The Supreme People’s Court’s Interpretations of Certain Issues Concerning the Application of The Contract Law of the People’s Republic of China
September 12, 2009
Adopted at the 1090th Session of the Adjudication Committee of the Supreme People’s Court on December 1, 1999
The Supreme People’s Court’s Interpretations of Certain Issues Concerning the Application of The Contract Law of the People’s Republic of China (Part One), which shall become operative as from December 29, 1999, were adopted at the 1090th Session of the Adjudication Committee of the Supreme People’s Court on December 1, 1999 and are hereby promulgated.
Pursuant to The Contract Law of the People’s Republic of China (hereinafter the “Contract Law“), and with a view to facilitating the proper adjudication of contractual disputes, we hereby promulgate the following interpretations of certain issues concerning the application of the Contract Law by People’s Courts:
I. Scope of Application of the Law
Clause 1 Where a suit is brought to a People’s Court in respect of a dispute arising out of a contract formed after the operative date of the Contract Law, the provisions of the Contract Law shall apply; where a suit is brought to a People’s Court in respect of a dispute concerning a contract formed before the operative date of the Contract Law, except otherwise provided herein, the provisions of the law in effect at the time shall apply, provided that if the law in effect at the time did not provide for such matter, the relevant provision of the Contract Law may apply.
Clause 2 Where a contract was formed before the operative date of the Contract Law, but the prescribed time limit for performance extends beyond, or commences after, the operative date of the Contract Law, if a dispute arises out of its performance, the relevant provisions of Chapter Four of the Contract Law shall apply.
Clause 3 In determining the validity of a contract formed before the operative date of the Contract Law, if application of the law in effect at the time leads to its invalidation, but application of the Contract Law leads to affirmation of its validity, the People’s Court shall apply the Contract Law.
Clause 4 After the Contract Law became operative, a People’s Court may only invalidate a contract in accordance with laws adopted by the National People’s Congress or its Standing Committee, or administrative regulations adopted by the State Council, and may not invalidate a contract in accordance with any local statutes or administrative rules.
Clause 5 Where a People’s Court re-adjudicates a case on which a final judgment has been rendered, the Contract Law does not apply.
II. Time Limit for Action
Clause 6 In a dispute arising out of a technology contract, where infringement of the right of a party occurred before the operative date of the Contract Law, if there was a lapse of more than one year between the date on which the party knew or should have known that its right was infringed and the operative date of the Contract Law, the People’s Court will no longer enforce such right; where the lapse was less than one year, the time limit during which the party may bring a suit shall be two years.
Clause 7 In a dispute arising out of a technology import/export contract, where infringement of the right of a party occurred before the operative date of the Contract Law, if there was a lapse of more than two years between the date on which the party knew or should have known that its right was infringed and the operative date of the Contract Law, the People’s Court will no longer enforce such right; where the lapse was less than two years, the time limit during which the party may bring a suit shall be four years.
Clause 8 The time period of “one year” set out in Article 55, and the time period of “five years” set out in Article 75 and Paragraph 2 of Article 104 of the Contract Law are fixed, and are not subject to the rules governing the suspension, termination or extension of time limit for action.
III. Validity of Contracts
Clause 9 Where as set forth in Paragraph 2 of Article 44 of the Contract Law, the relevant law or administration regulation provides that the effectiveness of a certain contract is subject to completion of the relevant approval procedure, or the relevant approval and registration procedures, if before completion of court debate by the parties in the trial of first instance, the parties still fail to carry out the relevant approval procedure, or approval and registration procedures, as the case may be, the People’s Court shall rule that the contract has not yet taken effect; if the relevant law or administration regulation requires that a certain contract be registered without subjecting its effectiveness to such registration, then failure to effect registration shall not impair the effectiveness of the contract, provided that such failure constitutes an impediment to the conveyance of title to, or such other real right in, the subject matter of the contract.
In the case of amendment, assignment or termination of a contract as set forth in Paragraph 2 of Article 77, Article 87, and Paragraph 2 of Article 96 of the Contract Law, the provisions of the previous Paragraph apply.
Clause 10 Where the parties entered into a contract the subject matter of which was outside their scope of business, the People’s Court shall not invalidate the contract on such ground, except where conclusion of the contract was in violation of state restriction concerning, or licensing requirement for, a particular business sector, or in violation of any law or administrative regulation prohibiting the parties from participation in a particular business sector.
IV. Subrogation
Clause 11 Where an obligee is to bring a suit of subrogation pursuant to Article 73 of the Contract Law, the following conditions shall be met:
(1) The obligee’s creditor’s right against the obligor is lawful;
(2) The obligor’s delay in exercising the creditor’s right due to it has caused harm to the obligee;
(3) The creditor’s right of the obligor is due;
(4) The creditor’s right of the obligor is not exclusively personal to it.
Clause 12 As referred to in Paragraph 1 of Article 73, a creditor’s right exclusively personal to the obligor means a claim for alimony, child support, parental support or succession, or, a claim for wage, retirement pension, old age pension, death benefits, relocation allowance or life insurance, or, a personal injury claim.
Clause 13 The clause “Where the obligor delayed in exercising its creditor’s right against a third person that was due, thereby harming the obligee” in Article 73 of the Contract Law refers to the following circumstance: The obligor fails to render performance which is due to the obligee, and further, it has failed to enforce a creditor’s right which is due to it and which involves the payment of money against an obligor either through a suit in court or through arbitration, thereby frustrating the obligee’s realization of the creditor’s right due to it.
Where the secondary obligor (i.e. the obligor of the original obligor) denies that the obligor has delayed in exercising its creditor’s right due to it, the secondary obligor bears the burden of proof.
Clause 14 Where an obligee brings a suit of subrogation pursuant to Article 73 of the Contract Law, jurisdiction shall vest in the People’s Court in the place where the defendant is domiciled.
Clause 15 Where after bringing a suit against an obligor to a People’s Court, an obligee brings a suit of subrogation against a secondary obligor to the same court, if such suit complies with the provisions of Article 13 hereof as well as the conditions for bringing a suit set forth in Article 108 of the Civil Procedural Law of the People’s Republic of China, the court shall accept such suit; where such suit does not comply with Article 13 hereof, the court shall direct the obligee to bring a separate suit to the People’s Court in the place where the secondary obligor is domiciled.
Before judgment on the suit brought by the obligee against the obligor takes legal effect, the People’s Court adjudicating the suit of subrogation against the secondary obligor shall stay such suit in accordance with Item (5) of Article 136 of the Civil Procedural Law of the People’s Republic of China.
Clause 16 Where in a suit of subrogation brought to a People’s Court, an obligee names only the secondary obligor as the defendant without also naming the original obligor as an interested third person, the People’s Court may add the original obligor as an interested third person.
Where in suits of subrogation brought separately by two or more obligees, the same secondary obligor is named as the defendant, the People’s Court may combine the suits for adjudication.
Clause 17 In a suit of subrogation, if the obligee petitions the People’s Court for preservative measure against the assets of the secondary obligor, it shall provide appropriate financial assurance.
Clause 18 In a suit of subrogation, the secondary obligor may, in respect of the obligee, avail itself of any defense it has against the original obligor.
In a suit of subrogation, where the obligor raises a defense against the obligee’s claim, if the People’s Court affirms the defense, it shall dismiss the suit brought by the obligee.
Clause 19 In a suit of subrogation, if the obligee prevails, the court fee shall be borne by the secondary obligor, and shall be paid in priority out of the proceeds from the enforced creditor’s right.
Clause 20 Where an obligee brings a suit of subrogation against a secondary obligor, and the People’s Court affirms the subrogation, the secondary obligor shall perform the payment obligation, whereupon the respective obligee-obligor relationships between the obligee and the obligor, and between the obligor and the secondary obligor, are discharged accordingly.
Clause 21 In a suit of subrogation, where the amount in subrogation claimed by the obligee exceeds the amount owed by the obligor or the amount owed to the obligor by the secondary obligor, the People’s Court shall not enforce the claim to the extent the claimed amount exceeds the actual amount.
Clause 22 In a suit of subrogation, if the obligor also brings a claim against the secondary obligor for the difference between the amount owed to it and the amount in subrogation claimed by the obligee, the People’s Court shall direct the obligor to bring a separate suit to the People’s Court with the proper jurisdiction.
Where such suit brought separately by the obligor meets the legally prescribed conditions, the People’s Court shall accept such suit; the People’s Court accepting the suit brought by the obligor shall stay such suit in accordance with the law pending the legal effectiveness of the judgment on the suit of subrogation.
V. Cancellation Right
Clause 23 Where an obligee brings a suit to enforce its cancellation right pursuant to Article 74 of the Contract Law, jurisdiction shall vest in the People’s Court in the place where the defendant is domiciled.
Clause 24 If in a suit to enforce its cancellation right pursuant to Article 74 of the Contract Law, the obligee only names the obligor as the defendant without also naming the beneficiary or the assignee as an interested third person, the People’s Court may add such beneficiary or assignee as an interested third person.
Clause 25 Where an obligee brings a suit to enforce its cancellation right pursuant to Article 74 of the Contract Law and petitions the People’s Court for cancellation of the obligor’s act of waiving its creditor’s right or transferring its property, the People’s Court shall adjudicate the case to the extent of the amount claimed by the obligee, and if the obligor’s act is canceled in accordance with the law, such act is invalid ab initio.
Where suits on the same subject matter are filed separately by two or more obligees to enforce their respective cancellation rights, and the same obligor is named as the defendant, the People’s Court may combine the suits for adjudication.
Clause 26 The necessary expenses incurred by the obligee in enforcing its cancellation right, such as attorney’s fee and travel expenses, shall be borne by the obligor; where the interested third person was also at fault, it shall share such expenses as appropriate.
VI. Interested Third Person in Case of Assignment of Contracts
Clause 27 If subsequent to the obligee’s assignment of its contractual right, a suit is brought to a People’s Court in respect of a dispute between the obligor and the assignee which arose from the performance of the contract, and the obligor raises a defense against the contractual right of the obligee, it may name the obligee as an interested third person.
Clause 28 If with the consent of the obligee, the obligor has delegated its contractual obligation, and subsequently a suit is brought to a People’s Court in respect of a dispute between the obligee and the delegatee which arose from the performance of the contract, and the delegatee, in defense against the obligee, avails itself of the obligor’s right against the obligee, it may name the obligor as an interested third person.
Clause 29 If with the consent of the other party, a party concurrently assigned its contractual rights and delegated its contractual obligations to an assignee, and subsequently a suit is brought to a People’s Court in respect of a dispute between the other party and the assignee which arose from the performance of the contract, and the other party raises a defense in respect of the rights and obligations under the contract, it may name the obligor as an interested third person.
VII. Merger of Claims
Clause 30 Where at the time the obligee brought a suit to a People’s Court, it made an election of claim in accordance with Article 122 of the Contract Law, and subsequently it changes its election, if the change is made before the commencement of hearing in the trial of first instance, the People’s Court shall allow such change. In the event the other party objects to the jurisdiction of the court and such objection is sustained, the People’s Court shall dismiss such suit.
Tags: Supreme, China, disputes
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How to prepare OEM Agreements in China?
August 16, 2009
Needless to say, China has become the world’s leading manufacturing base. However, with the recent product safety scares and the constant media attention, “Made in China” has become a high-profile issue for consumers and retailers. So how does a foreign company minimize the risks of tainted/substandard products manufactured in China? In this article, we discuss contract terms which foreign companies should consider when entering into OEM relationships with Chinese suppliers. (While we highlight some of what we feel are the main issues to be covered by the agreement, we recognize that each case is unique and there is no such thing as a ‘typical’ OEM arrangement.)
Standard Form Agreements
Generally, an OEM will have a standard form agreement which they are more than willing to provide to foreign companies who wish to use their services. While this may lower costs at the outset and allow the foreign company to ‘build favor’ with their Chinese counterpart, using such an agreement is almost never advisable, and foreign companies would be wise to consult counsel, who will assist the foreign company to properly negotiate and prepare agreements.
Note that we often advise that the written agreement is preceded by preparation and negotiation on the basis of a business term sheet, which will outline the major terms of cooperation. The agreed points in the term sheet then serve as the basis for the written agreement.
Major Terms of Agreement
Below, we highlight several major (though non-exhaustive) terms which should be included in an OEM Agreement:
1. Products and Specifications: The products to be manufactured should be well-defined in the agreement, along with product specifications which should be described in detail in appendix(es).
2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements often require that firm orders are placed through Purchase Orders, in order to ensure that there is a binding supply/purchase commitment in the agreement itself, the parties will often designate a certain minimum commitment on both sides, to produce and purchase a certain amount of product within a given time period. Aside from the minimum requirement, the buyer will often provide a non-binding forecast to supplier, such that supplier can plan and allocate adequate resources (often 6-, 12-, 18-, 24- month terms).
3. Price: For those products designated as described previously, the parties should determine firm prices, which will either be effective throughout the term of the agreement, or at least a portion thereof, subject to (we recommend) maximum periodic price increases. Further, it is beneficial to include for discounts upon meeting certain pre-determined purchase volumes.
4. Quality Control: Buyer and supplier will agree on certain terms afforded to buyer/required of seller for conducting quality control on production. Typical terms include i) access (often on short or no notice) to production sites, and ii) random testing of each batch of products. Further, the parties may, depending on the value of the contract, provide for a representative of the buyer to be on-site on a full-time/regular basis, for the purpose of assisting in quality control. (The buyer’s representative may also monitor supplier’s use of intellectual property and other improper dealings, though their effectiveness will invariably depend on his/her loyalty to the buyer.)
5. Term: The parties will determine an appropriate term for their contract, and may make the agreement renewable on request by buyer. This term should be sufficiently long so as to ensure that buyer’s initial investment can be adequately recovered.
6. Termination: Termination events, as in most agreements, will include those events which give rise to immediate termination rights (for example, unauthorized use of buyer’s intellectual property and violation of non-compete terms), and those which require a notice period and the breaching party’s right to remedy the breach (failure to supply products meeting specifications).
7. Consequences of Termination: In the event of termination, it is important for buyer specify those procedures necessary to protect its rights in the event of such occurrence. Often terms will include: sale of completed products to buyer, allowance for completion of partially completed products and sale to buyer, destruction or return of confidential information, and destruction or return of trademarks, logos, brochures, and other advertising materials.
8. Examination and Acceptance: Upon delivery of the products to buyer, it will be afforded a certain period to conduct inspection, subject to deemed acceptance in the event that a claim is not made within a certain period. Further, it is common for suppliers to require that upon buyer’s acceptance of the products, they will be absolved of all further liabilities. Note that we do not recommend that buyers wholly accept such terms (and provide a minimum carve-out and continued warranty), as buyer, after acceptance, will have little grounds for a claim (even for the use of sub-standard materials which are often difficult to visually detect).
9. Raw Materials/Components: As part of the quality control process, buyer should require that supplier provide a list of its suppliers along with purchase orders over a pre-set period to ensure that the agreed upon raw materials/components are being used.
10. Insurance: Due to the relatively unsophisticated nature of manufacturers/insurance industry in China, factories are often severely underinsured from risks. As a result, it is advisable for buyer to require that supplier obtain a minimum level of insurance.
11. Intellectual Property: All intellectual property used to manufacture the product, including trademarks, patents, copyrights, and other business secrets should be licensed to supplier, for the limited purposes of complying with its obligations under the agreement. Further, buyer should carefully draft related terms so as to restrict supplier from exercising any rights of ownership to the licensed IP.
12. Non-compete: As an OEM relationship necessarily involves substantial transfer of intellectual property and confidential information, buyer must not only be careful to ensure that additional products are not produced by the supplier, but also by its affiliated companies and senior directors and management. (Note that the implications of failing to adequately provide for such terms may result in not only the product being sold in China but more importantly in the same markets as buyer, and at significantly lower costs.)
13. Arbitration: As manufacturing tends to be concentrated in lesser-developed regions in China in addition to cost/time/reliability benefits often associated with arbitration, we advise clients to select arbitration for dispute resolution. Arbitration can be conducted in China or internationally (in any New York Convention signatory state), though domestic arbitration allows buyer access to Chinese courts for injunctive relief.
Arguably more or at least equally important as negotiating and concluding a strong contract, buyer must be carefully monitor and enforce of its terms when necessary.
Finally, although long-term relations are often desirable and we encourage buyers to find and work with reliable suppliers, as a practical matter it is imperative that buyers ensure that they have one or more alternative suppliers, in the event of required termination of the primary OEM supply arrangement.
Source: China Law Practices
http://wwwchinalawpracticeblog.com
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Contract Damages
June 20, 2009
Chinese contract law is far more flexible with respect to remedies than the common law since it is based on civil law. China makes no distinction between law and equity. As a result, in addition to money damages, Chinese law provides for specific performance, contract liquidated damages, deposit, loss of bargain damages and incidental damages. Most importantly, the use of one remedy does not exclude the application of another remedy. For example, if contract damages are not sufficient to compensate for a party’s actual damages, Article 114 of the Contract Law provides that the injured party can request that the court order payment of an amount sufficient to allow for complete relief. However, to prevent abuse, the reverse is also true. Contract Law Article 114 provides that where stipulated contract damages are “excessively higher than actual damages”, the defendant may request a reduction in the amount. Explanation 29 provides that an amount 130% higher than actual damages will generally be considered “excessively high.” However, the burden of proof in establishing the amount of actual damages is on the defendant. In the absence of clear proof, there is a strong tendency for Chinese courts to accept the stipulated contract damage amount.
Tags: chinese, common law, contract lawRelated Posts:
The Contract Law Provides for a Series of Highly Restrictive Rules Relating to Form Contracts
June 20, 2009
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.
Tags: chinese, chinese law, CourtRelated Posts:
Unilateral Contracts are Enforceable Under The Contract Law
June 20, 2009
if a party announces publicly that it will make a payment to any person who completes a certain task, this is a contract enforceable under the contract law.
This provision makes clear that unilateral contracts are enforceable under the Contract Law. This clarifies a difficult issue. The plain wording of the Contract Law suggests that only multi-party contracts fall within the scope of the Contract Law. This Explanation would exclude unilateral contracts of reward or gift. However, such an exclusion is not consistent with other interpretations of the Contract Law and actual judicial practice in China. This clarifies the matter and makes clear that unilateral contracts are valid under Chinese law.
In this regard, note that China follows the German approach to contracts and has no requirement for consideration. Thus, a “naked promise” is enforceable under Chinese law.
Tags: Enforceable, chinese law, LawRelated Posts:
