On May 28, 2020, China’s top legislature – the 13th National People’s Congress passed the long-expected Civil Code. Comprised of seven parts plus supplementary provisions, 84 chapters and 1,260 articles, the Civil Code is the most extensive legislation in the history of the People’s Republic of China, and this is the only legislation officially named a “code”.
The Civil Code will take effect on 1 January 2021, and when it takes effect, it will abolish, among other laws, the General Provisions of the PRC Civil Law, the PRC Marriage Law, the PRC Guarantee Law, the PRC Contract Law, the PRC Property Law and the PRC Tort Liability Law.
The Civil Code touches upon almost every dimension of civil society and is a significant legislation for every individual in China. The adoption of the Civil Code is widely acclaimed as a milestone in the development of China’s legal system, as the Civil Code not only codifies the fundamental rules of law on civil and commercial matters but also strengthens the protection of citizens’ personal rights such as rights of privacy and personal information. This legislation will certainly have influence on foreign-related dealings in China. The purpose of this article is to introduce the newly enacted Civil Code and its implication on foreign-related contracts.
A brief history of the PRC Civil Code
The quest for a comprehensive civil code in the PRC dates back to 1954 when the Standing Committee of the National People’s Congress (NPCSC) appointed a panel to lead the drafting of a civil code. The first two attempts in 1954 and 1962 failed because of the then struggling economy and political turmoil in China.
After the Chinese government launched the ‘reform and opening-up policy’ in December 1978, the NPCSC re-commenced the drafting of a civil code in an attempt to meet the needs of building a market-oriented economy in 1979. The sweeping changes in the country’s economic and social conditions made it impossible to create a complete civil code at the time. Therefore, the NPCSC ultimately decided to embrace a new approach – to enact a series of separate civil law statutes first and then integrate them into a unified code when conditions were ripe for change.
A large number of civil law statutes have been formulated or amended since then, among them the General Provisions of the Civil Law, Marriage Law, Inheritance Law, Guarantee Law, and Contract Law, etc.
The Chinese legislature attempted for the fourth time to create a civil code in 2001. A draft civil code was submitted to the NPCSC for its review in 2012, but was shelved at the time because of its complexity and controversy. Nonetheless, the NPCSC continued with the approach to adopt separate civil law statutes. As such, the Property Law and Tort Liability Law were enacted and a number of other statutes were substantially revised, which laid the groundwork for a future civil code.
In October 2014, the Communist Party of China, as a necessary step in advancing the country’s rule of law, resolved to compile a unified civil code by 2020. In March 2017, the general provisions of the Civil Code was ratified, and beginning in August 2018, six draft parts were reviewed in different sessions of the NPCSC. The Civil Code in its finalized form was thus presented to and adopted by the NPC at its annual session on 28 May 2020, concluding the country’s six-decade journey to enacting a comprehensive and modern civil code.
What the Civil Code will cover
The Civil Code consists of 1,260 articles in seven parts, including the general provisions, real property, contracts, personality rights, marriage and family, inheritance, tort liability, and supplementary provisions. The Civil Code will serve as a systematic, fundamental law in the civil and commercial fields. At present, China’s current civil legal system covers all of the contents in the current Civil Code and is based on a compilation of laws and amendments1 published at different times. The Civil Code is largely a combination of existing laws, aiming to build a more complete and logical system. As mentioned by Wang Liming, a member of the drafting group of the Civil Code and a renowned law professor from Renmin University of China, "the Civil Code is the first law to carry the title 'code' for the People's Republic of China. It lays down the fundamental principles and regulations regarding civil activities and relations. It reflects the will of the people and protect their rights and interests."2
There are certain major innovations. Unlike civilian tradition, the Civil Code broke out the part of obligations into contracts and torts. There is a new part on personality rights. For the first time, equal protection of state and private properties becomes the guiding principle (See article 207). In the Part on Contracts (合同编), there are no longer two sets of validity rules for contracts and civil juristic acts and both are unified under the same set of rules as in German traditions (See articles 143-157).
How the Civil Code may affect contracts with foreign parties
With the promulgation of the Civil Code, the current contract law, property law, and other laws will therefore cease to take effect on 1 January 2021. In the context of globalization, the adoption of this historical code will affect not only the Chinese citizens, but also the foreign parties involved in China-related business. The Part on Contracts and Part on Property (物权编) are expected to be the most relevant parts. In the Civil Code, the Part on Contracts further improves the existing transaction rules, while the Part on Property develops the regulations on mortgages and pledge.
Composed of 562 articles, the Part on Contracts is the largest single section in the Civil Code and there have been some significant changes when comparing it to the current Contract Law. There will now be 19 nominate contracts compared to 15 nominate contracts in the Contract Law, amongst which guarantee contract, factoring contract, realty property service contract and partnership contract are some of the new additions. Moreover, with the development of e-commerce in China, the Civil Code promulgates the regulations on concluding the contracts in e-commerce businesses. For instance, if one party’s product or service information has been released through the Internet (thus constituting an offer), an e-contract will be formed once the other party selects the product or service and places the order successfully (acceptance). This is important to foreign parties that may be involved in the field of e-commerce business in China.
The Civil Code now emphasizes the principles of fairness and good faith. In this regard, the parties should pay more attention to the new regulation of standard clauses in the contracts. Article 496 of the Civil Code emphasizes the obligations for the party to the transaction with the stronger bargaining power. If the party providing the standard clauses fails to alert the other party on the clauses which may affect his major interest in the contract, and causes the other party who does not pay attention to or does not understand such clauses to suffer, the other party may rely on such failure as a defence to argue that those clauses do not form part of the contract. On the other hand, the Civil Code increases the protection to the creditors by improving the relevant provisions of loan contracts and financial lease contracts; and there is also a special chapter on providing guarantee contracts.
Furthermore, it is quite common for foreign parties dealing with PRC counterparties to request for guarantees or the alike as security. In this regard, the Civil Code also makes some modifications. For example, according to Article 406 of the Civil Code, unless agreed otherwise, the ownership of the mortgaged property or asset might be transferred without the mortgagee’s consent. However, the mortgagee’s rights will not be affected. Also, compared to the Guarantee Law of PRC, the Civil Code balances the interests of the guarantee and the creditor in a better way. Where the parties do not stipulate the type of guarantee or where the agreement is not clear, the guarantee responsibility shall be assumed in accordance with the general guarantee (See Article 686). The general guarantee could enjoy the defence where the creditor has to go after the debtor first.
Last but not least, the Civil Code formally codifies some areas left out in the existing laws and integrates such areas into a formal piece of legislation. For example, the doctrine of change of circumstance, currently only embedded in Article 26 of the Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law, has been codified in the Civil Code. This doctrine provides a basis for resolving current COVID-19- related disputes, which has great practical significance and is especially important. However, it is noteworthy that the original change of circumstances regime as set out in Interpretation II appears to not be fully covered by Article 533 and the Article 580 on frustration may be relied on when disputes arise. The relevant practices may still be pending further clarifications from the Authorities.
The Civil Code is a major consolidated piece of legislation in China and will serve as a guide and will regulate on almost every aspect of the PRC citizens’ civil lives. As the Civil Code is tentatively to take effect only on 1 January 2021, we expect that in the near future, there may be more implementation rules, judicial interpretations, and supplements to follow up on in order to assist the public’s understanding of the Civil Code as a commonly observed judicial practice in China. We will keep abreast of the latest developments on the Civil Code and provide you with timely updates.