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CONTRACT LAW OF THE PEOPLE'S REPUBLIC OF CHINA

National People's Congress Promulgation Date: 1999.3.15 Effective Date: 1999.10.1 

|Article 1-20 ||Articel 21-59||Articel 60-100 |

|Articel 104-149||Articel 150-184||Articel 185-286|
|Article 287-316||Article 317-380 |Article 381-428|

After almost six years of deliberations the National People's Congress (NPC) has passed a new Contract Law (New Law) that is due to come into effect on October 1 1999. The New Law overhauls the legal framework regulating contractual relations in the PRC. The most significant changes are discussed in this article.

Introduction

The New Law has been termed the 'unified contract law' as it is intended to unify and replace China's existing contract laws, most notably by making foreign and domestic contracts subject to the same legal framework. In this regard, Article 428 of the New Law provides that the Economic Contract Law, the Foreign-Related Economic Contract Law and the Technology Contract Law (which at present form the body of contract law in the PRC) will become null and void when the New Law comes into effect. However it is important to note that Article 123 provides that in the event other laws govern specific provisions in a contract, such provisions shall prevail. For example, where there is a dispute relating to a shipping contract, the parties concerned should consult the relevant provisions in the Maritime Law first. Only if that law does not contain provisions governing the matter in dispute should the New Law be consulted.

Most legal practitioners have hailed the New Law as a leap forward toward a more predictable and safer business environment. Only time will tell.

General Characteristics

The New Law consists of 23 chapters and 428 articles. The first eight chapters comprise general principles of contract law. The remaining 15 chapters deal with specific principles and classify contracts into categories including sales, loans, leasing, finance leasing, construction, transportation, technology, agency and supplemental provisions. Excluded from the New Law are contracts governed by other legislation such as insurance and assignment of foreign-related intellectual property rights.

Significant Provisions

Standard term contracts
The provisions in the New Law relating to standard terms are important as they may have a great effect on businesses that use standard form contracts in their day-to-day dealings. The New Law is biased toward protecting the party that is presented with a standard form contract and requires the party relying on standard terms to abide by the principle of fair dealing. The contract holder must draw the other party's attention to the provisions that limit or exclude liability and must explain them on request. More importantly, the New Law provides that in a dispute relating to the interpretation of a standard term, the interpretation should be interpreted in favour of the party that did not draft the contract. In addition, if a discrepancy exists between a standard term and a non-standard term, the non-standard term shall prevail.

All contract terms, including standard terms, will be held invalid if they attempt to exclude liability for (i) property damage caused by intentional misconduct or gross negligence or (ii) personal injury. Accordingly, parties who in the past have drafted their contracts to include clauses that limit or exclude liability in such cases will need to stop including these terms in order not to fall foul of this prohibition. In order to prevent confusion and disputes, clauses that limit or exclude liability in other situations should be written in very clear and simple language. They should be printed in bold letters and should, perhaps, even be explained in a separate leaflet that accompanies the standard form contract.

Oral contracts
Under the current law, all foreign contracts must be in writing. Oral agreements between domestic entities are enforceable only if performance is to take place immediately after entering into the agreement.

From October this year, the New Law will permit oral contracts made with foreign entities so that contracts will be need to be in writing only when specified by other legislation.

Formation of the contract
The New Law contains extensive provisions pertaining to the elements necessary to form a contract - conforming PRC legislation with the United Nations International Sale of Goods Convention.

Under the New Law, an offer must be specific, have definite terms, and show the offeror's intention to be bound. It shall take effect when it arrives with the offeree, but may be withdrawn before or at the same time it is received by the offeree. It may also be revoked, provided that the offeree receives notice of revocation before accepting the offer. An offer may also lapse in certain circumstances (e.g., when the offeree fails to accept the offer before expiry of the term of acceptance or makes material changes to the offer).

Contracts are generally formed in the place where the acceptance takes place. However, signed and sealed written contracts are deemed to be formed where the parties signed or sealed the contract.

The New Law provides that a material difference in the content of the acceptance will constitute a counter-offer. An acceptance with a non-material difference in content may be considered valid and its content shall prevail as the content of the contract, unless the offeror makes a timely refusal. Consequently, if the offeror did not make the offer conditional upon the offeree making no changes, he must be careful when receiving an acceptance to check that it contains no unwanted, non-material changes.

Whether or not consideration is required to form a valid contract, remains questionable under the New Law as there are no specific provisions on this subject.

Fraudulent contractual negotiations
The New Law contains provisions regarding fraudulent contractual negotiations. A party will be liable for damages if during the course of negotiating the contract that party engaged in one of the following:

  • negotiated in bad faith under the pretext of concluding a contract;

  • willfully concealed material facts relating to the conclusion of the contract or provided false information;

  • engaged in any other conduct that violates the principles of fair dealing and good faith.

Confidentiality
The New Law provides that a party may not disclose or improperly use the confidential technical or business information acquired during the course of contract negotiations. If a party does disclose or improperly use such information, that party will be liable for damages.

Agents
The New Law includes significant changes regarding agents' authority to enter into contracts. Generally, if an agent enters into a contract without the authority of his principal, the contract shall be deemed valid if the other party had reason to believe that the agent had the principal's authorization. The principal may, however, seek to make the agent responsible for performance, or the agent may request that the principal approve the contract. If the principal does not approve the contract within one month of this request, the principal will be deemed to have refused to approve.

Imputation of terms
The New Law provides that where the parties to a contract fail to state clearly material terms such as quality, price or remuneration, the contract is not automatically void. Instead, the parties may conclude a supplementary agreement. If the parties fail to reach a supplementary agreement, the missing terms may be imputed by reference to other relevant provisions of the contract or a previous course of dealings. If this cannot be achieved the missing terms may be imputed by reference to the following:

  • Quality shall be in accordance with the state or industry standard.

  • Price shall be in accordance with the prevailing market price at the place and time of performance.

  • The place of performance shall be where the debtor or non-moveable property is located - depending on the nature of the contract.

  • If the time limit for performance is not specified, the debtor may perform at any time and the creditor may demand performance at any time.

  • If the method of performance is not specified, performance shall be rendered in a manner that is most conducive to the realization of the purpose of the contract.

  • If the party responsible for the costs of performance is not specified, the debtor shall bear the costs.

The New Law's extensive provisions regarding interpretation of contracts and their missing terms, makes it more important than ever to make sure that there are no uncertainties in a contract.

Assignment
Under current legislation, a creditor may not assign his rights under a contract (e.g., to receive loan payments) unless he obtains the consent of the debtor. The New Law provides that the creditor need only notify the debtor unless consent is expressly required in the contract. This provision is an important development as it facilitates more sophisticated financial transactions in the PRC, such as securitization and repackaging transactions.

Specific performance
The New Law provides that where a party fails to perform a non-monetary obligation or fails to perform in accordance with the contract, the other party may petition for specific performance, except in the following circumstances:

  • when performance cannot be rendered in law or in fact;

  • when the subject matter of the obligation is not fit for specific performance or the cost of specific performance is excessively high; or

  • when the debtor fails to demand performance within a reasonable time limit.

Discharge of obligations
The right to unilateral termination of a contract in cases such as force majeure is currently limited in the PRC. However, the New Law provides that, not only can contracting parties provide for certain conditions under which the contract can be cancelled, but also that either party may cancel a contract if:

  • force majeure has rendered the purpose of the contract unattainable;

  • the other party states expressly that it will not perform its major obligations under the contract;

  • the other party has delayed performance of any of its main obligations and still fails to perform after receiving a request for performance; or

  • the other party has delayed performance or otherwise breached the contract resulting in serious impairment of the economic benefits for the non-breaching party.

Contracting parties may, and should, include contractual terms regarding the scope of force majeure. If a party is unable to perform obligations due to an event of force majeure, that party is required to notify the other party in a timely manner so as to mitigate the loss caused to the other party.

Anticipatory breach
Presently, the remedy of anticipatory breach (ie, the right to suspend one's performance if one has conclusive evidence that the other party cannot perform his contractual obligations) is available only to contracts among foreign parties. The New Law will extend this remedy to all contracts made in the PRC, even if a domestic party is involved.

Set off
The PRC's contractual framework does not provide for the set off of debts at present. However, from October 1999 contracting parties will be allowed to set off their obligations. The New Law provides that when contracting parties have obligations that are due and the subject matter of those obligations are identical in category and quantity, either party is entitled to set off its obligations against those of the other, unless the contract or another law prohibits it. A party that claims set off must notify the other party and such notice must not be subject to conditions. Furthermore, the parties may agree to set off their obligations if those obligations are not identical to each other.

Unfortunately, the New Law's provision regarding set off does not set out the types of obligations that will be considered to be 'identical in category and quantity'.

Damages for breach of contract
The New Law requires contracting parties to agree that if one party breaches the contract it will pay liquidated damages to the other party. The parties may also agree on the method for calculation of this amount. However, if the amount of liquidated damages stipulated is excessively above or slightly below the actual loss resulting from the breach, either party may apply to the People's Court or to an arbitration institution to reduce or increase the amount. In addition, where the parties agreed on liquidated damages for delay of performance, the party in breach must still perform its obligations in addition to paying damages.

This provision weakens the protection provided by contract clauses that seek to limit or exclude liability, as does the People's Court's authority to review damages that have been agreed to by the contracting parties.

When the parties do not provide for liquidated damages or a method for calculating such damages, the amount usually will be equivalent to the actual loss resulting from the breach. However, such damages cannot exceed the damages (including actual and consequential losses) that were foreseeable by the party in breach at the time of entering into the contract.

Limitation of actions
The time limit for filing a claim or applying for arbitration in a dispute over a contract for the international purchase and sale of goods or a contract for the import or export of technology, will be four years from the time the non-breaching party discovers or ought to have known of the breach. The time limit for filing claims or applying for arbitration in a dispute involving other types of contracts shall be determined in accordance with the provisions of the relevant laws governing those contracts.

Specific Contracts

More than two-thirds of the provisions in the New Law deal with specific contracts. Two of these are particularly noteworthy - those concerning finance leasing and technology contracts.

Finance leasing
Until now there have been few regulations governing finance leasing in the PRC. However, the New Law provides more information about the roles of the lessor, the lessee and the seller. It also confirms that title can pass from the lessor to the lessee at the end of the lease term. In addition, the parties may conclude an agreement that specifies the ownership of the leased property when the contract expires. If the parties do not specify who will own the leased property at the end of the lease period, it shall continue to be the property of the lessor.

If the parties agreed that the leased property should transfer to the lessee but the lessee fails to pay a portion of the rental payments, the lessor may rescind the contract and recover the leased property. However, the lessee may request a partial refund of rental payments if the value of the leased property recovered by the lessor exceeds the rental amount owed by the lessee.

Technology contracts
While there is no explicit provision in the New Law that technical consultation and technical services contracts must be in writing, the New Law does state that technology development contracts and technology transfer contracts must be in writing.

The current requirements that the government must approve of technology import contracts and the term of such contracts cannot exceed 10 years have been deleted from the New Law. However, this is only in relation to technology contracts between domestic companies. Such approval and time limit requirements will continue to apply to contracts to which at least one of the parties is a foreign party.

Consequently, although the New Law for the most part applies and treats equally contracts involving only domestic parties and contracts to which one party is foreign, there are exceptions where differences in treatment continue. Further legislation will be necessary in future to end such discrimination. In the meantime, foreign parties to PRC-related contracts should continue to seek professional legal advice as many aspects of PRC contract law are vague, discriminatory, or subject to change as a matter of government policy

(weiter...)

(c) Berlin 2000, apfb@chinaproject.de