This article was first published in Asian Counsels country
A discussion of issues such as formation, validity,
performance, termination and damages
On 24 April 2009, the PRC Supreme Court issued the Second
Judicial Explanation on the PRC Contract Law ("Second Judicial
Explanation"). This Second Judicial Explanation treats
contract law issues that were not covered or remained unclear in
the existing legislation and the first judicial explanation.
1. Formation of a contract
Article 1 of the Second Judicial Explanation clarifies the
existence of three indispensable elements for formation of a
contract: contract parties, contract object and quantity. Failure
to agree on other matters should "generally" not impair
formation of a contract, unless the law otherwise provides or the
parties otherwise agree upon.
2. Effectiveness of a contract
A contract signed by a person with limited civil capacity or
without due authorisation shall be deemed retroactively effective
as of its execution, when afterwards duly recognised by a statutory
agent or represented party (Article 11 of the Second Judicial
The start of the represented party to perform the contract may
qualify as de-facto recognition of the contract (Article 12 of the
Second Judicial Explanation).
In response to Article 52 of the PRC Contract Law, Article 14
of the Second Judicial Explanation explains that only the violation
of a "mandatory legal provision affecting the contract
effectiveness" will invalidate a contract.
3. Standard contract clauses
The party who provides standard contract clauses shall remind
the other party of clauses that exempt or restrict its liability,
and explain such clauses when the other party requests. If the
party fails to do so, and the other party hence remains unaware of
the concerned clauses, the court will support an application of
such other party for cancellation of them (Article 9 of the Second
4. "Default" before contract effectiveness
For a contract that become effective when approved by or filed
with a government authority, the failure of the party responsible
for handling such procedure to duly handle may render it liable for
losses incurred by the other party (Article 8 of the Second
5. Cancellation of debtors' transactions or disposal
Articles 18 and 19 of the Second Judicial Explanation extends
the application of Article 74 of the PRC Contract Law so that a
creditor may now seek invalidation of a wider range of malicious
transactions or disposal acts of its debtor that impairs its
ability to pay.
6. Termination right - Objection
Where one party seeks to raise an objection to the termination
right exercised by the other party, Article 24 of the Second
Judicial Explanation clarifies that a time period agreed by the
parties shall apply. If not agreed, the objection must be raised
within three months of the party's receipt of the termination
7. Major change of objective circumstance
Article 26 of the Second Judicial Explanation offers a new legal
basis for a contract party to require amendment or rescission of a
contract, when a major change of objective circumstances occurs
after contract conclusion, not being a commercial risk, but
none-foreseeable at contract conclusion, and also not caused
through a force majeure event.
8. Liquidated damages
Articles 28 and 29 of the Second Judicial Explanation aim to
bring compensation for liquidated damages in line with actual
losses. Although the court should also consider loss of anticipated
profits when reviewing liquidated damages alleged to be excessively
high, the court's decision shall be mainly based on actual
losses. It has been further clarified that liquidated damages that
exceed the losses by 30% may be generally considered as
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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The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
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