China: Supreme People’s Court issues 2nd Interpretation Of Contract Law

Last Updated: 28 July 2009

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 agreement.

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" :-

  1. 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
  2. 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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