The Contract Law Provides for a Series of Highly Restrictive Rules Relating to Form Contracts

The Contract Law provides for a series of highly restrictive rules relating to form contracts. Many foreign parties ignore these provisions and then are surprised when their contracts are not enforced by Chinese courts. This often happens even when the contracts provide that they are governed by foreign law, because the Chinese courts take the position that the Chinese form contract rules are a matter of public policy that cannot be waived. Any such waiver will not be enforced by Chinese courts.

The form contract rules are similar to consumer contract rules that have been adopted in Europe. However, there is a major difference that causes even Europeans to make mistakes in this area. The European rules protect only consumers. The Chinese rules are much broader and apply to all contracts, regardless of the status of the parties. Since Chinese companies have a strong tendency to use form contracts, these rules are very important within the Chinese system.

The basic form contract rules are as follows:

* The party making use of the form contract must use reasonable means to clearly identify those provisions of the contract that limit or eliminate its liability to the other party. Upon request, such provisions must be explained.
* The following provisions of a form contract are void:
o To eliminate one’s own liability.
o To increase the liability of the other party.
o To exclude the important rights of the other party.
o To exclude liability for physical injury to the other party.
o To exclude liability for negligence or intentional damage.

In the event of a dispute in interpretation, form clauses are interpreted against the drafter.

These provisions are contradictory and quite difficult to apply in practice.

If a form contract meets all of the above requirements, then it is a valid contract. This prevents lower courts from dismissing form contracts out of hand.

If the party that provides the form contract fails to explain an exculpatory provision and the other party requests that such a provision be invalidated, the court shall comply with such request. This then raises the following question: how is it possible to prove conclusively that an exculpatory provision has been explained? It appears to me that it will be virtually impossible to offer such proof, which suggests that all such provisions should be considered to be voidable under Chinese law. Perhaps the only way to do this would be to provide a written explanation and to require the other party to sign something indicating that it received and read that explanation.

Any provision of a form contract that fails to comply with the provisions of the Contract Law governing form contracts should be declared void by the court. This applies only to the offending provision, not the entire contract. That is, the obligations remain in place, only the exclusions are voided. Where a party has priced its contract obligations assuming that the form exculpatory provisions will be enforced, the result can be an unexpected and disadvantageous shift in the bargain.

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