On 13 May 2009, the Supreme People's Court ("SPC")
of the People's Republic of China ("PRC") issued an
"Interpretation on Several Issues concerning the application
of the PRC Contract Law (2)" ("Interpretation").
This second interpretation of the Contract Law aims to clarify some
of the vague and controversial provisions in the existing
Contract Law, promulgated on 1 October 1999. The Interpretation
covers issues on the formation, validity, performance, termination
and liabilities for breach of contract.
According to Article 30, this Interpretation is applicable to
all contractual disputes which arise after the implementation of
the Contract Law and still no final judgment has been awarded
for the disputes before the date of the Interpretation. Some of the
salient features of the Interpretation are set out below
1. Place Of Execution Of Contract
Article 4 provides that the Court shall consider the location of
signing of the agreement set out in the contract as the place of
execution of the contract, even if the contract was actually signed
in another place. If the location of signing of the agreement is
not stated in the contract, the Court shall then refer to the place
where the contract was last signed.
In PRC, the location where a contract was signed is an important
fact to determine the domestic courts'
jurisdiction to decide a contractual dispute in the absence of any
express provision in the agreement. Parties usually prefer to
resolve their dispute in a neutral place in the hope
of ensuring a fair trial. According to Article 25 of the
Contract Law, the parties to a contract may choose a court situated
in, inter alia, the location of the defendant, the location where
the contract is to be performed, the location where the
contract was signed etc. This provision in the Interpretation
affirms the parties' freedom to agree on the jurisdiction for
litigation and it remains to be seen if it will lead to
widespread forum shopping in China.
2. Registration Or Approval Procedures
Article 8 provides that if a contract requires approval or
registration under any law or administrative provisions
before it becomes effective and the responsible
party fails to apply for such approval or registration, such
failure shall be deemed "actions which violate the
principles of honesty and creditworthiness" under Article
42(3) of the Contract Law. The Court can then order the other
innocent party to apply for registration or approval on its own and
the responsible party shall be liable for losses and expenses as a
result of its failure.
The above provision is important as many agreements in PRC are
required to be registered with or approved by the relevant
authorities in order to take effect, such as joint
venture contracts, loan agreements with foreign banks or mortgages
involving foreign mortgagees etc. This provision will provide
wider protection to foreign parties who will now be
able to complete the registration or approval process on their own.
However, it is unclear whether the relevant authorities will
entertain such unilateral submission by one party to the
3. Exemption Clauses
Article 39 of the Contract Law requires the party supplying the
standard terms contract to draw the attention of the other party in
a reasonable manner to the terms of the contract which exclude or
limit his liability. Article 6 of the Interpretation clarifies the
meaning of "reasonable manner" which would include
printing such clauses with special features using words, symbols or
fonts etc to draw the attention of the other party concerned. The
burden of proving the sufficiency of the notice lies with the party
relying on the standard terms.
4. Trade Practice
Many contractual disputes in PRC involve the question
of whether a particular practice is the actual trade practice.
According to Article 61 of the Contract Law, if no supplemental
agreement is reached in relation to the quality, price,
remuneration or the place of performance, these terms shall be
determined according to the other related provisions of the
contract and trade practices. Article 7 of the Interpretation
states that the party raising the trade practice shall have
the burden of proving them and that the court will recognize the
following as "trade practices" :-
the practice usually adopted in the location or specific
industry or area, which is known or should be known to the parties
at the conclusion of the agreement; and
the habitual practice of both parties.
The above second Interpretation is expected to have far reaching
effects. We await to see how it will be used in practice.
If you have any questions about the above Interpretation or
other issues on commercial and corporate matters in Mainland China,
experienced lawyers in our China Business Department will be happy
to assist you.
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.
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Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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