The State Administration of Commerce and Industry (SAIC) recently promulgated the Measures on Supervision and Handling of Unlawful Contractual Practices (the Measures) , which will take effect as of November 13, 2010. The Measures aim to further regulate the entry and performance of commercial contracts, paying particular attention to how standard contractual clauses are applied by the business operators, in an effort to better protect the legitimate interests of the contracting parties.
The Measures define "unlawful contractual practices" as behaviours designed to derive illegal profits from contractual activities and in contravention of applicable laws and regulations. The Measures target three types of actions. The first is contractual fraud, meaning obtaining money or valuables by means of fabricating facts or concealing truth for the purposes of possessing money or valuables of the others. The second is seeking an illegitimate benefit by means of bribery, coercion or collusion with others using a contract. The third is to infringe upon the interests and rights of consumers by using standard contractual clauses to disclaim liability of its own and to aggravate liability on the part of the consumers.
The Measures clearly spell out the scope of contractual fraud by enumerating 10 types of prohibitive behaviours, including:
- to fabricate fraudulent excuses for suspension (termination) of contracts;
- to circulate or utilize false information to lure others into contracts; and
- to maliciously include in the contracts, provisions which cannot be performed and as a result rendering the counterparty unable to perform contract obligations.
It is worth noting that anyone knowingly (or should have known) facilitating contractual fraud, such as intentionally furnishing certificates, licenses, stamps, accounts or other facilitating acts, are also punishable under the Measures.
Misuse of standard contractual clauses
According to the Measures, business operators are now prohibited to disclaim liability by adopting standard contractual clauses from:
- personal injury to consumers;
- property damage to consumers caused by wilful misconduct or gross negligence of the business operators;
- warranty prescribed by law on goods and services provided by the business operators to consumers;
- liability arising out of breach of contract; and
- other liability prescribed by law.
The Measures further provide that business operators cannot use standard contractual clauses to aggravate consumer's liability in respect of:
- penalty for breach that exceeds the lawful limit or reasonable amount;
- operational risk that should be born by the business operators who drafted the standard contractual clauses; and
- other liability that should not be assumed by the consumers by law.
Finally the Measures list various consumer rights that cannot be eliminated by way of standard contractual clauses:
- right to amend or terminate contract pursuant to applicable law;
- right to claim penalty for breach by the other party;
- right to compensation;
- right to seek explanation of standard contractual clauses; and
- any other rights enjoyed by consumers by law.
Based on the foregoing, some commonly seen unfair clauses or the so-called "overlord clauses" such as "we reserve the right to final interpretation of the provisions under the contract", "the products cannot be returned by customers for whatsoever reason", and "tourist agency shall not be liable for the accidental personal injuries of tourists", etc, will be caught under the Measures.
Any unlawful contractual practices caught under the Measures could render a penalty to the business operator of a fine of up to three times the illegitimate benefit, but capped at RMB 30,000.
Time for business operators to review their standard contract clauses
If business operators have been using their standard contractual clauses to mitigate their contractual liability, it is time for them to revisit and review those standard clauses to ensure they are not caught under the Measures.
Mallesons Stephen Jaques is licensed in China as a foreign law firm and, as is the case for all international law firms, we are not authorised to issue legal opinions on matters of Chinese law.
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