[Legal Analysis] Civil Code Contract Provisions
2024. 5. 23
On May 23, 2023, the Adjudication Committee of the Supreme People’s Court adopted the “Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Principles of Contract Part of the Civil Code of the People's Republic of China” (hereinafter referred to as the “Judicial Interpretation of the Contract Part”), which was implemented from December 5, 2023.
After the promulgation of the Civil Code, the Supreme People’s Court abolished the “Interpretation of Contract Law I” and “Interpretation of Contract Law II” formulated based on the original contract law, and it was necessary to publish judicial interpretations related to the general provisions of the contract part of the Civil Code in judicial practice. Therefore, the Supreme People’s Court organized related judicial interpretations and, in conjunction with the difficult problems encountered in the practice of adjudication, formulated the Judicial Interpretation of the Contract Part. This time, the Judicial Interpretation of the Contract Part has refined and improved the relevant legal provisions of the Civil Code from many angles, such as general provisions, conclusion of contracts, effectiveness of contracts, performance of contracts, preservation of contracts, changes and transfers of contracts, termination of contractual rights and obligations, and liability for breach of contract. This article briefly introduces some important issues in the Judicial Interpretation of the Contract Part.
1.About the recognition of reservation contracts
In relatively complex transactions, the parties often sign a letter of intent before concluding a formal contract. In fact, the People’s Court often finds it difficult to judge whether various letters of intent and memorandums are transaction intentions or reservation contracts. In response to this, the Judicial Interpretation of the Contract Part provides clearer judicial rules for the recognition of reservation contracts.
The reason why the parties conclude a reservation first, without directly concluding the main contract, is that the parties want to fix the negotiation results step by step and give them legal binding force, while they want to reserve the right to further discuss the content that has not reached an agreement in the future, and decide whether to complete the transaction in the end. According to the Judicial Interpretation of the Contract Part, the parties have the right to decide whether to promote the transaction to the conclusion of the main contract. But after the reservation contract takes effect or when discussing the conclusion of the main contract, if the party refuses to conclude the main contract, the defaulting party will be deemed to violate the principle of good faith and the main contract fails to be established because all are violations of the reservation contract, and the defaulting party must bear the liability for breach of the reservation contract.
To establish whether a party violates the principle of good faith when concluding the main contract, and the main contract fails to be established, it is necessary to comprehensively consider factors: first is whether the conditions proposed by the party when concluding the main contract are obviously deviated from the content of the reservation contract, and the second is whether reasonable efforts have been made to negotiate. In addition, one interpretation of the liability for breach of a reservation contract is that a reservation contract only gives rise to a continuous negotiation obligation, and a party cannot be forced to conclude the main contract. Another interpretation is that a reservation contract, by its nature, can produce the effect of compulsory conclusion, and the judgment of the court can replace the expression of the party’s voluntary intention and give the effect of compulsory execution. The judicial interpretation of the contract part stipulates that the party must bear the liability for damages if it violates the reservation contract, but it does not stipulate whether the party can adopt the relief method of compulsory performance, if it violates the reservation contract. If there are new provisions in the civil compulsory execution law to be established in the future, they need to be handled according to the new provisions.
2.About the contract effectiveness problem in case of violation of mandatory provisions
Questions regarding violation of mandatory provisions and the validity or otherwise of the contract are indeed difficult problems in the judicial practice. The Judicial Interpretation of the Contract Part specifically lists five cases where the violation of mandatory provisions does not affect the effectiveness of the contract.
First, the mandatory provision aims to protect the public order of society, but the actual performance of the contract has a significantly minor impact on the public order of society, and the recognition of the invalidity of the contract leads to unfair and unjust handling of the case. Second, the mandatory provision aims to protect the national interests such as government tax revenue and land transfer money, not the civil rights and interests of the contracting parties, or the legitimate interests of other civil subjects, and the recognition of the validity of the contract does not affect the realization of this normative purpose. Third, the mandatory provision aims to require one party to strengthen risk control, internal management, and the other party does not have the ability or obligation to review whether the contract violates the mandatory provision, and the recognition of the invalidity of the contract leads to adverse results. Fourth, at the time of contract conclusion, one party violated the mandatory provision, but after the conclusion of the contract, it had the conditions to correct the violation of the mandatory provision, but violated the principle of good faith and did not correct it. Fifth, other situations stipulated by laws and judicial interpretations.
In addition to the above, there are other situations stipulated by laws and judicial interpretations refered to above. For example, after the parties have concluded a residential lease contract, even if they do not make a registration according to law, the effectiveness of the residential lease contract is not affected according to the provisions of Article 706 of the Civil Code.
3.Conclusion
The Civil Code occupies a fundamental position in the legal system and is also an essential law of the market economy. Most of the civil activities of enterprises are closely related to the Civil Code. The promulgation of the Judicial Interpretation of the Contract Part is applied as the interpretation of the general provisions of the Contract Law to the adjudication guidance of all types of contract disputes. Enterprises should attach importance to the content of the Judicial Interpretation of the Contract Part, and ensure their compliance to guarantee their own legitimate rights and interests.
Author: Andrew Zhang, Senior Partner at A&Z Firm