New measures to tighten regulation of the conclusion and content of contracts in China

On October 13, 2010, the State Administration for Industry and Commerce (“State AIC”) adopted the Measures for Supervision and Abolishment of Contract-related Illegal Activities (“Measures”). The Measures take effect as of November 13, 2010.

The purpose of the Measures is to tighten the regulation of all business activities connected to civil and commercial contracts in the People’s Republic of China (“PRC”). The Measures stipulate that no natural person, legal entity or other organization shall gain profits by illegally utilizing contracts. To achieve the above purpose, the Measures partly reiterate existing principles and statutory provisions of the civil law and criminal law. However, the Measures also to a certain extent modify and clarify the civil law regime by setting up new criteria for the validity of contract content and conclusion. Although the Measures are issued by the State AIC and, therefore, do not constitute a formal revision or modification of the PRC Contract Law which was enacted by the National People’s Congress, they should be taken into account when concluding contracts subject to PRC law. Finally, the Measures introduce supervision and control functions of administrative organs over the conclusion of contracts, including the power to impose fines.

Special provisions for general terms and conditions in consumer contracts

Articles 9 to 11 of the Measures are very important for businesses which directly conclude contracts with consumers. The Measures modify the existing civil law regime by introducing new criteria for the validity of general terms and conditions (“General Terms”) used in consumer contracts (“B-to-C contracts”). In the past, the use of all kinds of General Terms was only subject to the restrictions of Article 39 to 41 of the PRC Contract Law, being that General Terms should not increase the liability of the other party or exclude material rights of the other party, or exempt the liability of the party using the General Terms (“User”). Further, General Terms were subject to the same restrictions as any other contractual provisions, such as precluding the exclusion of a user’s liability for personal injury or property damage caused willfully or through gross negligence. The above restrictions equally applied to General Terms in contracts between business operators (“B-to-B contracts”) as well as to General Terms in B-to-C contracts.

Now, Articles 9 to 11 of the Measures introduce a special regime which only applies to General Terms in B-to-C contracts.

First, the Measures reiterate the major existing statutory restrictions on excluding liability for personal injury or property damages caused willfully or through gross negligence.

Further, the Measures introduce the following reasons for invalidating General Terms in B-to-C contracts. Such General Terms shall not:

  • exclude warranties for provision of goods or services which the business operators shall bear in accordance with the law;  
  • exclude liability for breach of contract or any other legal liability;  
  • exclude the consumer’s right to terminate the contract in accordance with the law,  
  • exclude the consumer’s right to request payment of liquidated damages or other damages;  
  • exclude the consumer’s right to have an explanation of the General Terms,  
  • exclude the consumer’s right to commence legal proceedings over disputes arising out of the General Terms;  
  • exclude other legal rights of consumers;  
  • increase the consumer’s obligation to pay liquidated damages or damages beyond the statutory amount or a reasonable amount;  
  • increase the consumer’s obligation to bear responsibility for operational risks which are undertaken by the business operator, or  
  • increase other responsibilities which should not be borne by the consumer in accordance with the law.  

The Measures do not stipulate the above mentioned statutory and contractual rights and liabilities of consumers which, according to the Measures, can not be excluded or increased respectively by means of the General Terms. Such rights and liabilities are stipulated in the PRC Contract Law, PRC Product Quality Law, PRC Consumer Protection Law, Provisions on the Liability for the Repair, Replacement and Return of Certain Commodities (“Three-Guarantee Provisions”) and in other statutory laws and regulations.

In a nutshell, the Measures introduce a stricter regime for determining the validity of General Terms in B-to-C contracts. In contrast, General Terms in B-to-B contracts are not subject to the above restrictions, but only to the provisions of the PRC Contract Law. It is essential for all business operators to adjust their General Terms used in B-to-C contracts to be in full compliance with the statutory PRC law when the Measures enter into effect on November 13, 2010.

General prohibition of fraudulent activities

Article 6 of the Measures lists ten types of prohibited fraudulent activities when entering into or performing a contract. Article 6 applies to all kinds of contracts, including B-to-B contracts, B-to- C contracts and General Terms. Several of them do not constitute anything new, but simply reiterate existing statutory prohibitions, such as not falsifying or fabricating contractual documents, not publicizing incorrect information to seduce others to conclude contracts, and other forms of forgery or cheating.

However, in particular Article 6 lit. h) is worth noting due to its potential to be too widely applied by the authorities or courts. This provision prohibits the fabrication of false reasons to suspend or terminate a contract, in order to unlawfully gain the other party’s money or property. It would be desirable if the courts and authorities can avoid using this provision to prevent any parties from exercising their due and lawful statutory or contractual termination rights. PRC courts appear at times to be inclined to decide in favor of the party objecting to a contract termination, in particular if a foreign party intends to terminate its contractual relationship with a domestic party.

Article 7 of the Measures mainly reiterates the parties’ obligations to comply with major criminal and administrative obligations, such as refraining from bribery, malicious conspiracy, or any business activities subject to prohibition or restriction by the State, and thereby, damaging the interests of the State and the public.

Administrative measures and fines

Article 12 of the Measures provides that in case of any violation of the Measures, the existing statutory laws and regulations shall apply. If any case is not covered by specific applicable laws or regulations, the industrial and commercial administrative organs are authorized by the Measures to, depending on the seriousness of the case, issue a warning letter, or impose a fine of less than three times of the illegal income and no more than RMB 30,000. If no illegal income has been obtained, a fine of less than RMB 10,000 shall be imposed. Any effort by a party to promptly correct, eliminate or mitigate the violations and respective damages shall be rewarded by a waiver or decrease of the administrative penalty, in accordance with the Measures. The option of imposing criminal punishment remains unaffected by the Measures.

Article 15 of the Measures provides that the State AIC is responsible for the interpretation of the Measures. It is to be expected that the State AIC will soon issue interpretation regulations, such as stipulating which administrative authorities will be in charge of supervision and punishment under the Measures.