Teresa Huang and Jolene Chen [1]
The Civil Code was adopted by the Third Session of the Thirteenth National People’s Congress on May 28, 2020, and will go into effect on January 1, 2021, when the era of the Civil Code in China will begin. The Contract Part accounts for more than half of the Civil Code in length and involves more substantial amendments. This article is mainly focused on the substantial amendments to the general principles under the Contract Part, which apply to all contracts, and also covers several nominate contracts, which are subject to relatively larger scale of amendments, to briefly introduce major precautions for the reference of the readers.
| Current Law | Civil Code | LTP Recommendations |
| Article 2 of the Contract Law: A contract in this Law refers to an agreement among natural persons, legal persons or other organizations as equal parties for the establishment, modification, termination of a relationship involving the civil rights and obligations of such entities. Agreements concerning identity relationships such as marriage, adoption, guardianship, etc., shall be governed by the provisions of other laws. |
Article 464: A contract is an agreement among civil entities on the establishment, modification or termination of a civil legal relationship. Agreements concerning identity relationship such as marriage, adoption, guardianship, etc., shall be governed by legal provisions governing such identity relationship; and in the absence of such legal provisions, the provisions of this Part may be considered as a reference and applied based on their nature. |
This Civil Code provides that the provisions of the Contract Part may be considered as a reference and applied to agreements concerning identity relationship such as marriage, adoption, guardianship, etc., based on their nature. It is recommended that in the future when an agreement involving identity relationship is executed, it may be agreed that the Contract Part of the Civil Code shall apply to matters relating the division of property, claims and obligations and liquidated damages, etc. in order to better guarantee the binding force of the agreement. |
| Article 2 of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law for the Trial of Cases Involving Disputes over Sales Contracts: Where both parties have signed a pre-contract such as purchase offer, purchase order, reservation form, letter of intent, and memorandum, and have agreed that a sales contract is to be concluded within a certain period of time, if one party does not perform the obligation of concluding a sales contract and the other party requests that it assumes liability for breach of the pre-contract or demands the rescission of the pre-contract and claims compensation for damages, the people’s court shall support such a claim. | Article 495: A purchase offer, purchase order, or reservation form, etc., in which the parties agree to enter into a contract within a certain period of time in the future shall constitute a pre-contract. If one of the parties fails to perform its obligation to enter into a contract under the pre-contract, the other party may claim that the other party shall assume the liability for breaching the pre-contract. |
The provisions of this Civil Code recognize the validity of pre-contracts other than sale and purchase contracts, and therefore, pre-contract signed by both parties is legally binding in the same way as the principal contract, and any violation of the pre-contract may also result in liability for breach of contract. Therefore, it is necessary to carefully review and sign a pre-contract. |
| Article 64 of the Contract Law: Where the parties agree that the obligor shall perform the obligations to a third party, but the obligor fails to perform its obligations to such third party or its performance of the obligations is not in conformity with the agreement, the obligor shall be liable to the obligee for breach of contract. | Article 522: Where the parties agree that the obligor shall perform the obligations to a third party, but the obligor fails to perform the obligation to the third party or the performance of the obligation is not in conformity with the agreement, the obligor shall be liable to the obligee for breach of contract. If a third party may directly request the obligor to perform the obligation to it pursuant to law or as agreed between the parties and the third party does not expressly refuse within a reasonable period, the third party may request the obligor to assume the liability for breach of contract in case of the obligor’s failure to perform the obligation to the third party or of the inconformity with the agreement. The obligor’s defense against the obligee may be asserted against the third party. |
The Civil Code stipulates this time that pursuant to law and the agreement between the parties, a third party can directly request the obligor to perform the obligation pursuant to the agreement and has the right to pursue the liability for breach of contract. Such a breakthrough to the privity of contract can greatly enhance the efficiency of contract performance and dispute resolution. Therefore, if the circumstances where an obligation shall be performed to a third party do exist under the contract, the covenant that the third party may request the obligor to perform the obligation and assume the liability for breach of contract may be added. |
| Article 26 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Contract Law of the People’s Republic of China (II): If, after the establishment of the contract, there is a material change in the objective circumstance which the parties cannot foresee when the contract is executed and which is not a commercial risk and not resulted from force majeure, and the continued performance of the contract is apparently unfair to one of the parties or fails to achieve the purposes of the contract, and the parties request the people’s court to modify or terminate the contract, the people’s court shall determine whether to modify or rescind the contract based on the principle of fairness and taking into account the actual circumstances of the case. | Article 533: After the establishment of a contract, if there is a material change in the conditions underlying the contract that the parties cannot foresee when the contract is executed and that is not a commercial risk, and if the continued performance of the contract is apparently unfair to one of the parties, the adversely affected party may renegotiate with the other party. If the negotiation fails within a reasonable period of time, the parties may request the people’s court or an arbitration institution to modify or rescind the contract. The People’s Court or the arbitration institution shall modify or rescind the contract, taking into account the actual circumstances of the case and based on the principle of fairness. |
The Civil Code as amended this time has added a preliminary procedure for the renegotiation between the parties. Therefore, in the event of a change in circumstances such as an adjustment to state policies, changes in current laws and regulations or abnormal changes in price level, exchange rates, or currency value, the parties should actively and timely negotiate with each other, and if the negotiation fails, they can request the people’s court or an arbitration institution to modify or rescind the contract.
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| Article 73 of the Contract Law: Where the obligor is remiss in exercising its due creditor’s right, thereby harming the obligee’s interests, the obligee may petition the people’s court to exercise, in its own name, the claim of the obligor by way of subrogation, provided that this shall not apply if the claim belongs to the obligor exclusively. The extent to which the subrogation right can be exercised is limited to the obligee’s claim. The expenses necessary for the obligee to exercise such subrogation right shall be borne by the obligor. |
Article 536: If, before the obligee’s claim expires, there are circumstances where the statute of limitations for litigation concerning the obligor’s claim or collateral claim is going to expire or the claim in bankruptcy is not declared in time to the extent that the realization of the obligee’s claim is affected, the obligee may request, by way of subrogation, the counterparty to satisfy the claim to the obligor, make a declaration to the bankruptcy administrator or take other necessary actions. | This provision adds circumstances in which a subrogation right can be exercised before the claim expires, and when the new conditions arise, such as the impending expiration of the statute of limitations for litigation, the subrogation right can be exercised against the secondary obligor in time to better preserve the realization of the obligee’s own claim. |
| Article 81 of the Contract Law: Where the obligee assigns its right, the assignee shall acquire the collateral rights related to the claim, except that the collateral rights belongs exclusively to the obligee.
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Article 547: If the obligee assigns a claim, the assignee acquires the collateral rights relating to the claim, unless the collateral rights belongs exclusively to the obligee itself. The acquisition of the collateral rights by the assignee should not be affected by the fact that the transfer of the collateral right is not registered or its possession is not transferred. |
The new system of transferring the collateral right along with the principal claim can ensure that the assignee of the principal claim can timely assert the collateral right such as mortgage, pledge, etc., without waiting for the registration of the collateral right or transfer of possession in order to avoid impediment to the exercise of the claim during the period, such as the loss of the subject matter or the seizure of the subject matter by other obligee. |
| Article 94 of the Contract Law: The parties to a contract may rescind the contract under any of the following circumstances:(Omitted)
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Article 563, Paragraph 2 (New): The parties to an indefinite contract with a continuing obligation may rescind the contract at any time, provided that a reasonable prior notice shall be given to the other party before a reasonable time limit. | An arbitrary right of rescission has been added this time for the parties to an indefinite contract, but when exercising such right of rescission, the other party shall be notified before a reasonable period of time in order to protect the other party’s reliance interest. |
| Article 95 of the Contract Law: Where time limit for the exercise of the right of rescission is stipulated by law or agreed-upon between the parties, if such right is not exercised within the time limit, such right shall lapse. Where the law is silent or the parties do not agree to the time limit for the exercise of the rescission right, if the right is not exercised within a reasonable period after notification by the other party, such right shall lapse. Article 15 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law for Trying Cases Involving Disputes over Contracts on the Purchase and Sale of Commodity Houses: Under Article 94 of the Contract Law, if the seller delays the delivery of a house or the buyer delays the payment of the purchase price and still fails to perform within a reasonable period of three months after being notified to do so, a request by one of the parties to rescind the contract shall be upheld, unless the parties agree otherwise. In the absence of such provisions under the law or such agreement between the parties, the reasonable period for the exercise of the right of rescission shall be three months upon notification by the other party. If the other party has not delivered a notice, the right of rescission shall be exercised within one year from the date on which the right of rescission becomes exercisable; and if it is not exercised within the period, the right of rescission shall lapse. |
Article 564: If the law stipulates or the parties agree to a time limit for the exercise of the rescission right, and the time limit expires while such right is not exercised by the parties, the right shall lapse. Where the law does not stipulate or the parties have not agreed to a time limit for the exercise of the right of rescission, if the right is not exercised within one year from the date when the party entitled to the right of rescission becomes aware or should have been aware of the reason for the rescission, or if such right is not exercised within a reasonable period upon notification by the other party, such right shall lapse. |
This Civil Code clarifies the time limit for the right to rescind a contract. To wit, if the law is silent or the parties do not agree to the time limit for the exercise of the right of rescission, the time limit for exercising the right of rescission is one year. Therefore, in case of any matter giving rise to the rescission of a contract, the right of rescission should be exercised in time during the time limit to terminate the contractual rights and obligations. |
| Article 96 of the Contract Law: If one of the parties claims the right to rescind the contract in accordance with the Article 93, Subparagraph 2 (agreed-upon rescission of the contract) and Article 94 (legal rescission of the contract) of this Law, the party shall notify the other party. The contract shall be rescinded upon receipt of the notice by the other party. If the other party has objections, such other party may request a people’s court or an arbitration institution to confirm the validity of the rescission of the contract. If laws and administrative regulations provide that the termination of the contract shall be subject to approval, registration and other formalities, such laws and administrative regulations shall govern. | Article 565: If one of the parties claims the right to rescind the contract pursuant to law, the other party shall be notified. The contract shall be rescinded upon receipt of the notice by the other party. If the notice states that if the obligor does not perform the obligation within a certain period of time, the contract will be automatically rescinded; and if the obligor fails to perform the obligation within such period, the contract shall be terminated upon the expiration of the period stated in the notice. If the other party objects to the rescission of the contract, either party may request a people’s court or an arbitration institution to confirm the validity of the act of rescission. If one of the parties, without notifying the other party, directly claims the right to rescind the contract by filing a lawsuit or applying for arbitration, and the people’s court or arbitration institution upholds the claim, the contract will be rescinded upon delivery of a copy of the complaint or arbitration application to the other party. |
This Civil Code adds a grace period for the exercise of the right to rescind a contract. This means that the other party may be notified to perform within a certain period of time or the contract will be automatically terminated. This is a more effective way to address contractual disputes. In addition, either party to a contract can request a people’s court or an arbitration institution to confirm the validity of the rescission. Therefore, if the parties disagree with the exercise of the rescission right, they can file a lawsuit or arbitration. |
| Article 110 of the Contract Law: Where a party fails to perform non-monetary obligations or its performance of non-monetary obligations fails to satisfy the terms of the contract, the other party may request its performance except under any of the following circumstances: (Omitted)
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Article 580: Where a party fails to perform a non-monetary obligation or where the performance of a non-monetary obligation does not comply with the agreement, the other party may request performance, except for any of the following circumstances: (Omitted) In any of the exceptional circumstances in the preceding paragraph where the purposes of the contract cannot be achieved, a people’s court or an arbitration institution may terminate the right and obligation relationship under the contract at the request of the parties, provided that this shall not prejudice the assumption of the liability for breach of contract. |
This provision gives the breaching party the right to sue for rescission of a contract under certain circumstances. Therefore, if the purposes of the contract cannot be achieved due to the actual inability to perform, the unsuitability of the subject matter to be performed compulsorily, excessive cost of performance, failure of the obligee to request performance within a reasonable period, even the breaching party can also file a lawsuit or refer to arbitration to terminate the rights and obligations relationship under the contract. This provision can encourage the parties to deal with contractual disputes as quickly as possible to avoid a contractual impasse. |
| Article 97 of the Contract Law: After a contract is rescinded, the performance of the portions which are not yet performed shall be terminated, and for portions which have been performed, the parties may request the original state to be restored or other medial measures to be taken, depending on the circumstance of performance and the nature of the contract, and have the right to demand compensation for damage.
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Article 566: After a contract is rescinded, the performance of the portions which have not been performed shall be terminated, and for the portions which have been performed, the parties may request the original state to be restored or other remedial measures to be taken, depending on the circumstance of performance and the nature of the contract, and have the right to demand compensation for damage. If a contract is rescinded for breach of contract, the rescinding party may request the breaching party to assume the liability for breach of contract, except as otherwise agreed by the parties. After the principal contract is terminated, with respect to the civil liability which should be assumed by the obligor, the guarantor shall continue to bear guarantee liability, except as otherwise agreed in the guarantee contract. |
This time, the Civil Code added the provision that if the principal contract is terminated for breach of contract, with respect to the civil liability that should be assumed by obligor, the guarantee liability shall still be assumed, except as otherwise agreed in the guarantee contract. Therefore, when a party signs a contract as a guarantor, it is recommended that the parties to the agreement clarify in the contract the extent of the guarantor’s civil liability. |
| Article 19 of the Guarantee Law: If the parties have not agreed on the guarantee method or the agreement is not clear, they shall assume the guarantee liability according to their joint and several liability. | Article 686: The methods of guarantee shall include general and joint and several guarantees. If the parties have not agreed on the guarantee method in the guarantee contract or the agreement is not clear, they shall assume the guarantee liability for general guarantee. |
This time, the Civil Code amended the provision that the guarantee liability shall be a liability for general guarantee in the absence of an agreement or in case of unclear agreement. Therefore, when a guarantee agreement is signed, if the guarantor is required to assume joint and several liability, it should be clearly agreed that the guarantee shall be a joint and several guarantee; otherwise it will be regarded as a general guarantee, and the general guarantor shall have the right of beneficium ordinis. |
| Article 31 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Guarantee Law of the People’s Republic of China: There shall be no legal consequences of suspension, interruption, or extension of the guarantee period for any reason whatsoever. Article 32: The guarantee period agreed upon in the guarantee contract shall be deemed not agreed upon if it is earlier than or equal to the period of performance of the principal obligation, and the guarantee period shall be six months after the date when the performance period of the principal obligation expires. If a guarantee contract provides that the guarantor shall assume guarantee liability until the principal and interest on the main obligation are repaid or contains similar content, the contract shall be deemed unclear. Thus, the guarantee period shall be two years after the date when the performance period of the principal obligation expires. |
Article 692: The guarantee period shall be the period during which the liability of the guarantor is established without suspension, interruption or extension. The obligor and the guarantor may agree on the guarantee period, provided that if the agreed-upon guarantee period is earlier than or expires at the same time as the performance period of the main obligation, it shall be deemed that there is no agreement; and if there is no agreement or the agreement is unclear, the guarantee period shall be six months after the date when the performance period of the principal obligation expires. If there is no agreement between the obligee and the obligor on the period for the performance of the principal obligation or the agreement is not clear, the guarantee period shall commence on the expiration date of the grace period for the obligor’s performance of the obligation as requested by the obligee. |
This Civil Code unifies the regulations that the guarantee period shall be six months after the date when the performance period of the principal obligation expires in the absence of an agreement or a clear agreement. Therefore, if a further agreement is signed with the provision that the guarantee liability of the guarantor shall continue until the repayment of the principal and interest of the principal obligation or contains similar provisions, the provision that the guarantee period shall be six months upon expiration of the performance period of the principal obligation will apply, and the two-year provision will no longer apply. Therefore, it is recommended that the parties stipulate the guarantee period in the guarantee contract, or in the absence of such agreement, it is recommended to timely exercise rights within the guarantee period. |
| Article 410 of the Contract Law: Either the entrusting party or the entrusted party may rescind the commission contract at any time. Where the other party sustains any loss due to the rescission of the contract, the other party shall be compensated for its losses except for reasons not attributable to the rescinding party.
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Article 933: The entrusting party or the entrusted party may rescind the commission contract at any time. Except for reasons not attributable to the rescinding party, if the other party sustains losses due to the rescission of the contract, the rescinding party to a gratuitous commission contract shall compensate for the direct loss caused by the rescission at improper time, and the rescinding party to a non-gratuitous commission contract shall compensate the other party for the direct loss and the gains expected of the performance of the contract. | This Civil Code has added the provision that when the right of rescission is exercised over a gratuitous commission contract, it is still possible to assume the direct loss incurred as a result of untimely rescission. In case of a non-gratuitous commission contract, the rescinding party should also compensate the other party for its direct loss and the loss of the gains expected of the performance of the contract. Therefore, in the performance of a commission contract, even if the law provides that both parties shall enjoy the right of rescission, but still they should actively perform the contract based on the principle of good faith, otherwise assume the corresponding liability for damages. |
[1] The authors are lawyers at Shanghai Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.