China: News In Chinese Contract Law

Last Updated: 17 June 2009
Article by Moritz Heidbuechel and Jenna Wang-Metzner

Interpretation of the Supreme People's Court addresses limitation of liability in standard terms, liability for unauthorised agent actions, frustration of contract, limits on liquidated damages and settling debts

The Supreme People's Court ("Court"), the highest legal authority in China, issued its second Interpretation of Several Issues Concerning the Application of the Contract Law, effective as of 13 May 2009 ("Interpretation"). The importance of the Interpretation is related to the widespread applicability of the Contract Law, and we discuss below the legal issues addressed in the Interpretation that are most important to businesses in China.

1. Limitation of liability in standard terms and conditions

Standard terms and conditions face especially strict legal scrutiny, as they can potentially affect a large number of contracts and are often used in situations where one party is in the position to impose its terms on the other party. And it is wrong to assume that merely supplying the other side with completely one-sided terms is a good strategy. Prudence dictates that the supplying party provide terms that are fair to the other side and make sure that the other side also understands them.

In the Interpretation, the Court selected limitation of liability clauses as a type of standard term that requires special graphic treatment in a contract. The Court notes that Article 39 of the Contract Law requires special marking for any limitation of liability and suggests doing so by using text, punctuation and typeface. We believe that choosing a conspicuous colour, a bigger font size or another graphic marker should also be acceptable ways of ensuring that the limitation of liability stands out from the rest of the terms.

Upon the other party's request, the party who supplies the standard terms is obliged to explain them. The Court places on the party who supplies the terms, the burden of proof for the provision of the requested explanation. If your company receives any queries about your standard terms and conditions, document your replies so that you can demonstrate your fulfilment of this obligation should the matter go to court.

Chinese law does not recognise limitations of liability for bodily harm or damage caused by intentional or gross negligence.

2. Liability of an agent without power of attorney

Article 49 of the Contract Law holds that a contract concluded by an agent without an adequate power of attorney is valid as long as the other party had reason to believe that the agent was authorised to represent the principal. That means your company will have to honour a contract that may have been signed by an unauthorised representative. While the Interpretation confirms this principle, it asserts that the agent will be liable to the principal for losses incurred due to the agent's misrepresentation.

In theory, this will allow you to recoup losses incurred because of such misconduct. In practice, because the agent may abscond or simply lack funds to cover the loss, it may be difficult to pursue such claim. Therefore, you should make sure to have employees and other representatives return any documents regarding their power of attorney when they are no longer necessary for their work. In addition, you should strictly control the use of the company seal since in China such seal has the same effect as the signature of the legal representative. Also, if your representative oversteps his or her authority, rather than simply honour the contract, indicate to the other party that, although you intend to fulfil your obligation, the representative lacked the authority to represent you in the manner or to the extent presented. This will help to avoid creating the false impression that you authorised the representative's actions.

3. Frustration of contract and material change

The Interpretation for the first time officially confirms the concept of frustration of a contract due to changed circumstances. While this possibility had previously only been discussed in light of Article 4 of the General Principles of Civil Law and Articles 94 and 117 of the Contract Law, the legal basis remained unclear. The Interpretation now lays out the conditions under which a court may change or rescind a contract that has been rendered obviously unfair or can't be realised at all because of a change in objective circumstances which

  • was unforeseeable for the parties at the time of conclusion of the contract;
  • was not caused by force majeure; and
  • can not be attributed to the commercial risks of either party.

The court will remedy such a situation with regard to the principle of fairness and actual conditions.

It remains to be seen how this will actually be implemented by Chinese courts. While the Interpretation seems to set relatively tight requirements as preconditions for finding material change, it also confirms the practice of Chinese courts to use the concept of fairness to reach a verdict they consider equitable to both parties. It also remains to be seen what kind of contracts will be considered "obviously unfair" by the courts.

Although the Interpretation explicitly excludes "commercial risks", it is likely that parties whose business model is damaged by unforeseen risks will claim frustration of contract. Courts generally, for example, refuse to honour a party's attempt to modify contract terms unilaterally in the face of even a dramatic change of a commodity price because such instability is considered a customary business risk. However, one can expect such claims to be made and it will be interesting to see how courts react to them.

4. Thirty-percent threshold for liquidated damages

The Contract Law addresses "unreasonably" or "excessively" high or low payments of liquidated damages for breach of contract. Article 114 of the Contract Law, for example, allows a court to raise or lower liquidated damages agreed between the parties if such damages are less than losses sustained or excessively high compared to the actual loss. The Court has now set a threshold of 30% above or below the actual loss to determine if a court should intervene.

While it is welcome that the Court now has provided a clear numerical threshold, the 30% threshold may be inadequate for some situations. In addition, liquidated damages are generally agreed upon to relieve the party that benefits from them from the obligation to evidence its actual losses, or in situations where losses are very hard to determine. Having to evidence liquidated damages that are between 70% and 130% of actual damages reintroduces the necessity to determine actual losses—a hassle the parties may have originally sought to avoid. It's also unclear whether courts will conform the agreed damages to the acceptable threshold or award the actually evidenced damages.

Still, the Interpretation's thresholds may serve as a guideline for the interpretation of other indefinite terms of other articles of the Contract Law and can guide drafters when determining what liquidated damages to put into a contract.

5. Order of fulfilment of debts

Especially in strained economic times, not all debtors will be able to fulfil their obligations. Under the Interpretation, in absence of other agreements between the parties on the order of debt settlement, a debtor's payments shall be set off against outstanding obligations as follows:

1.

Debts due have priority over debts not yet due

2.

Debts that lack guarantees or collateral have priority over secured debts

3.

Larger debts have priority over smaller debts

4.

Debts due earlier have priority over debts due later

5.

The remaining debts are set off according to their proportion to each other

The Interpretation also provides that when payments are insufficient to discharge all debts, costs and interest have priority over the principal debt. So, for example, the necessary costs of a lawyer retained to claim outstanding amounts as well as court and enforcement fees will be covered by any payments received before they are set off against the principal debt unless the parties agreed otherwise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions