands not clean. In addition, articles 680 and 1125 of Civil Code implicitly follow the clean hands rule which for example is applied in Chinese cases of buying false products deliberately where the buyer will not be awarded a refund for and damages of three times the price of false products they bought because their hands are not clean and their acts are not protectable by law.