Interpretation on Several Issues Concerning the Application of the «PRC Contract Law» (2)

Article 1: If a dispute exists among concerned parties as to whether a contract has been formed and the people's court is able to determine the names of the parties, the subject matter and the quantity or quantities, in general, it shall hold that the contract has been formed, unless otherwise provided in law or otherwise provided by the parties.

Where a contract is silent on matters other than those set forth in the preceding paragraph and the parties fail to reach agreement thereon, the people's court shall make its determination in accordance with relevant provisions such as Articles 61, 62 and 125 of the Contract Law.

Article 2: If the parties have not concluded a contract in writing or orally but, from the civil acts carried out by them, it is possible to infer that they had the intention to conclude a contract, the people's court may hold that a contract was concluded “in another form” as specified in the first paragraph of Article 10 of the Contract Law, unless otherwise provided in law.

Article 3: If a party offering a reward publicly states that it will pay compensation to someone who completes a certain action and the person who completes the specified action requests the party offering the reward to pay the compensation, the people's court shall uphold such request in accordance with the law, unless any of the circumstances set forth in Article 52 of the Contract Law applies to the reward.

Article 4: If a contract is concluded in writing but the place of execution as specified in the contract is inconsistent with the place where the contract was actually signed or stamped, the people's court shall hold that the place of execution of the contract is the specified place of execution. If the contract is silent on the place of execution and the parties sign or stamp the contract in different locations, the people's court shall hold that the place where the contract was signed or stamped last is the place of execution of the contract.

Article 5: If the parties conclude a contract in the form of a written contract, such written contract shall be signed or stamped. If a party affixes a fingerprint to the written contract, the people's court shall hold such fingerprint to have the same legal effect as a signature or stamp.

Article 6: If a party that provides standard terms uses, at the time of conclusion of the contract, a special indication, such as words, symbols or a font sufficient to draw the attention of the other party to provisions of such standard terms that exempt it from or limit its liability and, as requested by the other party, it explains such standard terms, the people's court shall hold that the same complies with “a reasonable manner” as mentioned in Article 39 of the Contract Law.

A party that provides standard terms shall bear the burden of proving that it has fulfilled its obligation of giving a reasonable alert and explanation.

Article 7: If either of the circumstances set forth below does not violate mandatory provisions of laws or administrative regulations, the people's court may hold them to be “trading practice” as mentioned in the Contract Law:

(1) a practice that is normally adopted in the place of the transaction, or in a certain sector or in a certain industry and that, at the time of the conclusion of the contract, was known or ought to have been known by the transaction counterparty; or

(2) a habitual practice often used by the concerned parties.

A party that makes an assertion of trading practice shall bear the burden of proof in respect thereof.

Article 8: If, after the formation of a contract that, pursuant to laws or administrative regulations, only enters into effect once approved or registered, the party with the obligation to carry out the application procedures for approval or registration, etc. fails to carry out such procedures in accordance with the law or the contract, such failure shall be deemed “another act counter to the principle of good faith” as specified in Item (3) of Article 42 of the Contract Law, and the people's court may, based on the specific circumstances of the case and the petition of the opposite party, render a judgment permitting the opposite party to itself carry out the relevant procedures. The other party shall be liable for damages in respect of the expenses and the opposite party's actual losses arising therefrom.

II. Validity of contracts

Article 9: If a party that provides standard clauses violates the provisions on the obligations of alerting and explanation of the first paragraph of Article 39 of the Contract Law, resulting in the other party failing to note the terms on the exemption or limitation of its liability, and the other party applies for cancellation of the relevant standard clauses, the people's court shall uphold such application.

Article 10: If a party that provides standard clauses violates the first paragraph of Article 39 of the Contract Law and any of the circumstances specified in Article 40 of the Contract Law applies to it, the people's court shall hold the relevant standard clauses to be invalid.

Article 11: Pursuant to Articles 47 and 48 of the Contract Law, a ratified intent shall enter into effect once it reaches the opposite party, and the contract shall enter into effect upon conclusion.

Article 12: If the principal has commenced performing the obligations under a contract concluded in its name by an agent without the authority to do so, it shall be deemed to have ratified the contract.

Article 13: After the principal bears the liability arising from a valid agency act in accordance with Article 49 of the Contract Law, it may seek recourse against the agent that acted without authorisation for the losses incurred as a result of the agency act.

Article 14: The term “mandatory provisions” specified in Item (5) of Article 52 of the Contract Law means mandatory provisions that affect validity.

Article 15: If a seller concludes multiple sales contracts for the same subject matter and none of the circumstances as specified in Article 52 of the Contract Law that would make them invalid applies, and a buyer petitions to pursue the liability of the seller due to its being unable to obtain ownership of the subject matter in accordance with the contract, the people's court shall uphold such petition.

III. Performance of contracts

Article 16: Depending on the specific circumstances of a case, the people's court may name the third party specified in Article 64 or 65 of the Contract Law as a third party without an independent right of claim, but may not, ex officio, name such party as a defendant in such contract suit or as a third party with an independent right of claim.

Article 17: If a creditor names a foreign party as a defendant in a subrogation suit, the people's court shall determine jurisdiction in accordance with Article 241 of the PRC Civil Procedure Law (2nd Revision).

Article 18: If a debtor waives its unmatured claim or waives the security on such claim or extends the term for the performance of a matured claim in bad faith, thereby causing injury to the creditor, and the creditor institutes a legal action for the right of annulment in accordance with Article 74 of the Contract Law, the people's court shall uphold such right.

Article 19: With respect to “a price that obviously is unreasonably low” as specified in Article 74 of the Contract Law, the people's court shall confirm the same in line with the judgement of the average business operator in the place where the transaction occurred, by referencing the guiding price of the pricing department or the market transaction price in the place and at the time the transaction occurred and by comprehensively considering other relevant factors.

If the transfer price is less than 70% of the guiding price or market transaction price in the place and at the time of the transaction, in general, it may be deemed to be a price that obviously is unreasonably low. If the transfer price is more than 30% above the local guiding price or market transaction price, in general, it may be deemed to be a price that obviously is unreasonably high.

If a debtor acquires another's property at a price that obviously is unreasonably high, the people's court may, pursuant to an application by the creditor and with reference to Article 74 of the Contract Law, cancel the acquisition.

Article 20: If a payment made by a debtor is insufficient to discharge all of the same type of debts that it owes to a creditor, the payment shall be used to first set off a debt that has matured; if more than one debts have matured, the debt that is unsecured or that has the lowest amount of security shall be set off first; if the amounts of the security are identical, the debt that presents the greater debt burden shall be set off first; if the burdens are identical, the debts shall be discharged in their maturity sequence; if the debts mature at the same time, they shall be set off pro rata, unless the creditor and the debtor have provided otherwise in respect of the discharge of the debts or on the discharge and set off sequence.

Article 21: When a debtor is required to pay interest and charges in addition to the principal debt, its payment is insufficient to discharge all of the debt, and the parties have not provided for such circumstance, the people's court shall have them set off in the following sequence:

(1) the expenses for realising the claim;

(2) interest; and

(3) the principal debt.

IV. Termination of contractual rights and obligations

Article 22: If a party breaches any of the obligations specified in Article 92 of the Contract Law, thereby causing the other party to incur a loss, and the other party petitions for compensation of its actual losses, the people's court shall uphold its petition.

Article 23: If, with respect to a matured claim that in accordance with Article 99 of the Contract Law can be set off, the parties provide that such claim may not be set off, the people's court may hold such provision to be valid.

Article 24: If a party objects to the termination of a contract or the setting off of a debt as specified in Article 96 or 99 of the Contract Law, but only makes such objection known and institutes a legal action in a people's court after the expiration of the specified time limit for objections, the people's court shall reject such legal action. If the parties have not provided for a time limit for objections and a party institutes a legal action with a people's court only three months after the date of arrival of the contract termination or debt setoff notice, the people's court shall reject such legal action.

Article 25: If, pursuant to Article 101 of the Contract Law, a debtor delivers the subject matter of the contract or the proceeds from the auction or sale of the subject matter to a lodgement authority, the people's court shall hold that such lodgement is valid.

If a lodgement is valid, the debtor shall be deemed to have performed its debt obligations within the scope of the lodgement.

Article 26: If a material change in the objective circumstances that could not have foreseen by the parties at the time of the conclusion of the contract caused by something other than force majeure and falling outside the realm of commercial risk occurs after the formation of the contract and continued performance of the contract would be manifestly unfair to one of the parties or realisation of the objectives of the contract has become impossible and a party petitions a people's court for amendment or termination of the contract, the people's court shall, based on the principle of fairness and while taking into consideration the actual circumstances of the case, determine whether to amend or terminate the contract.

V. Liability for breach of contract

Article 27: If a party, through a counterclaim or plea, petitions the people's court for a revision of the liquidated damages in accordance with the second paragraph of Article 114 of the Contract Law, the people's court shall uphold such petition.

Article 28: If, pursuant to the second paragraph of Article 114 of the Contract Law, a party petitions the people's court for an increase in the liquidated damages, the limit of such increased liquidated damages may not exceed the amount of the actual losses. If after an increase in the liquidated damages the party further petitions for the other party to compensate it for its losses, the people's court shall reject such petition.

Article 29: If a party asserts that the agreed upon liquidated damages are too high and petitions for them to be appropriately reduced, the people's court shall weigh the matter and render its judgment based on the actual losses and in line with the principles of fairness and good faith by comprehensively considering factors such as the extent of the performance of the contract, the degree of fault of the party and the forecast benefits.

If the liquidated damages agreed upon by the parties exceed more than 30% of the losses caused, they may, in general, be held to “grossly exceed the loss incurred” as specified in the second paragraph of Article 114 of the Contract Law.

VI. Supplementary provisions

Article 30: If a dispute over a contract formed after the implementation of the Contract Law remains pending after the implementation hereof, the Interpretation shall apply. If trial of such dispute was final before the implementation hereof and a party applies for a re-trial or a decision for a re-trial is rendered based on the trial monitoring procedure, the Interpretation shall not apply.