• Document Number：Judicial Interpretation No. 5 [2009]
• Area of Law： Contract
• Level of Authority： Judicial Interpretation
• Date issued：04-24-2009
• Effective Date：05-13-2009
• Issuing Authority： Supreme People's Court
• Status： Effective

Announcement of the Supreme People's Court of the People's Republic of China
The Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law of the People's Republic of China, which was adopted at the 1462nd meeting of the Judicial Committee of the Supreme People's Court on February 9, 2009, is hereby promulgated and shall come into force on May 13, 2009.
April 24, 2009
Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law of the People's Republic of China
(Adopted at the 1462nd meeting of the Judicial Committee of the Supreme People's Court on February 9, 2009; Judicial Interpretation No. 5 [2009])
In order to correctly try the cases of disputes over contracts, in accordance with the provisions of the Contract Law of the People's Republic of China (hereinafter referred to as the Contract Law), we hereby interpret several issues concerning the application of the Contract Law by the people's courts as follows:
I. Conclusion of Contract
Article 1 Where there is any dispute over whether a contract has been formed between the parties, if the people's court is able to determine the names of the parties, subject matter and quantity, generally, it shall determine the contract as having been formed, unless it is otherwise provided for by law or agreed on by the parties.
Where the parties fail to reach an agreement on any missing content of a contract other than that as mentioned in the preceding paragraph, the people's court shall determine it in accordance with the relevant provisions of Articles 61, 62 and 125 of the Contract Law.
Article 2 Where the parties did not conclude a contract in a written or verbal form, but it may be inferred from the civil conduct of both parties that both parties intended to conclude the contract, the people's court may determine that the contract was concluded in “any other form” as mentioned in paragraph 1 of Article 10 of the Contract Law, unless it is otherwise provided for by law.
Article 3 Where a reward provider publicly declares to pay a reward to the person who has completed some specific conduct, if the person who has completed the specific conduct requests payment of the reward by the reward provider, the people's court shall support his request, except under the circumstances as described in Article 52 of the Contract Law.
Article 4 For a contract concluded in a written form, if the conclusion place as agreed on in the contract is different from the place where the contract was actually signed or sealed, the people's court shall determine the conclusion place as agreed on in the contract as the conclusion place of the contract. If no conclusion place is agreed on in the contract and the contract was signed or sealed by both parties at different places, the people's court shall determine that the place where the contract is last signed or sealed as the conclusion place of the contract.
Article 5 Where the parties conclude a contract in a written form, they shall sign or seal it. If a party affixes his fingerprint to the contract, the people's court shall determine that the fingerprint has the equal legal effect of a signature or seal.
Article 6 Where, at the time of concluding a contract, the party providing the standard clauses adopted special characters, symbols, fonts and other signs sufficient to arouse the other party's attention to the content of the standard clauses regarding liability exemptions or restrictions in favor of the party providing the standard clauses, and made an explanation of the standard clauses according to the requirements of the other party, the people's court shall determine that the requirement of “a reasonable way” in Article 39 of the Contract Law has been satisfied.
The party providing the standard clauses shall bear the burden of proof on its/his fulfillment of the obligation to make reasonable prompting and explanation.
Article 7 The people's court may determine the following circumstances as the “customary business practices” as mentioned inthe Contract Law, provided that they are not in violation of the mandatory provisions of any law or administrative regulation:
1. The practice which is universally adopted at the place of transaction or in a certain field or sector and is known or should be known by the other party to the transaction when the contract is concluded; and
2. The customary practice often used by both parties.
The claimant shall bear the burden of proof on a customary business practice.
Article 8 After the formation of a contract which does not become effective until it is approved or registered under a relevant law or administrative regulation, if the party which has the obligation to apply for going through the approval or registration formalities fails to apply for approval or registration under the relevant law or contractual provisions, such a failure shall fall within the scope of “any other act in violation of the principle of good faith”, and the people's court may, as the case may be and upon the request of the opposite party, rule that the opposite party shall go through the relevant formalities by itself; however, the other party shall be liable for compensating the opposite party for the expenses incurred therefor and the losses actually caused to the opposite party.
II. Validity of Contract
Article 9 Where the party providing the standard clauses violates the provision of paragraph 1 of Article 39 of the Contract Law regarding the obligation to make prompting and explanation and causes the other party's failure to notice the clauses regarding liability exemptions and restrictions in favor of the party providing the standard clauses, the people's court shall support the other party's application for revoking the standard clauses.
Article 10 Where the party providing the standard clauses violates the provision of paragraph 1 of Article 39 and falls under any of the circumstances as described in Article 40 of the Contract Law, the people's court shall determine the standard clauses as invalid.
Article 11 In accordance with Articles 47 and 48 of the Contract Law, a retroactive recognition shall become effective upon reaching the opposite party, and the contract becomes effective upon conclusion.
Article 12 For a contract concluded by an agent without authority on behalf of the principal, if the principal has already started to perform the contractual obligations, it (he) shall be deemed to have retroactively recognized the contract.
Article 13 After the principal has assumed the liability resulting from the valid conduct of agency under Article 49 of the Contract Law, it (he) may recover losses incurred for the conduct of agency from the agent without authority.
Article 14 The term “mandatory provisions” as mentioned in subparagraph 5 of Article 52 of the Contract Law refers to the mandatory provisions on effectiveness.
Article 15 Where a seller concludes several sale contracts on the same subject matter, if none of these contracts falls under any of the circumstances on void contracts as mentioned in Article 52 of the Contract Law and a buyer requests that the seller be held liable for breach of contract because the buyer is unable to acquire the ownership of the subject matter under the contractual provisions, the people's court shall support the buyer's request.
III. Performance of Contract
Article 16 The people's court may, as the case may be, list a third party as described in Articles 64 and 65 of the Contract Law as a third party without an independent right of claim, but shall not, in its own capacity, list such a third party as the defendant in or a third party with an independent right of claim to the case of contract lawsuit.
Article 17 Where a creditor lodges a subrogation lawsuit against an overseas party as the defendant, the people's court shall determine the jurisdiction over the case in accordance with Article 241 of the Civil Procedure Law of the People's Republic of China.
Article 18 Where a debtor waives any of its (his) undue claims or any guaranty for its (his) claims or maliciously extends the term of performance for any due claim, causing any damage to the creditor, if the creditor lodges a revocation right lawsuit in accordance with Article 74 of the Contract Law, the people's court shall support such a lawsuit.
Article 19 With regard to the phrase “obviously unreasonable low price” as used in Article 74 of the Contract Law, the people's court shall confirm it based on the judgment of an ordinary business operator at the place of transaction, by reference to the guiding price of the price department or the market trading price at the place of transaction and in combination with other relevant factors.
If the transfer price does not reach 70% of the guiding price or market trading price at the place of transaction at the time of transaction, generally, it may be deemed as an obviously unreasonable low price. If the transfer price is higher than the local guiding price or market trading price by 30%, generally, it may be deemed as an obviously unreasonable high price.
Where a debtor purchases any property of others at an obviously unreasonable high price, the peoples' court may, upon application of the creditor, revoke the debtor's purchase according toArticle 74 of the Contract Law.
Article 20 Where the debtor's repayment is not enough to pay off all debts of the same type owed to the same creditor, the repayment shall first offset a due debt; if several debts are all due, it shall first offset the debt for which no guaranty is provided to the creditor or the guaranty provided to the creditor is in the smallest amount; if the amounts of guaranty for the debts are the same, it shall first offset the debt with a heavier debt burden; if the debt burdens are the same, it shall offset the debts in the order of the dates of maturity of the debts; if the dates of maturity of the debts are the same, it shall offset the debts in proportion, unless there is any agreement between the creditor and debtor on the debts to be paid off or on the order of repayment to offset the debts.
Article 21 The debtor shall pay interest and expenses besides the primary debt. When its repayment is not enough to pay off all debts, if there is no agreement between the parties, the peoples' court shall offset the debts in the following order:
1. Expenses incurred for realizing the creditor's rights;
2. Interest; and
3. Primary debt.
IV. Termination of Contractual Rights and Obligations
Article 22 Where a party violates the obligations as prescribed inArticle 92 of the Contract Law and causes losses to the other party, if the other party requests compensation for its actual losses, the people's court shall support such a request.
Article 23 With regard to the due claims that may be offset under Article 99 of the Contract Law, if the parties agree that no offset is allowed, the people's court may determine such an agreement as valid.
Article 24 Where a party objects to the rescission of a contract or debt offset as prescribed in Article 96 or 99 of the Contract Law, but only lodges a lawsuit in the people's court after the expiration of the agreed time limit for raising objections, the people's court shall reject such a lawsuit. If the parties fail to agree on the time limit for raising objections and a party lodges a lawsuit in the people's court three months after the day when the notice of contract rescission or debt offset is served on it (him), the people's court shall reject such a lawsuit.
Article 25 Where, under Article 101 of the Contract Law, the debtor delivers to the escrow department the contractual subject matter or the proceeds from the auction or sale of the subject matter, the people's court shall determine the escrow as established.
Where an escrow is established, the debtor shall be deemed to have performed its (his) obligations to the extent of the escrow.
Article 26 Where any major change which is unforeseeable, is not a business risk and is not caused by a force majeure occurs after the formation of a contract, if the continuous performance of the contract is obviously unfair to the other party or cannot realize the purposes of the contract and a party files a request for the modification or rescission of the contract with the people's court, the people's court shall decide whether to modify or rescind the contract under the principle of fairness and in light of the actualities of the case.
V. Liabilities for Breach of Contract
Article 27 Where, by counterclaim or defense, a party requests the court to adjust the default fine under paragraph 2 of Article 114 of the Contract Law, the people's court shall support such a request.
Article 28 Where a party requests the people's court to increase the default fine under paragraph 2 of Article 114 of the Contract Law, the amount of the default fine after the increase shall not exceed the amount of the actual losses; if, after the increase of the default fine, the party requests compensation for losses by the other party, the people's court shall reject such a request.
Article 29 Where a party alleges that the agreed default fine is too much and requests a proper reduction, the people's court shall weigh the request and make a ruling on the basis of the actual losses, in consideration of the performance of contract, seriousness of the fault of the party, expected benefits and other comprehensive factors and under the principles of fairness and good faith.
If the default fine agreed on by the parties exceeds the losses incurred by 30%, generally, it shall be deemed as “significantly higher than the losses incurred” as mentioned in paragraph 2 of Article 114 of the Contract Law.
VI. Supplementary Provisions
Article 30 For a case of disputes over a contract formed after the Contract Law came into force, if a final judgment has not been made after the implementation of this Interpretation, this Interpretation shall apply to the case; if a final judgment has been made before the implementation of this Interpretation and the party concerned petitions for a retrial or a retrial decision is made under the judicial supervision procedure, this Interpretation shall not apply to the case.