China's New Civil Code – Part 3: Contractual Law

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published on 27 July 2020 | reading time: approx. 4 minutes

 

The new Civil Code (CC) of China, which will enter into force on January 1, 2021, consists of 7 parts. With this series of articles we inform about the essential legal provisions and new regulations in the new Civil Code.

  

  


Background

Contractual law in China has so far been regulated in particular in the Contract Law, the provisions of which have been incorporated into and supplemented by the Civil Code. Upon entry into force of the Civil Code, the Contract Law will be repealed and become ineffective.

Structure and essential content

Part 3 of the Civil Code is divided into 29 chapters consisting of three subsections: a subsection containing general provisions, a subsection on special types of contracts and a subsection on management of affairs without mandate (negotiorum gestio) and unjust enrichment.

The general provisions govern in particular the conclusion of a contract, effectiveness, fulfilment, amendment and termination as well as liability in case of breach of contract.

The subsection on special contract types contains a list of 18 typical contracts such as purchase contract, leasing, technology contract, guarantee contract, property management contract, factoring, but also partnership contract. The provisions on the different types of contracts usually contain a definition of the relevant type of contract and a list of terms that should typically be included in such particular contracts.

Definition of contracts and applicable law

The Civil Code defines a contract as an agreement between legal entities to establish, modify and terminate a civil law relationship. In principle, the provisions for specific types of contracts should be applied to a given contract first and the general provisions are to be applied for matters not regulated there. If a contract does not fall under one of the 18 types of contracts, the general provisions apply to the contract. Furthermore, the parties to the contract are free to determine the law applicable to the contract in accordance with the law, although it should be noted that in some areas no choice of law is possible, provided that the contracts are to be performed in China.
 

Conclusion and effectiveness of contracts

In principle, contracts can be concluded in written, oral or other forms.

The term “written form” is broadly defined and includes any form that makes the information contained in a contract reproducible in a tangible form such as a written agreement, a letter or also a fax. This also includes electronic data which can reproduce the content specified by electronic data exchange or e-mail in a tangible form and which is accessible and can be used for reference purposes at any time.

In the case of a written contract, the contract is concluded when the contracting parties sign the contract, provide it with their fingerprint or stamp it appropriately. Unless otherwise provided for by law or by the contract, the contract shall also become effective at that moment.

Termination of contracts

Contracting parties can, in principle, freely agree in the contract reasons for a termination of the contract by one of the parties. In addition to such contractual reasons for termination, a party may also unilaterally terminate a contract without a corresponding contractual provision if one of the following circumstances applies:

  • Impossibility to achieve the purpose of the contract due to a circumstance of force majeure;
  • Explicit declaration by a party or corresponding conduct that it will not perform its principal obligation before the expiry of the period for performance;
  • Delay of a party in the fulfilment of the main obligation and also no fulfilment after the setting of a reasonable grace period;
  • Delay of a party in the fulfilment of a main performance obligation or other breach of contract, which makes it impossible to achieve the purpose of the contract;
  • Other grounds for termination provided for by law.

Liability for breach of contract

Liability in the event of a breach of contract is initially regulated by law. If one party breaks the contract because it has not fulfilled its performance obligations or has not fulfilled them as agreed, it is in principle liable and obliged to take various measures such as continuous performance, remedial measures, but also compensation for the losses incurred by the other party due to the breach of contract.

In principle, contracting parties can also agree in the contract to pay damages in the event of breach of contract. On the one hand, this can be a lump sum compensation. On the other hand, however, a calculation method for determining damages can also be agreed. It should be noted that the amount of damages must be proportionate to the severity of the breach of contract. Thus, a court may, upon request, reduce a lump-sum amount of damages which, in a specific individual case, significantly exceeds the losses suffered as a result of the breach of contract, but may also, upon request, increase a lump-sum amount of damages which is too low.

Legal implications

The regulations on contractual law do not contain any significant changes or novelties for companies in China, with the exception of the increase in the number of typified contracts. However, companies should not be solely guided by the corresponding specific regulations when drafting a contract that falls under one of the specified contract types, as these are only basic essential regulations and a contract should always be tailored to the planned specific legal transaction.

Since the regulations on the conclusion and validity of contracts have not been changed, and therefore the stamping of the corresponding document is sufficient for the conclusion of a contract in the future as well. Companies should continue to ensure proper safekeeping of the company chops and regulate the use of the chops (access authorization, dual control principle, documentation of use, etc.) within the company.

The next article in this series will deal with some aspects of the 4th part of the Civil Code – Personality Rights.

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