The increase in complexity of the social life has led the administrative authority to become widely involved in civil and commercial activities.  The social element has become a more important aspect of the regulations implemented by the administrative authority.  The approval or registration of acts mechanism used by the administrative authority is an indispensible legal element, which enables or supports the establishment of numerous civil juristic acts.  As civil juristic acts and administrative acts are intertwined by nature, different views over the effectiveness of the Approval Clause arose when the dispute occurred.  This article gives a preliminary analysis of the attitude towards the nature of the contract approval clause in judicial practice, based on a case in the Gazette of the Supreme People's Court of the People's Republic of China.

Case in Brief

In 2005, the Supreme People’s Court initiated the second instance proceedings to hear the dispute between Land and Resources Bureau of Qingdao Laoshan District (“Laoshan Land and Resources Bureau”) and Qingdao Nantai Real Estate Co., Ltd(“Nantai Co.”) over a state-owned land assignment contract ( 2004, Min Yi Zi No. 106, ”Supreme Court case” ).[1]

Laoshan Land and Resources Bureau and Nantai Co. entered into a state-owned land assignment contract, which stipulated that the land assignment plan under the contract shall be approved by Shandong Province People’s Government and that the contract shall become effective upon the time of approval.  When Shandong Province People’s Government approved the transformation of the farmland under the contract into land for construction, it also asked for specific projects with pieces of land designated for construction to be reported by Qingdao Land and Resources Bureau to Shandong Province Land and Resources Bureau for recording purposes.  Laoshan Land and Resources Bureau currently claims that the contract has not come into effect on the ground that Shandong Province People’s Government approved the transformation of the farmland but did not approve the land assignment plan.  The Supreme Court concluded after hearing the case that whether the contract shall be submitted to the administrative authority for approval lies on the provisions of laws or administrative regulations, rather than the terms agreed upon by the parties to the contract.  Shandong Province People’s Government indicated in their official reply that the control of land for construction does not use an approval system, but uses a filing system.  It thus held that the inclusion or exclusion of the agreements of the contract in the request (addressed to the provincial government) of instructions for the land made by Qingdao People’s Government did not affect the contract’s validity.

Nature of terms on the approval to related matters agreed upon under the contract

The effectiveness of the contract is the key issue for the Supreme Court case.  Therefore, it is essential to determine the nature and the effect of the contract approval clause.  According to Article 45 of the Contract Law of PRC, the parties to the contract may agree to attach conditions, which affect the validity of the contract.  A contract with collateral conditions becomes effective upon the fulfillment of those conditions.  Although it was agreed upon by both parties that the collateral condition of the contract was the approval of the land assignment plan by Shandong Province People’s Government, the Supreme Court considered that this condition did not meet the criteria prescribed by the Contract Law of the PRC for a contract with collateral conditions.

It was previously generally admitted by intellectual circles that Article 45 of the Contract Law of the PRC does allow for conditions to be attached to the validity of a contract.  Regardless of the origin of a condition, whether it is legal or bilateral, the condition can be further divided into an agreed condition and a statutory condition.  This allows for the approval clause of the contract to be tied to the statutory condition of the contract.  Since the parties to the contract both agreed that the contract would become effective as soon as the administrative authority approved the land assignment plan, the contract is indeed one with collateral conditions.

The Supreme Court has clarified that the contract has no collateral conditions since the parties set the statutory authority for approval as the condition for the contract.  The Supreme Court stated that collateral conditions in a contract should only be those that will be based on uncertain future events, and those that are legitimate and most importantly non-statutory.  In China, the power and duty of a governmental authority to approve a certain matter or a contract are derived from the provisions of the laws and administrative regulations and are not within the scope of the matters to be agreed upon by the parties.

Although, the Supreme Court recognizes the legal nature of the approvability as a statutory condition, and it further considers an agreed condition and a statutory condition to be those of the collateral conditions for the creation or elimination of a juristic act,[2] the Supreme Court’s attitude toward the approval clause with regard to the case remains unchanged.  According to The Comprehension and Application of Provisions of the Supreme People's Court on Various Issues Concerning the Trial of Cases involving Disputes Relating to Foreign-invested Enterprises (1), the difference between an agreed condition and a statutory condition lies in that the realization of the agreed condition can be affected by the interests of the parties while the realization of the statutory condition is independent of the intentions of the parties.  The approval authority decides whether a matter is approved or not.  In this regard, it is considered that the approval clause agreed upon by the parties is not in compliance with Article 45 of the Contract Law of the PRC.

Implications of judicial practice for legal practice

The judgment of the case has excluded the possibility that an approval is a condition for a contract with collateral conditions.  When looking at Article 44 of the Contract Law of the PRC,[3] from which the limitations of judicial hierarchical power over the right of approval for contracts are derived, we can find that:

  • If any law or administrative regulation states, for a specific contract, that approval, registration, and other procedures are required for that contract to become effective, when both parties to the contract have come to terms, the contract is only formed and is binding in form only.  The contract becomes effective only when and until approval by or registration with the approval authority is effected.  However, a contract is considered to not have conditions attached when the parties agree to attach the right of approval of a governmental authority empowered by the laws or administrative regulations as one of such condition.
  • A contract with the right of approval of a governmental authority attached as one of the conditions will not lead to a legal effect limiting its effectiveness if the laws or administrative regulations have not empowered any governmental authority with the right of approval for a certain matter or a contract.
  • Although the laws or administrative regulations have not empowered any governmental authority with the right of approval, there are prescribed circumstances in other rules and local regulations which give rise to the right of approval, and the judicial practice is quite complicated, to which we will continue to pay our close attention.

Under the circumstances that although the laws or the administrative regulations have not vested any governmental authority any contract approval power, the regulations or local laws may have done the opposite, the judicial practice seems to be complicated in practice.  That is what we will closely and seriously follow.