Over the years, boosting domestic demand and promoting consumption have become one of the major propositions of Chinese government concerning the unified national market and the rule of law. The effective protection of consumer rights, however, faces various challenges. This is particularly true, given the rapid development of online commerce and the widespread use of pre-prepared online terms by business operators, which are often non-negotiable (“take-it-or-leave-it”) for consumers. Among these online terms, the inclusion of the “right to final interpretation” (or “unilateral interpretation right”) clause has triggered numerous disputes, making it a hot topic in the field of consumer protection in China.

The “right to final interpretation” clause empowers the party who prepared the contract to make final interpretation about the terms and conditions in the contract when disagreement arises. It is often regarded as an “overlord clause” in commercial activities and commonly appears in scenarios such as promotional activities by business operators. Such clauses not only raise doubts about their validity, but also face the risk of administrative penalties from regulatory authorities for harming consumer rights and disrupting the order of the market economy.

In the context of stimulating consumption potential and protecting consumers' interests, the State Administration for Market Regulation of China announced the Measures for the Administrative Supervision and Administration of Contracts (“theMeasures”) on May 18, 2023, which came into effect on July 1, 2023. The Measures apply to both online and offline pre-drafted terms, which are collectively referred to as “standard terms”. By imposing administrative liabilities, the Measures regulate various improper behaviors of the business operators towards consumers in the process of entering contracts. Compared to the previous Measures for Supervision and Handling of Illegal Contractual Acts (“the Old Measures”), the Measures raise the cap of penalties for business operators' illegal acts from RMB 30,000 to RMB 100,000 and explicitly prohibit the use of the “right to final interpretation” clause in standard terms. This article will provide an overview from three aspects: the legislative evolution of the “right to final interpretation” clause, the provisions of the Measures regarding standard terms, and relevant judicial precedents.

I. The Historical Evolution and Legal Origin of the “Right to Final Interpretation” Clause in China

The implementation of the current Measures will replace the Old Measures promulgated in 2010 and revised in 2020. Compared to the Old Measures, the Measures replace the protection of “rights and interests of the parties” in Article 1 with “rights and interests of consumers”. The focus of regulation has shifted from contracts in a general sense to standard terms between business operators and consumers, including the “right to final interpretation” clause.

In fact, before the promulgation of the Measures, the “right to final interpretation” clause had already been regulated in other legislation, including the Old Measures, two departmental regulations, and two judicial interpretations.

Article 6 of the Administrative Measures for Sales Promotion Acts of Retailers promulgated in 2006 stipulates that, “The contents of the advertisement or any other publicity for the sales promotion of a retailer shall…not impair the lawful rights and interests of consumers under the excuse of retaining the final interpretation right.” This regulation imposes penalties of up to three times the illegal gains (but up to RMB 30,000), or up to RMB 10,000 if there are no illegal gains.

Article 12 of the Measures for Penalties against Infringement upon Consumers' Rights and Interests revised in 2020 stipulates, “Business operators that use standard terms, notices, statements, and on-site posters, among others, in provision of goods or services to consumers…shall not provide for the following contents:… (6) providing that business operators enjoy the power of unilateral interpretation or ultimate interpretation; or (7) other provisions that are unfair to and unreasonable for consumers.” The amount of fines for violations of this regulation is the same as that of the Administrative Measures for Sales Promotion Acts of Retailers. However, the latter only emphasizes the prohibition of abusing the “right to final interpretation” to harm consumers, while this regulation directly categorizes the “right to final interpretation” clause as “provisions that are unfair to and unreasonable for consumers”, reflecting a stricter prohibition against such clauses.

Article 11 of the Old Measures also stipulated that “Where a business operator and a consumer adopt standard terms in concluding a contract, the business operator shall not exclude the following rights of the consumer in the standard terms: … (4) the right to interpret the standard terms”. It implies a negative attitude towards the “right to final interpretation” set by business operators. On this basis, the Measures explicitly prohibits the “right to final interpretation” clause and further clarifies its illegality.

In addition to the administrative regulations, the judicial legislation also negates the validity of the “right to final interpretation” clause. Especially regarding online terms in e-commerce scenarios, the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases of Disputes over Online Consumption (I) promulgated in 2022 provides that, “standard terms provided by an e-commerce operator containing the following contents shall be deemed invalid by the people's court according to the law: …(3) E-commerce operators have the right to unilateral or ultimate interpretation.” At the end of the same year, the Opinions of the Supreme People's Court on Providing Judicial Services and Guarantees for Promoting Consumption clearly state that, “If there is a dispute over the understanding of standard terms, and the consumer claims to interpret them in accordance with the provisions of Article 498 of the Civil Code of China, and the business operator raises a defense on the ground that it has the right to final interpretation, the people's court shall not support the defense.” This indicates that the “right to final interpretation” clause cannot counter the interpretation rules established by Article 498 of the Civil Code, thus negating the effectiveness of the “right to final interpretation” clause from a practical perspective.

II. Comprehensive Regulation of Standard Terms – “Right to Final Interpretation” Clause Faces a Maximum Penalty of RMB 100,000

In general, the Measures stipulates the focus of market regulatory authorities to carry out supervision and administration of contracts, as well as supervision methods, law enforcement measures, penalties, etc., zooms in on the online and offline pre-prepared standard terms concluded between business operators and consumers. Article 6 of the Measures stipulates that “notices, statements, shop bulletins, etc. pre-drafted by a business operator stipulating the rights and obligations of both parties to a contract shall be deemed as standard terms.” This suggests that the business operator's promotional advertisements are within the scope of the standard terms.

Article 7 of the Measures states that business operators shall not make use of standard terms or by other means to relieves or exempts itself from its own liabilities. This covers not only invalid exemption clauses as defined in Article 506 of the Civil Code but also clauses exempting the liability for repair, remanufacturing, replacement, return of goods, making-up for quantity shortage, refund of payment for goods and service fees, liability for breach of contract, obligations of assistance, notification, confidentiality and so on.

According to Article 8, standard terms shall not aggravate the liabilities of consumers or exclude, restrict the rights of consumers. The liquidated damages or the compensation for damages shall not exceed the statutory amount or a reasonable amount, consumers shall not be required to bear the operation risks which shall be borne by the business operators in accordance with the law, and the rights of consumers to independently choose goods or services, change or rescind the contract, request the payment of liquidated damages or compensation for damages, lodge complaints, report, request mediation, apply for arbitration, or file lawsuits in accordance with the law shall not be excluded or restricted. Article 8 also stipulates that the standard terms shall not provide thatbusiness operators unilaterally enjoy the right to interpretation or final interpretation. Based on the expanded definition of standard terms in Article 6, this means that the “right to final interpretation” clause should not appear in the product or service contract finally concluded between the business operator and the consumer, neither in the notices, statements, shop bulletins pre-drafted by a business operator stipulating the rights and obligations of both parties.

Article 17 provides for the investigation and punishment measures that can be taken by market regulatory authorities at and above county level for illegal contractual act. According to Article 18, for violations, “If there are relevant provisions in the laws and administrative regulations, such provisions shall prevail; in the absence of such provisions, the market regulatory authority at county level or above shall order the business operator to make correction within a stipulated period, give it a warning, and may impose a fine of not more than RMB 100,000 on it.” Article 19 provides leniency policies, stating that “with regard to any illegal contractual act that is minor and promptly corrected, with and no harmful consequences caused, no administrative penalty shall be imposed; where the harmful consequences are voluntarily eliminated or mitigated, a lighter or mitigated administrative penalty shall be imposed.” Additionally, administrative penalty decisions will be announced to the public through the National Enterprise Credit Information Publicity System.

III. Judicial Practice in China Tends to Deny the Validity of the “Right to Final Interpretation” Clause and Confirm Damages

It is noteworthy that the Measures only provides administrative penalties for the “right to final interpretation” clause, but says nothing about its legal effect under the civil law. This means that the validity of such clause, and the contractual obligations of both business operators and consumers need to be determined in accordance with other relevant civil laws and regulations. From the perspective of judicial practice, it is difficult for the business operator to defend by referring to the “right to final interpretation” clause alone.

  1. The “right to final interpretation” clause is void because it violates the mandatory provisions of the Civil Code of China on the method of interpretation of standard terms

In February 2022, the Hangzhou Internet Court made a judgement concerning typical online terms provided by platform operators and clarified that the “right to final interpretation” clause in the user agreement of a game platform should be void.1 In this case, a consumer owned two accounts on the game platform. Both were banned by the platform for the consumer using one of the accounts to sell game props in violation of the rules of the platform. The consumer filed a lawsuit, arguing that the banning measure should only target the offending account and that the “right to final interpretation” clause stipulated by the game platform should be void. The court pointed out that Article 498 of the Civil Codeof China provides for the method of the interpretation of standard terms, “if a dispute over the understanding of standard terms occurs, interpretation shall be made in accordance with common understanding. Where there are two or more kinds of interpretation, an interpretation unfavorable to the party furnishing the standard terms shall prevail. Where the standard terms are inconsistent with non-standard terms, the latter shall prevail.” The above provisions are mandatory, and the parties are not allowed to exclude the application by contractual agreement. In other words, the platform can interpret the standard terms, but does not have the final right to interpretation. Similar clauses such as “the Company shall have the final right to interpretation” shall be void, and the court will still make interpretation in favor of consumers according to relevant laws.

  1. The “right to final interpretation” clause in online terms can lead to damages under the Consumer Protection Law of China

In addition to the administrative liabilities and invalidity discussed above, the “right to final interpretation” clause may also cause damages paid to consumers according to the judicial practice of China.

In 2016, a consumer bought a mobile phone from a company at Tmall online shopping platform. On the package of the product, it was printed with “Beijing Tianyu Communication Equipment Co., Ltd. has the final interpretation right”. The court held that this “right to final interpretation” clause violated Article 11 of the Old Measures and Article 12 of the Measures for Penalties against Infringement upon Consumers' Rights and Interests (see Part I). More importantly, the company should not only return the payment of the product, but also pay damages of RMB 500 to the consumer, according to Article 44 and 55 of the Consumer Protection Law of China – “Consumers whose lawful rights and interests are infringed upon in purchasing commodities or receiving services through online trading platforms mayclaim compensation from the sellers or service providers…Business operators which fraudulently provide commodities or services shall, as required by consumers,increase the compensation for consumers' losses, and the increase in compensation shall be three times the payment made by a consumer for the commodity purchased or the service received or be RMB 500 if the increase as calculated before is less than RMB 500.” Accordingly, the consumer shall return the product to the company or give up the payment if it cannot be returned.2

To summary, in addition to administrative liabilities, the "right to final interpretation" clause is likely to be invalidated by the courts, and companies which provide such clause can be ordered to pay damages which are three times the payment for the commodity or the service (at least 500 RMB).

IV. Statutory Amendments Usher in a New Era of Consumer Protection in China

The Measures has further strengthened the regulatory intensity on business operators and the protection of consumers, from clarifying the illegality of the “right to final interpretation” clause to significantly increasing the cap of penalties, in response to the hot concerns in the consumer field. Previously, law enforcement authorities in the country had imposed penalties on the “right to final interpretation” clause in some cases, but the fines were small and the deterrent effect was insufficient. It can be expected that the enforcement efforts on the “right to final interpretation” clause will be further strengthened in the future, and online user agreements, preferential policies, promotional coupons, etc. formulated by platforms, large businesses, and chain brands may become the next focus of law enforcement.

When drafting online terms, business operators need to pay attention to fulfilling their disclosure obligations under Article 496 of the Civil Code and Article 6 of the Measures. If there are restrictions on consumer rights in the online terms, it is advisable to provide special written notice and fully obtain the consumer's consent to prove that the relevant standard terms are the result of mutual agreement, in order to ensure the validity of the contract.

China isa traditional statutory law country, and the regulation of infringement of consumer interests largely relies on the improvement of statutory laws. The promulgation and implementation of the Measures will have a huge impact on both consumers and business operators, and undoubtedly will usher in a new era of consumer protection in China. Its historical significance will gradually become evident in law enforcement by the market regulatory authorities.

Footnotes

1. Hangzhou Internet Court: Is it valid if the game platform says it has the “right to final interpretation”? (Chinese), https://mp.weixin.qq.com/s/YE7sO5XdF680QWoymgvbkg?scene=25#wechat_redirect.

2. Conghua District People's Court of Guangzhou (2016) Yue 0184 Min Chu No. 4529 Civil Judgement.

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