PRC Contract Law

1
PRC Contract Law

• Donald J. Lewis
• Faculty of Law
• The University of Hong Kong

2
Legal Framework

• Contract Law
• General Principles of Civil Law (GPCL)
• Judicial Opinions of Supreme Court
• UN Convention on Contracts for the International
  Sale of Goods (CISG)
• Trade usage

3
Choice of Law/Proper Law

• Foreign-related vs domestic bifurcation still
  evident in CL
• Party autonomy but only for foreign-related
  (shewai) contracts
• Also no foreign governing law for 3 types of
  foreign-related investment contract
• If no choice of law, closest connection test is
  employed

4
General Contract Principles

• Equality of the parties
• Voluntariness
• Fairness
• Good faith

5
Formation of Contract

• Civil capacity
• Natural persons may now enter into economic
  contracts, including those with foreign parties
  (however, foreign trade rights or authorization
  still required)
• Legal Persons may enter into economic contracts
  generally

6
Formation of Contract

• Formalities
• Contracts may take oral, written or other forms,
  including EDI forms
• Some contracts must take a written form under
  more specific PRC laws and regulations
• If written form required, contract is formed when
  signed or sealed
• No specific content requirements for PRC
  contracts (cf. Article 12, CL)
• May refer to model contract forms

7
Formation of Contract

• Offer Acceptance
• PRC contract formed on basis of offer and
  acceptance
• Note no requirement of consideration
• Definition of offer a declaration of intention
  to conclude a contract which
• (1) is sufficiently specific and definite and
• (2) indicates that offeror will be bound by
  acceptance

8
Formation of Contract

• Offer Acceptance
• Offers distinguished from invitations to treat
  (e.g., tender bids and commercial advertisements)
• Effectiveness of Offer the offer becomes
  effective upon receipt by the offeree
• Withdrawal of offers permitted provided
  withdrawal reaches offeree before or at same time
  as offer

9
Formation of Contract

• Revocation of Offers permitted provided notice
  of revocation reaches offeree before dispatch of
  acceptance
• Note revocation is not permitted if
• (1) offer clearly states that it is
  irrevocable or
• (2) offeree has reason to believe that offer
  was irrevocable and has made preparations to
  perform

10
Formation of Contract

• Acceptance
• Definition of acceptance offerees declaration
  of intention to assent to offer
• Communication of acceptance
• (1) by notification to offeror or
• (2) if permitted by trade usage or offer, by
  performing an act

11
Formation of Contract

• Acceptance
• Time for communicating acceptance
• (1) by time fixed in offer or
• (2) if offeree is not present, acceptance
  must reach offeror within a reasonable time
• Specific rules for fax or other electronic forms
  of communication

12
Formation of Contract

• Acceptance
• Effectiveness of acceptance
• PRC contracts are formed when acceptance becomes
  effective
• Acceptance becomes effective upon receipt by the
  offeror, except where it may be performed by an
  act
• Late Acceptances may be effective (see Articles
  28 29, CL)

13
Formation of Contract

• Material Alterations/Counter-Offers
• Acceptance should match offer
• Material alterations to the offer constitute a
  new offer
• Material alterations include
• Subject-matter of contract
• Quantity
• Price
• Time for performance
• Liability for breach
• Method of dispute resolution

14
Formation of Contract

• Non-material alterations form part of the
  contract unless the offeror makes timely
  objection
• The role of confirmation letters (see Article
  33, CL)

15
Formation of Contract

• Pre-contractual Liabilities
• Damages are now available if the other party is
• Negotiating in bad faith
• Deliberately concealing materials facts relevant
  to conclusion of the contract or providing false
  information OR
• Engaging in acts violative of good faith
• (See Article 42, CL)

16
Formation of Contract

• Pre-contractual Liabilities
• Damages are also available if the other party
• Engages in unauthorized disclosure or use of
  trade secrets (e.g., proprietary technology)
  revealed during the course of negotiations (e.g.,
  joint ventures) regardless of whether contract is
  later formed
• (See Article 43, CL)
• Prudence still suggests executing a separate
  confidentiality agreement with Chinese parties

17
Validity of Contracts

• The Case of Standard Clauses
• Duty of disclosure (and explanation)
• What is a standard clause boilerplate clauses
  which exempt or limit the liability of a party
• A standard clauses is void if
• (1) circumstances in Articles 52 or 53, CL,
  exist OR
• (2) it exempts liability OR
• (3) it increases the liability of other
  party OR
• (4) it deprives the other party of a major
  right

18
Validity of Contracts

• What are some examples of standard clauses?

19
Validity of Contracts

• Article 44, CL, provides A legally formed
  contract is valid and effective from the time of
  formation
• However, caveat if PRC laws or regulations
  provide that approval and/or registration be
  carried out before the contract becomes
  effective, such provisions prevail
• This latter situation may be the case for a range
  of foreign-related contracts