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Contract interpretation

In China's regime, the rules of choice-of-law are mainly provided in the PRC Contract Law, PRC Choice Law of Foreign-Related Civil Relation (PRC Choice of Law) and PRC General Principles of Civil Law.

According to Article 3 of the PRC Choice of Law, as a general principle, Chinese law recognises and respects parties' agreement on the choice of law in a foreign-related contracts with a few of exceptions. However, for domestic contacts, parties are not allowed to select the governing law applying to the contract. This position has been well established by both statutes and court-decided cases. For example, in Shenzhen Jianda Construction Engineering Limited v. Jin Yilin (Dongguan) Housing Development, the Guangdong Donguan Intermediate Court expressly held that for a domestic contact without any foreign elements, parties' agreement on applying foreign law is invalid and Chinese law should apply. Foreign-related contracts means contracts with foreign elements. In the following circumstances, a contract could be regarded as having foreign elements:

  1. one or more than one contracting party is a foreign party or its domicile is outside China;
  2. the subject matter is outside China; or
  3. the legal facts that caused the establishment, change or termination of the contractual relation took place outside of China.

If there are mandatory provisions on foreign-related civil relations in the laws of China, these mandatory provisions shall prevail over parties' agreement and directly apply. In the event that the law has no provision on the application of any laws concerning foreign-related civil relations and parties have no agreement, the laws that have the closest relation with this foreign-related civil relation shall apply.

If any disputes arise between the parties over the understanding of any clause of the contract, the true meaning thereof shall be determined according to the words and sentences used in the contract, the relevant provisions in the contract, the purpose of the contract, the transaction practices and the principle of good faith.

In the event that a contract is concluded in two or more languages and it is agreed that all versions are equally authentic, the words and sentences in each version are construed to have the same meaning. In the case of any discrepancy in the words or sentences used in the different language versions, they shall be interpreted in light of the purpose of the contract.

The PRC Contact Law also provides that where, after the contract becomes effective, there is no agreement in the contract between the parties on certain contents such as quality, price or remuneration, or place of performance, or such agreement is ambiguous, the parties may agree upon supplementary terms through consultation. If a supplementary agreement cannot be reached, such terms are determined in accordance with the relevant provisions of the contract or the transaction practices.

According to Article 62 of the PRC Contract Law, where certain contents agreed upon by the parties in the contract are ambiguous and cannot be determined in accordance with the methods discussed in the above paragraph, the court may consider the following rules in deciding the case:

  1. if quality requirement is not clear, performance shall be in accordance with the state standard or industry standard; absent any state or industry standard, performance shall be in accordance with the customary standard or any particular standard consistent with the purpose of the contract;
  2. if price or remuneration is not clear, performance shall be in accordance with the prevailing market price at the place of performance at the time the contract was concluded, and if adoption of a price commissioned by the government or based on government issued pricing guidelines is required by law, such requirement applies;
  3. where the place of performance is not clear, if the obligation is payment of money, performance shall be at the place where the payee is located; if the obligation is delivery of immovable property, performance shall be at the place where the immovable property is located; for any other subject matter, performance shall be effected at the place of location of the party fulfilling the obligations;
  4. if the time of performance is not clear, the obligor may perform, and the obligee may require performance, at any time, provided that the other party shall be given the time required for preparation;
  5. if the method of performance is not clear, performance shall be rendered in a manner that is conducive to realising the purpose of the contract; and
  6. if the responsibility for the expenses of performance is not clear, the party fulfilling the obligations shall bear the expenses.