2009-7-3 14:40:01Supreme People’s Court: Interpretations II of Contract Law

On April 24, 2009, the Supreme People’s Court of the People’s Republic of China (“PRC”) issued Judicial Interpretation No. 5 [2009] on Interpretations II of the Supreme People’s Court on Several Issues Concerning the Application of Contract Law of the People’s Republic of China (“Interpretations II”). The Interpretations II is consisted of 30 articles altogether, providing interpretations to major issues, including the conclusion, effectiveness, performance, termination and breaching liabilities of civil contracts.

Interpretation II, which is effective as of May 13, 2009, is considered as a major action of the Supreme People’s Court for overcoming the financial crisis and safeguarding the stable and rapid economic growth in China. The Interpretations II had been drafted and discussed for nearly eight years before its release. It focuses on settling the problems concerning the application of contract laws, and provides guidelines for the judicial practice.

For instance, as for the contracts which would be effective after being approved or registered, Interpretations II clarifies Contracting Fault Liability: should the party under the obligation of dealing with the procedures of approval or registration fail, or intend not to perform such obligations and so such contracts could not become effective, the party shall be considered as performing “other acts against the principle of good faith”. The court may decide the other party to deal with the necessary procedures and require the one party to pay all the cost and compensate the other party accordingly.

Interpretations II conditionally recognizes the principle of “rebus sic stantibus”: should unpredicted changes take place to the circumstances, which are not considered as force majeure or commercial risk, and to continue performing the contract be obviously unfair to one party or not accomplish the purpose of the contract, the court may decide to revise or discharge the contract according to the affected party’s claims and the doctrine of fairness.

Interpretations II clarifies such vague wordings as “obviously unreasonable low price”, “obviously unreasonable high price” and “penalty much higher than the loss”, which mean “the transfer price is less than 70% of the guiding price or market price when the transaction happens”, “the transfer price is more than 130% of the guiding price or market price when the transaction happens”, and “the agreed penalty is more than 130% of the actual loss” respectively.

Certainly, Interpretations II could not settle all problems concerning the application of Contract Law. The Interpretations is not conforming to other existing regulations. For instance, the discharge order provided in Article 21 of Interpretations II is different from the accounting rules applied by financial institutions of China. The courts would deal with such issues according to the certain circumstances case by case.