2012 Review: Contract Law – new interpretation brings clarity

“The SPC's intention with judicial interpretations is to provide practical guidance on the general provisions in laws, address any gaps in the provisions and ensure a consistent approach in their application. They have a binding effect on all judges in the courts,” said Jessica Fei of Herbert Smith Freehills.

Articles 1 and 2 of the Interpretation clearly detail the types of evidence that can be used to determine intent to enter into a sale and purchase contract. Businesses in China should be aware that the courts are more willing to recognise a sale and purchase contract existed, except when there is clear and compelling evidence to the contrary.

For this reason, companies need to consider if any documentation they are signing could later be construed as intent to enter into a sale and purchase agreement.

Articles 29 to 31 consider damage awards and reinforce how damages should be calculated. Courts have previously been inconsistent in their approach of awarding damages despite Article 113 of the PRC Contract Law (中华人民共和国合同法) clearly stating the party responsible for the breach is liable to compensate the other party for all losses and apply the principle of expectation interest.

This is a positive development for companies and individuals entering into commercial agreements. It will provide certainty and sends a clear message to all local courts that they are expected to apply consistent principles when dealing with damages in sale and purchase contracts.

For detailed analysis of the Interpretation see: Foolproof: How to draft commercial contracts

Also in 2012 Contract Law news:

SPC's 100% compensation for non-compete agreements

In August 2012, the Supreme People's Court released a draft judicial Interpretation requiring employers to make non-compete payments of 100% of the employee's previous month's salary. Typically, non-compete payments range from 20% to 60% depending on the location, as different provinces have different minimum payouts.

This Interpretation has caused much controversy because, if issued, employers would face unreasonable amounts of compensation and several non-compete cases would come before the courts.

The SPC has tried several times to issue an interpretation over the PRC Employment Contract Law (中华人民共和国劳动合同法), which governs non-compete agreements.

“This is the fourth interpretation and the previous three have all covered substantial issues in their draft form, but become procedural in substance once they are issued,” said May Lu of MWE China Law Offices in Shanghai.

At the end of 2012 on December 28, the Standing Committee of the National People's Congress finally approved amendments to the Employment Contract Law. It comes into effect on July 1 2013, but as expected the changes only consider labour dispatch issues and fail to touch on non-compete agreements.

Contract lessons from Apple's trademark dispute

While Apple's case against Proview teaches the importance of trademark due diligence in China, there also contract law lessons to consider.

“This case is an excellent example of the establishment and enforcement of a contract,” said Steven Lin, legal counsel for Shanghai Shanda Networking, a developer and operator of online games.

The legal battle over Apple's iPad trademark went before a Hong Kong Court and Shenzhen People's Intermediate Court. Hong Kong ruled in Apple's favour, granting an interlocutory judgment. The Shenzhen Court ruled against Apple, stating that Proview Shenzhen was the legitimate owner of the trademark.

The difference was that the Hong Kong court considered the contract between the two parties while the judges over the border in Shenzhen did not.

The resounding message is that there are no guarantees a contract will be upheld before Chinese courts. There are also no certainties courts will look at the bigger picture – only the case at hand and the evidence available.

By David Tring

Further reading:

2012 Review: Capital Markets – market reforms, SME boards and shareholder fundraising
2012 Review: Dispute Resolution - all eyes on CIETAC
2012 Review: Employment Law - Exit-entry Law, female workers and social insurance
2012 Review: IP – reforms, famous trademarks top cases and patent marking