Editor's Note: The Third Seminar of the International Commercial Expert Committee of the Supreme People's Court and Reappointment Ceremony of the First Group of Expert Members was held successfully on Augest 25, 2022. Over 40 experts from more than 20 countries and regions focused on the theme of the Development, Challenges and Countermeasures of Cross-Border Commercial Disputes during the seminar. Extensive and in-depth discussions were held within the framework of four specific issues. The texts of speeches delivered by the participants would be posted on the CICC's website. 

LEGISLATION IN BOOK III CONTRACT OF THE CIVIL CODE OF THE PEOPLE'S REPUBLIC OF CHINAWITH INTERNATIONAL VISION

Wang Liming

Vice President of the China Law Society, 

Chairman of the Civil Law Research Association of China Law Society

In the era of globalization, capital and commercial exchanges often need to cross national borders, so efficient market development increasingly requires the uniformity of transaction rules. The Book III Contract (Book III) of the Civil Code of People's Republic of China (the Civil Code) meets the needs of developing a high-quality market economy and improving the business environment. It draws heavily on relevant international conventions and model laws, as well as the advanced experience of the common law and civil law system on contract legislation. It makes the contract rules consistent with the world trend of legislation, in line with international business transaction custom. Book III holds a global vision and the characteristics of the time. Its internationalization is mainly reflected in the following aspects.

I. Introduction of new rules for entering into contracts

First, the General Provisions of Book III, drawing on comparative law experience, stipulate the substantial modification of rules of acceptance. It is generally believed that substantial modification is a modification made to the substantive content of the offer. According to Book III, the acceptance should still be effective if it does not substantially modify the content of the offer. Article 488 of the Civil Code basically adopts the relevant rules of the United Nations Convention on Contracts for the International Sale of Goods (the CISG). Instead of an abstract definition, but lists the specific circumstances that constitute a substantial modification. It is conducive to providing guidance to the parties and further fulfilling the institutional function of contract law to encourage transactions.

Second, Book III provides the legal regulation of standard terms. Drawing on the experience of comparative law, Book III of the Civil Code regards "repeated use" as an element of the definition of standard terms. It reflects the nature of standard terms and conforms to the legal adjustment of standard terms to protect the interests of unspecified parties in transactions, especially consumers. At the same time, based on the provisions of the original Contract Law, Book III of the Civil Code has improved the rules on the legal effect of "surprising term". It requires that the opposite parties must be reasonably reminded to pay attention to such terms, or these terms must be construed. Otherwise, "the other party may argue that the term is a part of the contract." Book III specifies the rules for handling conflicts between standard and non-standard terms. The non-standard terms shall prevail where a standard term is inconsistent with a non-standard term. It also stipulates rules for making an interpretation unfavourable to the party supplying such standard terms.

II. Renewal of rules for judging the validity of contracts

Regarding the rules for judging the validity of contracts, Book III of the Civil Code has partially revised and improved the provisions of the original Contract Law. First, it provides rules on the validity of contracts without the right of disposal. Based on judicial practice, the Civil Code absorbs the theory of validity generally adopted in comparative law. Paragraph 1 of Article 597 of the Civil Code stipulates that "If the ownership of the subject matter cannot be transferred due to the seller's failure to obtain the right of disposal, the buyer may rescind the contract and request the seller to bear the liability for breach of contract." The provision is of great significance to balance the interests of all parties and encourage transactions. It can provide more protection for buyers in good faith, and encourage future property transactions. Second, it stipulates the severability of dispute resolution clauses. The dispute resolution clause refers to the contractual provisions by which parties specify how their disputes that may arise in the future are to be resolved: this includes the jurisdiction clause and provisions governing settlement and winding-up. Although the dispute resolution clause is also a part of the contract, its purpose is to solve the disputes that may occur between the parties in the future due to the contractual relationship. The validity of the dispute settlement clause is relatively independent. Unlike the Contract Law, the Civil Code provides in its Article 507 and 567 for the severability of these clauses.

III. Changes in contract performance Rules

The Book III Contract also includes some important institutional innovations in terms of contract performance rules.

The first is the introduction of the doctrine of change of circumstances: Based on a study of comparative law, Article 533 of the Civil Code provides the doctrine of change of circumstances, which can effectively resolve a large number of disputes arising from changes in circumstances that the parties could not foresee at the time of contracting (for example, when the contract is difficult to perform due to COVID-19, etc.). Article 533 of the Civil Code also clarifies the obligation to renegotiate in the change of circumstances, which is conducive to maintaining the validity of the contract and thus achieving the purpose of encouraging transactions. However, Article 533 of the Civil Code does not stipulate the legal consequences of the party's violation of their obligation if the renegotiation is unsuccessful.

The second is the establishment of the principle of contract for the benefit of third parties. The so-called contract for the benefit of third parties (also known as an altruistic contract in which a third party obtains creditor's rights, or a contract concluded for the benefit of a third party) refers to a contract in which the parties agree that one party will pay a third party outside the contractual relationship for the other party's performance. The Book III Contract of the Civil Code has made provisions for the principle of contract for the benefit of third parties: Article 522 has respectively made provisions in the contract for third parties with actual benefits and those without, thus filling the legal gap.

The third is the provision of rules for performance of an obligation by a third party. It means that a third party other than the parties to the contract performs the debt on behalf of the debtor. Based on the principle of privity of contract, a contract is only effective between the parties, and a third party is not allowed to intervene in the contractual relationship. However, in some cases, whether the contract is performed or not will have a significant impact on the third party. The Civil Code has stipulated provisions for the performance by a third party, thus filling the legal gap and establishing new rules for debt performance.

The fourth is the provision regarding to repayment and set-off. The provision refers to an occasion in which a debtor bears several debts of the same type of payment at the same time. When all of the debt cannot be fully paid off, the payor determines the debt to be offset at the time of repayment. On the basis of the experience of foreign legislation and domestic judicial practice, the Civil Code has comprehensively provided rules of repayment and set-off in Article 560.

IV. Improvements on the rules of modification and assignment

Book III makes the following improvements regarding the rules on the modification and assignment of contracts. First, special circumstances are set where the creditor's claim may not be assigned. Drawing from foreign legislation, Paragraph 2 of Article 545 of the Civil Code differentiates monetary claim and non-monetary claim, and stipulates that even if the parties agree that a non-monetary claim shall not be assigned, the agreement shall not be used against a bona fide third party, except that the third party is aware or should be aware of such agreement. However, agreements by the parties not to assign monetary claims shall not be effective against a third party even if the third party is not acting in good faith. Considering the comparatively smaller influence on the debtor imposed by the assignment of monetary claims, the free flow of such claims in practice is relatively more valuable. Moreover, by encouraging monetary claims assignment, financing and economic development can be boosted.

Second, rules are set to protect the debtor ("obligor" in Book III of the Civil Code) in assignment of claims. The assignment of claims, being conducted to giving full play to the economic value of the claims and promoting trade, can also affect the interests of the debtor under certain circumstances. Therefore, while protecting creditors ("obligor" in Book III of the Civil Code), a protection of debtor is also needed in assignment of claims. In this regard, Book III strengthens the protection of debtor by stipulating that an obligation of notification shall be performed by the creditor to the debtor while assigning such claim, which shall not be revoked, and a debtor may raise any defenses against the assignor to the assignee, as well as exercise the right of set-off in accordance with the law.

V. Changes to the Rescission of the Contract

Book III provides innovations regarding the rescission of the contract. First is the adoption of fundamental breach within contract law. Fundamental breach of contract, or material breach of contract, refers to a breach by a party which makes it impossible for the other party to achieve the purpose of the contract or causes material damages to the other party. Item 4 of Paragraph 1 of Article 563 clarifies the rules regarding fundamental breach of contract. According to the rules, the circumstances under which the contract can be rescinded are strictly limited, so as to guarantee that the agreement shall be strictly honored. However, the Civil Code only provides for the circumstance of "the other party…breaches the contract…, rendering it impossible to achieve the purpose of the contract" without specifying the requirements that constitute the fundamental breach of contract. This abstract provision needs to be further deliberated by judicial interpretations. For instance, when determining whether a party fundamentally breaches the contract, factors including whether the breach constitutes "material deprivation", whether a party violates the major obligation of performance, whether the violation of duties by one party causes failure by the other party to believe that the breaching party shall perform the contract in the future, and whether the rescission of the contract causes material damages to the other party. Second, the rules for the rescission of non-term contract are set up. Given the special features of obligations in non-term contract, i.e., the parties shall continuously perform during a period of time, the term of the performance is uncertain. Paragraph 2 of Article 563 of the Civil Code specifically provides for such rules. According to this provision, a contract without a performance period, requiring the successive performance of obligations, may be rescinded by a party at any time, provided that the other party is notified within a reasonable time.

VI. Improvements on rules of liability for breach of contract

First, Book III provides the rules for the rescission of contracts by judicial institutions. In practice, there are circumstances where the contract cannot be performed due to many reasons, and the non-breaching party refuses to rescind the contract, resulting in a deadlock in contract performance. In view of this, paragraph 2 of Article 580 of the Civil Code provides a solution by having the contract rescinded by judicial institutions. According to the provision, any party may request the people's court or an arbitration institution to terminate the contract under the following circumstances: 1) it is unable to be performed in law or in fact, or the performance expenses are excessively high; 2) it is impossible to achieve the purpose of contract if the performance continues; 3) the non-breaching party refuses the request to rescind the contract put forward by the breaching party; and 4)it does not constitute a change of circumstances. If the foregoing conditions are met, any party (including the breaching party) may request the people's court or an arbitration institution to confirm the termination of the contractual relation.

Second, Book III effectively integrates the defence of anticipatory breach of contract and the right of uneasy counterplea. An anticipatory breach occurs when a party, before the predetermined contractual end date, takes action to indicate or explicitly states that it will not honor its contractual obligations upon the predetermined contractual end date without a reasonable explanation. Anticipatory breach is a common law concept, adopted by the United Nations Convention on Contracts in the CISG and the UNCITRAL Model Law, which has not been recognized by most civil law countries who set up the Uneasy Counterplea right. The latter refers to, when there is an order of priority in respect of the performance of the obligations of commercial contracts, the right of the party required to perform the obligation first to temporarily suspend its performance when it has conclusive proof that the party who is to perform later will not honor its obligations or will lose its ability to perform by the predetermined contractual end date, without being liable for breach of contract, before the party who is to perform later carries out performance or provides sufficient assurance. The Civil Code concurrently adopts both of them and also coordinates between the two. According to Article 528, the anticipatory breach in nature constitutes fundamental breach of contract making the contract's goal unrealizable, and thus the other party is eligible to rescind the contract; in the meantime, anticipatory breach is also a form of breach, thus when an anticipatory breach occurs, the breaching party shall be liable for breach of contract against the other party.

Book III of the Civil Code is formulated by systematically summarizing the experience regarding legislation of contract law, the socialist market economy, as well as the reform and opening up in China, thus integrating distinctive Chinese characteristics. Meanwhile, Book III of the Civil Code also learns from advanced legislative experience in other jurisdictions, bringing it distinct characteristics of the time. As basic legal norms that adjust trade relations, Book III of the Civil Code is a set of rules formulated to facilitate trade, encourage mobility of important production factors and also provide instructions for participation in international transactions.

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*The original text is Chinese and has been translated into English for reference only. If there is any inconsistency or ambiguity between the Chinese version and the English version, the Chinese version shall prevail.