Following the examination of three draft versions of the General Rules of the Civil Law of the People’s Republic of China (“the Rules”), the final version of the Rules has been adopted at the Fifth Session of the 12th National People's Congress of the People's Republic of China (the “PRC”) on 15 March 2017. The Rules will be effective from 1 October 2017.
The Rules contain 206 provisions divided into eleven chapters covering fundamental principles, natural persons, legal persons, unincorporated organisations, civil rights, civil juristic acts, proxies, civil liability, statutes of limitation, calculation of periods of time and supplementary provisions. Many of these topics were provided for in the General Principles of Civil Law of the PRC (the “GPL”) which was adopted by the People’s Congress on 12 April 1986 and has been in effect for 30 years since 1 January 1987.
The Rules are considered to be a key development in the legislative process that will eventually result in the PRC having a civil code. The PRC does not currently have a civil code but adheres to the fragmented laws and regulations of the GPL as well as other civil regulations. The GPL will not be replaced by the Rules and will remain valid. Where there are discrepancies between Rules and the GPL, the Rules will prevail. Eventually, the GPL, the Rules and the other civil regulations will be replaced by a civil code. The National People’s Congress has announced that the civil code will be in place by 2020.
The fundamental principles of the Rules and the proposed changes are summarised below.
- Fundamental Principles
- Aside from the principles of equality, voluntariness, honesty and credibility, the Rules emphasise the importance of the principles of environmental protection, saving energy and harmonious co-existence between man and nature. The principle of protecting the environment is a new addition though the Rules do not explicitly address the consequences of violating this new basic principle.
- The Rules also state that in a civil dispute, if there are no relevant provisions prescribed by the law, customary laws such as business customs can be applied to resolve such dispute. The PRC Contract Law had already established the same principle which is followed when interpreting a contract.
- Natural Persons
- Under the Rules, a foetus has newly established rights which are not addressed under the existing law. A foetus will have civil rights to the inheritance or acceptance of a gift, except if it is stillborn.
- The standard age of juveniles with limited capacity for civil conduct will be lowered from ten years old to eight years old (even though in previous drafts of the Rules, it had been suggested the minimum age would be lowered to six years old).
- The Rules improve the custody system in the following ways:
- emphasise the obligations that parents have regarding minors as well as an adult child’s obligation to take care of their parents;
- give adults with full capacity the civil conduct right to select their future guardian, which can be an individual or an organisation. The guardian would be required to take responsibility if the ward loses capacity for civil conduct due to disease or mental illness in the future;
- increase the scope of organisations that can be guardians. Amongst other organisations, schools, medical units, women’s federations, the federation of the disabled and the organisations of the elderly can now be guardians;
- abolish the guardian obligation of the unit of the minor’s parents as well as the unit to which the mentally ill person belongs. In China, the term ‘unit’ can be used as a synonym for employer;
- fully set out the procedures of the People’s Court’s right to disqualify a guardian; and
- the interested parties in a dispute regarding guardianship can now file an application to the court themselves.
- Legal Persons
The Rules divide legal persons into three categories: profit-making legal persons, non-profit-making legal persons and special legal persons. A profit-making legal person has the aim of making a profit to be distributed to shareholders and other investors.
A non-profit making legal person typically operates in the public sphere or other not for profit sectors. A special legal person can be an official organ, rural collective economic organisation, urban and rural cooperative economic organisation or grass-roots self-governing mass organisation.
The regulations governing rights and internal organisation are different for each form of legal person. Dividing legal persons into three categories ensures the registration process of each category can be managed accordingly for corporate purposes. For profit-making legal persons, the establishment and registration procedures are normally easier than for non-profit-making legal persons and special legal persons.
- Unincorporated Organisations
The Rules provide further detail in relation to unincorporated organisations, including privately owned enterprises and partnerships. These organisations do not have legal personality but do have capacity for civil conduct and their investors or founders have unlimited responsibility for the organisation’s debts. This principle also applies to organisations prior to their incorporation. For limited liability companies, this was set out previously in the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law (III). The Rules, however, will be the first time that the law confirms the definition, liabilities and other general related information of unincorporated organisations. It is important for investors to have clarity regarding the legal status of a company they have invested in before it has been fully incorporated. For this reason, China follows the same principle as other foreign jurisdictions regarding companies that are not yet incorporated.
- Civil Rights
- In respect of personal rights, natural persons enjoy the rights of liberty and dignity as well as the right to life, health, body, name, identity, reputation, honour, privacy and freedom to marry. Most of these rights are already included in the current GPL, but the right to a body is a new addition. Other new additions include the right to a name, reputation and honour of unincorporated incorporations. These rights currently only apply to legal persons.
- The Rules cover property ownership and related property rights as well as creditors’ rights.
- Personal data is protected from illegal collection, use, processing, transferring, providing, publishing or being sold.
- The Rules address intellectual property rights including, amongst others, works, inventions, utility models and designs, trademarks, geotagging, business secrets, designs of integrated circuits and new varieties of plants.
- The Rules provide that data and network virtual property shall be protected according to relevant laws in these areas.
- Civil Juristic Acts
- The Rules change the definition of civil juristic acts. A civil juristic act will be the act of a civil subject to establish, change or terminate a civil juristic relationship through an expression of intent. The Rules distinguish between lawful acts, null and void acts, revocable acts and acts with pending validity. This is in contrast to the previous definition of civil juristic acts in Article 54 of the GPL where only a ‘lawful act’ is defined.
- Previously under PRC law, manifestation of intent was only recognised when concluding a contract. It is now recognised as the basic means to establish, change and end civil legal relationships. The Rules provide a general definition of manifestation of intent including its effectiveness and method of expression as well as the rules of explanation depending on the circumstances.
- The Rules make the following changes to the rules of effectiveness of civil juristic acts:
- The Rules confirm the existing rights that are regulated by the PRC Contract Law and the Opinions of the Supreme People's Court, such as the right of a statutory agent to ratify civil acts carried out by a person with limited capacity for civil conduct.
- Under the GPL, a civil juristic act cannot violate laws passed by the National People’s Congress. Under the Rules, a valid civil juristic act will not violate mandatory laws or administrative regulations.
- Under the GPL, litigants have the right to request a people's court or an arbitration agency to alter or rescind civil acts that are obviously unfair or performed by someone who seriously misunderstood the consequences of the acts. The Rules provide that, under these circumstances, litigants will only have the right to request to rescind civil acts rather than alter them.
- The Rules limit the rights of revocation, which have previously only been addressed by the PRC Contract Law. Firstly, in a situation where a civil act is committed due to gross misunderstanding, the Rules shorten the revocation period to three months from the date when the relevant person knew, or should have known the cause for revocation. Secondly, the Rules specify that the revocation period for a party under coercion is one year from the date when the coercion ceased. Finally, the Rules state that if a party does not exercise the right of revocation within five years from the date when the civil juristic act occurred, the right of revocation will be extinguished.
- The definition of a proxy under the Rules only applies to statutory proxies and excludes appointed proxies, which shall be governed by the PRC Contract Law.
- The Rules state that the proxy shall not perform a civil juristic act as the agent for themselves or for two parties unless otherwise provided for by law. The prohibition can be waived by the agent’s principal.
- The current Chinese legal requirements for company seals often present difficulties for foreign investors. If an unauthorised person uses and affixes a company seal, the contract is binding and it is nearly impossible for the company to invalidate it under the regulation of apparent agency. Apparent agency had been addressed in the previous drafts of the Rules which had given hope to foreign businesses that both greater legal certainty and increased protection against the apparent misuse of their company chop would be provided. The final version of the Rules has not met these expectations, only adding one provision, which is the same as Article 49 of the PRC Contract Law i.e. where a person who has no power of agency, wrongfully purports to have the power of agency, or where a person whose power of agency has expired, concludes a contract in the principal’s name, and the counterparty has reason to believe that the person has the power of agency, such act of agency shall be effective. Consequently, the custody of the company will remain a pivotal issue for Chinese companies, especially taking into consideration the difficulty of restricting “reason to believe that the person has the power of agency” as defined in the Rules.
- Civil Liability
- Civil subjects shall take civil responsibility when they do not perform their civil obligations or do not perform their civil obligations fully.
- The Rules have confirmed punishment compensation.
- The Rules emphasise that anyone who causes harm whilst offering voluntary help in an emergency situation shall not bear civil liability. This addresses the widespread phenomenon of Chinese people not being willing to help strangers in emergency situations for fear of being made responsible by the victims they had helped. It is, however, not clear whether the rule can also be applied if the harm is caused due to the helper’s gross negligent conduct.
- The rights of name, portrait, reputation and honor of a hero or a martyr are classified as social and public interests. Anyone who infringes this right shall bear civil liability. It is still unclear who should be the claimant in such situation as theoretically the claimant could be either the heirs of the hero/martyr or, taking into considering the fact that this provision is to protect the social and public interests, the claimant could even be the public organisation or the authority agencies. No definition of ‘hero’ has been provided in the Rules. The definition of martyr has only been provided in the Regulations of Martyr Praise.
- Statute of Limitation and Supplementary Provisions
- The Rules increase the limitation period for bringing an action to three years instead of the current two years under the GPL. This change will have a significant impact on contract claims under PRC law becoming time-barred. It is important to note that Article 129 of the PRC Contract Law provides for a limitation period of four years for contracts for the international sale and purchase of goods or contracts for the import and export of technology. Until further guidance is provided, it is likely that this four year limitation period will remain applicable as a special regulation.
- The Rules specifically clarify the areas where the statute of limitation does not apply including claims for ceasing infringements, removing obstacles and eliminating dangers, claims of the obligee with real property titles and registered real rights of movables for returning his or her property and claims for paying upbringing payment, alimony payment or maintenance fees. These claims will not be limited by the three year limitation of action.
- The Rules also emphasise that an agreement between the parties on the limitation of actions is invalid. This confirms the prevailing opinion of the PRC Supreme People’s Court.
The introduction of the Rules will be a significant step towards establishing the rule of law and protection of civil rights in China. Such changes will be important for both individuals and businesses in China. Businesses should be aware of any changes which will affect the way they operate to ensure they maintain compliance with the updated legal requirements.