Jolene Chen
The Civil Code of the People’s Republic of China (the “Civil Code”) was adopted during the 13th Session of the National People’s Congress on May 28, 2020 and will go into effect on January 1, 2021. A large part of the Civil Code borrows from or is a revision of the General Principles of the Civil Law, the Contract Law, the Inheritance Law, the Marriage Law, the Tort Law and other laws and regulations. Some of the provisions are identical with the existing language, while some are slight wording revisions, and some others contain more substantive changes. This article briefly describes the relevant substantial amendments to the Contract Part as follows:
First, the Contracts Chapter of the Civil Code makes a differentiation between what is considered “not part of a standard term contract” and what is an “invalid standard provision”. Article 496 of the Civil Code explicitly provides that the failure of the party providing the standard terms to perform its obligation to indicate or explain so as to render the other party to be unable to note or understand provisions that are material to its interest, such other party may claim that such provisions do not constitute part of the contract. Article 497 stipulates that standard terms shall be invalid in any of the following circumstances: (1) they are subject to the grounds for invalidity under Part 1, Chapter 6, Section 3 (concerning the validity of civil legal acts) and Article 506 (immunity provisions concerning personal injury or willful or gross negligence resulting in the property damage of others) of this law; (2) the party providing the standard terms unreasonably exempts or mitigates its own liabilities, enhances the liabilities of the other party or restricts the main rights of the other party; or (3) the party providing the standard terms excludes the main rights of the other party.
Second, the Civil Code contains a new provision on breaking through privity of contract. Article 522 of the Civil Code provides that if the parties had agreed that the debtor shall perform the obligation to a third party but fails to do so or if the performance does not comply with the contract, the debtor shall be liable to the creditor for breach. If the law provides or the parties agree that a third party may directly request the debtor to perform the obligation to such third party, and the third party does not expressly refuse during a reasonable period, the debtor’s failure to perform or if the performance does not comply with the contract, the third party may require the debtor to be liable for breach; the debtor’s defenses against the creditor may be asserted against the third party. Article 524 provides that if the debtor fails to perform the obligation and a third party has a legitimate interest in such performance, the third party has the right to perform the obligation to the creditor unless the obligation is of a nature where it can only be performed by the obligor pursuant to the agreement between the parties or to law.
Third, the Civil Code amends relevant provisions concerning statutory rescission. One paragraph is added to Article 563 to stipulate that the parties of an open-ended contract for continuous performance may rescind the contract at any time, provided that the other party is notified a reasonable period in advance. In addition, a party’s right to initiate a lawsuit or request an arbitration to exercise a rescission right has also been amended. Article 565 provides that in case one of the parties directly files a lawsuit or requests for arbitration to claim for rescinding the contract without notifying the other party, and if the people’s court or the arbitration tribunal upholds such claim, the contract shall be deemed rescinded at the time a copy of the complaint or a copy of the request for arbitration is delivered to the other party.
Fourth, the Civil Code has significantly amended the provisions on guaranty contracts. For example, without stipulation otherwise, a guaranty shall be a general guaranty; under Article 686, if the parties of a guaranty contract does not stipulate the form of the guaranty or if the stipulation is not clear, it will be considered as a general guaranty. In addition, previous provisions concerning the six-month guaranty period if “no agreement is deemed to exist” and the two-year guaranty period if “the agreement is unclear” have been deleted. Instead, it is generally stipulated that the guaranty period shall be six months after the expiration of the performance of the principal obligation. Article 692 of the Civil Code provides that the creditor and the guarantor may agree on the guaranty period, but if the guaranty period will expire before or at the same time as the principal obligation, no agreement shall be deemed to exist. In the absence of an agreement or a clear agreement, the period of guarantee shall be six months after the principal obligation expires.
Fifth, the Civil Code distinguishes the scope of damages for the rescission of a non-compensated commission contract and of a compensated commission contract. Under Article 933, either the commissioning party or the commissioned party may rescind the commission contract at any time. In the event of any loss incurred by the other party as a result of the rescission, unless such loss is not attributable to the rescinding party, the party rescinding a non-compensated commission contract shall pay damages for the direct losses, if any, from the improper timing of the rescission; and in the case of a compensated commission contract, the other party shall be paid both for direct losses as well as the gains expected of the performance of the contract, if any.
Sixth, the Civil Code also provides for the circumstances in practice where the seller and the buyer bypass the intermediary and enter into a sale and purchase contract in private. Article 965 provides that after accepting the services of an intermediary, if the commissioning party then leverages the transaction opportunity or intermediary service provided by the intermediary to directly enter into a contract with the counterparty while bypassing the intermediary, compensation shall be paid to the intermediary.