22 February 2021
In contrast to the vague provisions of the repealed Contract Law, pursuant to Article 511 Item 1 of the Civil Code, where contractual quality requirements are unclear and cannot be determined with the help of a supplementary agreement, other relevant contractual clauses or trade custom, the contract shall be performed according to:
In practice, the contractual quality requirements are a key part of a sales contract. They should be carefully and clearly worded. Otherwise, if in doubt, the relevant Chinese standards could apply. This might not be fully consistent with the real contractual purpose (e.g. items bought for distribution in foreign countries where different quality standards than China’s apply).
The Civil Code explicitly confirms the privity of contract doctrine. Pursuant to Article 465 paragraph 2, unless otherwise provided for by laws, a contract lawfully concluded shall be legally binding only on the parties thereto.
On the other hand, the Civil Code recognises contracts for the benefit of third parties as an exception to the privity of contract doctrine. For instance, a sales contract between the seller and the buyer for delivering a machine to the end user entitles the end user to request delivery from the debtor directly.
Pursuant to Articles 522 paragraph 2, a third party is entitled to directly request the debtor to perform the contract obligations if
Should the debtor fail to perform the obligations vis-à-vis the third party in accordance with the contract, the third party is entitled to request the debtor to bear liabilities for breach of contract. However, vis-à-vis the third party the debtor may avail itself of any defence it has against the creditor.
In practice, should a contract for the benefits of third parties be concluded, the relevant contractual clauses should unequivocally stipulate the involved parties’ rights and obligations (especially the third party’s rights and the debtor’s obligations). To avoid uncertainties, the debtor should try to obtain an explicit acceptance of its performance from the third party.
In contrast to the repealed Contract Law, Articles 496 – 498 of the Civil Code have substantially modified the regulations on GTC as follows:
Not all clauses excluding the GTC provider’s liabilities and increasing the other party’s liabilities shall be null and void, as provided for in the past by the repealed Contract Law. Now only clauses unreasonably exempting or mitigating the GTC provider’s liabilities, increasing the other party’s liabilities or limiting the major rights of the other party shall be null and void.
In the course of concluding a contract, the contract parties have a statutory confidentiality obligation. Under the repealed Contract Law, such statutory confidentiality obligation was only limited to trade secrets. The legal term of “trade secret” under Chinese law refers to:
Now, Article 501 of the Civil Code has extended the scope of such confidentiality obligation from trade secrets to other information (e.g. personal information) that shall be kept confidential.
Under a former but now repealed judicial interpretation of the Supreme People’s Court, a party concerned can file a request for the modification or rescission of the contract with the people's court, where:
This rule has played an important role against the background of the current COVID-19 pandemic. However, in practice, several ambiguities had to be clarified. For instance, will a major change in any objective circumstances suffice? Why such major change shall not be caused by a force majeure event? Shall the party affected at first try to negotiate a corresponding amendment to the contract with the other party?
Now, pursuant to Article 533 of the Civil Code a party can (only) apply to the competent people’s court or arbitral institution for amending or rescinding the contract, if:
In practice, if a party is affected by such material change in the contractual basis and wishes to amend or rescind the contract, such party should carefully collect relevant evidence and try to negotiate a solution with its contract partner at first. Only when such renegotiation fails, a request for amending or rescinding the contract can be filed with the competent people’s court or arbitration institution.
A revised judicial interpretation of the Supreme People’s Court now officially confirms the change of regulation on default interest. In the absence of a relevant agreement,
Regarding exercise of rescission right (e.g. due to material breach of contract by one contract party), Articles 564 and 565 of the Civil Code supplement the repealed Contract Law as follows:
In practice, the principle of “trust but verify” shall also apply to the performance of contract. Each breach of contract should be carefully documented, and its rectification should be required. Should a breach of contract be able to justify a rescission of contract and a rescission also be wished, the entitled party should exercise his rescission right in time to avoid being forfeited or causing the impression of tacit consent, approval or even waiver.
Same as the repealed Contract Law, pursuant to Article 580 of the Civil Code, if either contract party fails to perform non-monetary obligations as agreed, the other party cannot ask performance under any of the following circumstances:
In contrast to the repealed Contract Law, the Civil Code further confirms that if any of the above results in the impossible realisation of the contract, a party may request the competent people’s court or arbitral institution to end the contractual relationship. However, such ending ruled by the competent people’s court or arbitral institution does not affect the liabilities for breach of contract to be borne by the responsible party.
Pursuant to Article 552 of the Civil Code, the creditor may request a third party to bear joint and several liability for repaying a debt within the scope of debts assumed by the third party where:
Such debt assumption shall be distinguished from suretyship (Articles 681 – 702 of the Civil Code). In the case of debt assumption, the third party will join in the debt and discharge the obligations as his own and no written form for debt assumption contract is required.
In contrast, under a suretyship contract, the surety shall perform the obligation for the debtor or assume liability when the debtor fails to perform the obligation on time or when circumstances agreed upon by the parties occur. A suretyship contract shall be concluded in writing by and between the surety and the creditor.
According to the new Supreme People’s Court’s judicial interpretation, if it is difficult to determine between debt assumption and suretyship, the relevant contract shall be deemed a suretyship contract.
Furthermore, pursuant to Article 686 Paragraph 2 of the Civil Code, in the absence of a clear agreement on the type of suretyship, the surety shall bear the liabilities according to a general suretyship. In the past, in such case the surety shall bear the liabilities based on a joint and several suretyship.
Under a general suretyship, with a few exceptions the surety can refuse to assume suretyship liabilities to the creditor until:
In contrast, under a joint and several suretyship, the creditor can require the debtor to assume liabilities or the surety to assume suretyship liabilities once the debtor fails to perform his obligation on time.
In practice, if a debt assumption or a joint and several suretyship is intended, the relevant contractual clauses shall be carefully and unequivocally worded. Otherwise, they could be deemed a general suretyship contract with weaker protection for the creditor.