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: Law, China, Court
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Stopping infringement of Patent Right Before Instituting Legal Proceedings
July 1, 2009
(Several Provisions of the Supreme People’s Court for
the Application of Law)
With a view to protecting the lawful rights and interests of patentees and other interested parties, these several Provisions have been made for the application of law to stopping infringement of patent right before instituting legal proceedings according to the relevant provisions of the General Principles of the Civil Law of the People’s Republic of China, the Patent Law of the People’s Republic of China (hereinafter referred to as the Patent Law), the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as the Civil Procedure Law):
Article 1 Any patentee or interested party may file an application with the people’s court for ordering the party against whom an application is filed, before instituting legal proceedings, to stop its or his act of infringement of the patent right in accordance with the provision of Article 61 of the Patent Law.
The interested party that files an application refers to the licensee of the licensing contract for exploitation of patent and the legal heir to the property right of the patent, etc.. Among the licensees of the licensing contract for exploitation of patent, the licensee alone of a monopolising exclusive patent license* contract may file an application with the people’s court; the licensee of a sole exclusive patent license contract may file an application when the patentee does not.
Article 2 Any application for ordering to stop infringement of patent right before instituting legal proceedings shall be filed with the people’s court having jurisdiction over cases of patent infringement.
Article 3 Any patentee or interested party who files an application with the people’s court shall submit an application in writing, in which the interested party per se and the basic information thereof, the claims and the extent of and reasons for the application shall be clearly indicated. The reasons for the application shall include the specific statement that irremediable damages will be caused to the legitimate rights and interests of the applicant if the relevant act is not to be promptly stopped.
Article 4 The applicant shall submit the following evidence when filing an application:
(l) The patentee shall submit document proving the authenticity and validity of its or his patent right, including, among other things, the patent certificate, claims, description and receipt of payment for the annual patent fee. Where the application filed relates to a patent for utility model, the applicant’ shall submit the search report by the Patent Administrative Organ under the State Council.
(2) The interested party shall submit the patent licensing contract and the proof for filing the Patent Administrative Organ under the State Council; where the proof is not for filing, it or he shall submit the certificate of the patentee or other evidence that proves that it or he enjoys the right.
Where the licensee of a sole exclusive licensing contract files an application alone, it or he shall submit the proof of abandonment by the patentee of the application. The heir to the patent property right shall submit evidence indicating that it or he has already inherited or is in the process of inheriting the patent property right.
(3) The applicant shall submit evidence to prove that the party against whom an application is filed is committing or will commit an act of infringing its or his patent right, including the alleged infringing product and the technical features of the patented technology and the alleged infringing product and the comparison thereof.
Article 5 The ruling made by the people’s court to stop an act of patent infringement before instituting legal proceedings shall be confined to the application filed by the patentee or interested party.
Article 6 Any applicant shall provide guaranty when filing an application; where no guaranty is furnished, the application is rejected.
Where the guaranty furnished by the interested party, in the form of pledge or hypothecation is reasonable and valid, the people’s court shall grant its approval.
When the people’s court determines the scope of the guaranty, it shall take account of the sales of the product in question and the reasonable. costs of storage and stock-keeping; of the losses that may be caused by stopping the relevant act of the party against whom an application is filed and other reasonable costs, such as the wages or salaries and of any other factors involved as Well.
Article 7 Where, in the process of executing the ruling to stop the relevant act, the party against whom an application is filed may suffer greater losses due to the adoption of the measure, the people’s court may order the applicant to provide guaranty in an extroactive manner. Where no such guaranty is provided, the measure to stop the relevant act shall be removed.
Article 8 Any measure taken to execute the ruling to stop the act of patent infringement shall not be removed because the party against whom an application is filed provides a counterguaranty.
Article 9 After accepting the application filed by a patentee or interested party to order to stop the act of patent infringement, the people’s court shall make a ruling in writing within 48 hours where the application conforms with Article 4 of these Provisions upon examination; where the ruling is made to order the party against whom an application is filed to stop its or his act of patent infringement, the ruling shall be executed without delay.
Where it is necessary for the people’s court to verify the relevant facts within the aforementioned time limit, the people’s court may summon and inquire the one or both interested parties and, then, make the ruling in a timely manner.
The people’s court making the ruling to order the part) against whom an application is filed to stop the relevant infringing act before instituting legal proceedings shall promptly notify the party against whom an application is filed, or does so within no more than 5 days at the latest.
Article 10 Where the interested party is not satisfied with the ruling, it or he may apply for reconsideration within l0 days from the date of the receipt of the ruling. The execution of the ruling shall not be suspended during the reconsideration.
Article 11 The people’s court shall examine the application for reconsideration filed by the interested party as to the following aspects:
(l) whether or not the act which is being committed or will be committed by the party against whom an application is filed constitutes an infringement of patent right;
(2) whether or not not taking the relevant measure will cause irremediable damages to the legal rights and interests of the applicant;
(3) the content of the information relating to the applicant’s provision of the guaranty; and
(4) whether or not to the order the party against whom an application is filed to stop the relevant act would impair the public interests.
Article 12 Where the patentee or interested party does not institute legal proceedings within l5 days, after the people’s court takes the measure to stop the relevant act, the people’s court shall remove the adopted measure of the ruling.
Article 13 Where an applicant does not institute legal proceedings or there is an error in the application, causing losses to the party against whom an application is filed, the party against whom an application is filed may institute legal proceedings in the people’s court having the jurisdiction, requesting the applicant to compensate for the losses; or file a request for damages during the patent infringement litigation instituted by the patentee or interested party. The people’s court may simultaneously handle the requests.
Article 14 The ruling ordering to stop the infringement of patent right shall generally remain effective until the final legal instrument comes into effect. The people’s court may also fix a specific time limit according to the facts of the case; after the expiration of the time limit, the people’s court may still make a ruling to continue to stop some relevant acts on the request of the interested party.
Article 15 Where the party against whom an application is filed runs counter to the ruling made by the people’s court to order to stop the relevant act, the matter shall be handled according to the provision of Article l02 the Civil Procedure Law.
Article 16 When executing the pre-litigation measure to stop the act of patent infringement, the people’s court may, according to the application of the interested party, simultaneously preserve the evidence in the light of the provision of Article 74 of the Civil Procedure Law.
The people’s court may, according to the application of the interested party, preserve the property pursuant to Articles 92 and 93 of the Civil Procedure Law.
Article 17 Where the patentee or the interested party institutes proceedings against patent infringement, when simultaneously requesting for stopping the act of patent infringement in advance, the people’s court may first make the ruling on the request.
Article 18 In respect of a case to stop an act of patent infringement, the applicant shall pay the fees according to the Standards of the People’s Court for Litigation Charges and the Additional Provisions thereof.
Adopted on 5 June 2001Â at the 1179th Meeting of the Adjudication Committee of the Supreme People’s Court
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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.
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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.
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An Oral Contract is Enforceable Under Chinese Law
June 20, 2009
The Contract Law at Article 10 provides that contracts can be formed through a writing, orally or through “other means.” If the conduct of the parties is sufficient to show the parties intended to enter into a contract, then the courts should enforce such contract as a contract formed by “other means.”
First, many of businesspersons believe that an oral contract is not enforceable under Chinese law. This is not true. Article 10 of the Contract Law clearly provides that oral contracts are valid and enforceable.
Second, there is a general trend in the Chinese courts to limit enforcement of oral contracts. The Supreme Court constantly battles against this trend. Lower courts have avoided enforcing contracts arising from conduct, and the Supreme Court is now pushing the courts to expand their jurisdiction to cover such contracts.
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