Interpretation by the Supreme People's Court of Several Issues Concerning the Application of Title One General Provisions of Book Three Contracts of the Civil Code of the People's Republic of China

Interpretation by the Supreme People's Court of Several Issues Concerning the Application of Title One General Provisions of Book Three Contracts of the Civil Code of the People's Republic of China

Announcement of the Supreme People's Court of the People's Republic of China

The Interpretation by the Supreme People's Court of Several Issues Concerning the Application of Title One General Provisions of Book Three Contracts of the Civil Code of the People's Republic of China, as adopted at the 1,889th meeting of the Judicial Committee of the Supreme People's Court on May 23, 2023, is hereby issued, and shall come into force on December 5, 2023.

Supreme People's Court

December 4, 2023

Interpretation by the Supreme People's Court of Several Issues Concerning the Application of Title One General Provisions of Book Three Contracts of the Civil Code of the People's Republic of China

(Adopted at the 1889th meeting of the Judicial Committee of the Supreme People's Court on May 23, 2023, coming into force on December 05, 2023, SPC Interpretation No. 13 [2023])

For the purposes of correctly trying cases involving contract disputes and cases involving disputes over creditor-debtor relations not arising from contracts and protecting the lawful rights and interests of the parties in accordance with the law, this Interpretation is developed in accordance with the Civil Code of the People's Republic of China, the Civil Procedure Law of the People's Republic of China, and other relevant laws and in light of trial practice.

I. General Rules

Article 1 When a people's court interprets a contract clause in accordance with paragraph 1 of Article 142 and paragraph 1 of Article 466 of the Civil Code, the court shall determine the meaning of the disputed clause based on the common meaning of words and sentences, in light of relevant clauses, the nature and purpose of the contract, customs, and the principle of good faith, in reference to factors such as the contracting background, negotiation process, and performance.

If there is evidence that the parties have between themselves a common understanding of the contract clause which is different from the common meaning of words and sentences, and a party contends that the contract clause is understood based on the common meaning of words and sentences, the people's court shall not uphold the contention.

Where there are not less than two interpretations of the contract clause, which are likely to affect the validity of the clause, the people's court shall choose the interpretation conducive to the validity of the clause; or choose the interpretation less burdensome for the debtor, in the case of a gratuitous contract.

Article 2 Subject to the imperative provisions of laws and administrative regulations, public order, and good morals, the people's courts may determine “usage of trade” in the Civil Code to include:

(1) Any customary practice of the parties in trade activities.

(2) Any practice ordinarily observed in the place of trade or in a field or industry which the trade other party knows or should know at the time of contracting.

The party claiming a usage of trade shall have the burden of proof.

II. Contracting

Article 3 If the parties dispute the formation of the contract, and the people's court can determine the names of the parties, the subject matter, and quantity, it shall generally determine that the contract has been formed, unless otherwise provided by law or otherwise agreed upon by the parties.

If formation of a contract can be determined according to the provisions of the preceding paragraph, the people's court shall determine the omitted content of the contract in accordance with Articles 510 and 511 of the Civil Code, among others.

If a party claims invalidity of the contract or requests revocation or recession of the contract, and the people's court deems that the contract is not formed, it shall try whether the contract is formed as an issue according to Article 53 of the Some Provisions of the Supreme People's Court on Evidence in Civil Procedures, and may fix a new period for adducing evidence based on the specific circumstances of the case.

Article 4 If a contract is entered into by means of invitation to bid, and the parties claim a confirmation that the contract is formed when the notice of contract award is received by the successful bidder, the people's court shall uphold the claim. If after the contract is formed, the parties refuse to sign a written contract, the people's court shall determine the content of the contract based on the documents of invitation to bid, documents of bid proposal, and notice of contract award.

Where a contract is entered into by means of physical auction, online auction, or any other public bidding, and the parties claim a confirmation that the contract is formed when the auctioneer's hammer falls or the electronic trading system confirms the completion of sale, the people's court shall uphold the claim. If after the contract is formed, the parties refuse to sign a written confirmation of sale, the people's court shall determine the content of the contract based on the announcement of auction and bidder's bid price, among others.

Where a property exchange or any other institution presides over an auction or offers quotes for trading, the announcement of auction, trading rules, and other documents published by it publicly determine the conditions necessary for contract formation, and the parties claim a confirmation that the contract is formed when the conditions are fulfilled, the people's court shall uphold the claim.

Article 5 If a third party commits fraud or coercion, causing a party to enter into a contract against its true declaration of will and suffer losses, and the party requests the third party to be liable for compensation, the people's court shall uphold the request according to the law; if the party has also acted contrary to the principle of good faith, the people's court shall determine their liability based on their respective faults. However, if the law or any other judicial interpretation has other provisions on the civil liability of the party and the third party, the law or any other judicial interpretation shall prevail.

Article 6 Where the parties agree to enter into a contract within a given period in the form of subscription order, purchase order, or pre-order, among others, or where they pay a deposit to secure entry into a contract within a given period, and the parties, subject matter, and other content of the contract can be determined, the people's court shall determine that a preliminary agreement is formed.

When the parties express their intention to engage in trade by signing a letter of intent, memorandum, or other means, without agreeing to enter into a contract within a specified period, or when they so agree by such means, but the parties, subject matter, and other content of the contract are difficult to determine, if either party contends that a preliminary agreement is formed, the people's court shall not uphold the contention.

When a subscription order, purchase order, or pre-order, among others, entered into by the parties demonstrates mutual assent to the subject matter, quantity, price, and other main content of the contract, and satisfies the contract formation conditions specified in paragraph 1 of Article 3 of this Interpretation, if the parties fail to unequivocally agree to enter into a separate contract within a specified period, or they so agree, but either party has rendered performance that the other party accepts, the people's court shall determine the contract to be formed.

Article 7 If, following the effectiveness of a preliminary agreement, either party refuses to enter into a contract or fails to enter into a contract due to acting contrary to the principle of good faith during negotiations, the people's court shall determine that the party has failed to perform the obligations under the preliminary agreement.

In determining whether either party has acted contrary to the principle of good faith during negotiations, the people's court shall take into account whether the conditions proposed by the party during negotiations evidently deviate from the content of the preliminary agreement, whether it has made reasonable efforts to negotiate, and other factors.

Article 8 If, following the effectiveness of a preliminary agreement, either party fails to perform the obligation to enter into a contract, and the other party claims compensation for resultant losses from the party, the people's court shall uphold the claim in accordance with the law.

In determining the compensation specified in the preceding paragraph, the parties' agreement shall apply, if any; or in the absence of such an agreement, the people's court shall take into account the completeness of the preliminary agreement, the fulfillment of the conditions for entering into a contract, and other factors.

Article 9 If contract clauses comply with the provisions of paragraph 1 of Article 496 of the Civil Code, and either party claims that the contract clauses are not standard terms only on the grounds that the contract is prepared based on the model text of a contract, or the parties have unequivocally agreed that the contract clauses are not standard terms, the people's court shall not uphold the claim.

Where a party engaged in business activities claims that the contract clauses that it draws up in advance, without negotiation with the other party, are not standard terms only on the grounds that they have not actually been used repeatedly, the people's court shall not uphold the claim, unless there is evidence that the contract clauses are not intended for repeated use.

Article 10 Where the party furnishing abnormal standard terms reminds the other party to pay attention to the terms excluding or limiting the liability of the party furnishing the standard terms, excluding or limiting the rights of the other party, or otherwise related to the material interest of the other party, by using writing, a symbol, a font, or any other conspicuous sign that is ordinarily sufficient to attract the attention of the other party when entering into the contract, the people's court may determine that it has performed the remanding obligation as specified in paragraph 2 of Article 496 of the Civil Code.

Where, at the request of the other party, the party furnishing the abnormal standard terms provides an ordinarily understandable written or oral explanation of the definitions, content, and legal consequences of the terms related to the material interest of the other party, the people's court may determine that it has performed the explanation obligation under paragraph 2 of Article 496 of the Civil Code.

The party furnishing the standard terms shall have the burden of proving that it has performed the reminding or explanation obligation. In the case of an electronic contract entered into on the Internet or any other information network, if the party furnishing the standard terms claims to have performed its reminding or explanation obligation only on the grounds of using a checkbox, a pop-up window, or any other means, the people's court shall not uphold the claim unless the party furnishing the standard terms adduces evidence of compliance with the provisions of the preceding two paragraphs.

III. Validity of Contracts

Article 11 If a party is a natural person, and the age, intelligence, knowledge, and experience of the party, in combination with the complexity of the transaction, are sufficient to determine that the party lacks a proper understanding of the nature of the contract, the legal consequences of entering into the contract, or the specific risks presented by the transaction, the people's court may determine that there is a “lack of judgment” as specified in Article 151 of the Civil Code.

Article 12 Where, after a contract is formed in accordance with the law, the party with the obligation to seek approval fails to perform the obligation or fails to perform according to the contract, laws, and administrative regulations, and the other party requests continued performance or requests rescission of the contract with the party being held liable for breach of the obligation, the people's court shall uphold the request.

After the people's court adjudges the party to perform the obligation, if it refuses to comply, and the other party requests rescission of the contract with the party being held liable as if it had breached the contract, the people's court shall uphold the request.

Before the contract is approved, if either party sues, requesting the other party to perform the principal obligations stipulated in the contract and refuses to modify its claim despite being enlightened, the people's court shall enter a judgment, dismissing the claim without prejudice to a future action by the party.

When the party with an obligation to seek approval has followed the approval application and other procedures or performed the obligation to seek approval as determined in an effective judgment, and the approving authority decides to refuse approval, if the other party requests liability for compensation, the people's court shall not uphold the request. However, if the contract fails to be approved by reason of a delay in performing the obligation attributable to the party, among others, and the other party requests compensation for the resultant losses, the people's court shall make disposition in accordance with Article 157 of the Civil Code.

Article 13 If a contract falls under any circumstance rendering it invalid or revocable, and either party claims its validity on the grounds that the contract has been filed for recordation with the relevant administrative agency or approved by the approval authority, or that the modification or transfer of property rights, among others, has been registered according to the contract, the people's court shall not uphold the claim.

Article 14 If the parties enter into several contracts for a single transaction, the people's court shall determine that any contract entered into with a false declaration of will is invalid. If a party conceals its true declaration of will behind a false one to circumvent the imperative provisions of laws and administrative regulations, the people's court shall determine the validity of the concealed contract in accordance with the provisions of paragraph 1 of Article 153 of the Civil Code. If the party conceals its true declaration of will behind a false one to circumvent the laws and administrative regulations requiring approval and other procedures for the contract, the people's court shall determine the validity of the concealed contract in accordance with paragraph 2 of Article 502 of the Civil Code.

If a concealed contract is determined to be invalid or not to take effect in accordance with the preceding paragraph, the people's court shall consider the concealed contract as the factual basis and determine the civil liability of the parties in accordance with Article 157 of the Civil Code, unless otherwise provided by law.

If the several contracts entered into by the parties for a single transaction are each true declarations of will and do not fall under other circumstances affecting their validity, the people's court shall determine whether the content of the contracts has been modified based on ascertaining the order of formation and actual performance of the contracts. If laws and administrative regulations prohibit the modification of the content of contracts, the people's court shall determine such a modification as invalid.

Article 15 A people's court shall determine the rights and obligations between the parties based on the content of the contract, regardless of the name of the contract. If the rights and obligations claimed by the parties are inconsistent with those determined in accordance with the contract, the people's court shall ascertain the true civil legal relation between the parties based on factors such as the background of contracting, the purpose and structure of the transaction, performance, and whether the parties have falsified the subject matter of the transaction.

Article 16 If a contract violates the imperative provisions of laws and administrative regulations and falls under any of the following circumstances, and the legislative purpose of the imperative provisions can be achieved by holding the violator administratively or criminally liable, the people's court may, in accordance with paragraph 1 of Article 153 of the Civil Code, determine that the contract is not invalid due to the violation, “unless the imperative provisions do not result in the nullity of the juridical act.”

(1) The performance of the contract will have a negligible impact on the public order that the imperative provisions are intended to maintain, and determining the contract to be invalid would result in an unfair and unjust outcome of the case.

(2) The imperative provisions are intended to protect the government's tax, land transfer fees, and other national interests or the lawful interests of other parties to civil legal relations rather than the civil rights and interests of the parties to the contract, and determining the contract to be valid will not defeat the purpose.

(3) The imperative provisions are intended to require a party to strengthen risk control and internal management, among others. The other party has no ability or obligation to examine whether the contract violates them, and determining the contract to be invalid will cause the other party to bear adverse consequences.

(4) A party violates imperative provisions when entering into the contract and fails to redress the violation in good faith when it subsequently has the ability to do so.

(5) Other circumstances specified in laws and judicial interpretations.

If the imperative provisions of laws and administrative regulations are intended to regulate the performance of a contract entered into, and a party requests the contract to be determined invalid on the grounds that it violates the imperative provisions, the people's court shall not uphold the request, unless the performance will inevitably lead to a violation of the imperative provisions, or unless otherwise provided by the law or any other judicial interpretation.

If the contract is determined to be valid based on the preceding two paragraphs, but the party has not been punished for the violation, the people's court shall issue judicial recommendations to the relevant administrative agency. If the party's violation is punishable as a crime, the people's court shall transfer the case clues to the criminal investigation authorities; or if there is a case for private criminal prosecution, it shall inform the aggrieved party that it may file a separate prosecution with the people's court with jurisdiction.

Article 17 Where a contract does not violate the imperative provisions of laws and administrative regulations, but falls under any of the following circumstances, the people's court shall determine the contract to be invalid in accordance with the provisions of paragraph 2 of Article 153 of the Civil Code:

(1) The contract affects political, economic, military, or other national security.

(2) The contract affects social stability or fair competition, harms the public interest, or otherwise disrupts the public order.

(3) The contract deviates from social morality or family ethics, destroys personal dignity, or otherwise violates customs.

When determining whether a contract violates public order and good morals, the people's court shall uphold the core socialist values, take into account the motive and transaction purpose of the parties, the intensity of regulation by government departments, the frequency of similar transactions by the parties within a specified period, the social consequences of their acts, and other factors, and provide sufficient reasons in the adjudicative document. If, to suit their daily needs, the parties conduct a transaction that neither has significant impact on the public order, nor affect national security, nor violates good morals, the people's court shall not determine the contract to be invalid.

Article 18 Where the provisions of laws and administrative regulations use "shall," "must," "shall (may) not," or any other expression, and are intended to restrict or confer civil rights, and an actor's violation of the provisions constitutes unauthorized disposition, unauthorized agency, or agency beyond the power, among others, or causes the other party to the contract or a third party to acquire the right of revocatory action, the right to rescission, or any other civil right, the people's court shall determine the validity of the contract based on the civil legal consequences of violating the provisions specified by laws and administrative regulations.

Article 19 When a contract has been entered into to transfer or create property rights, if a party or the real holder of property rights contends that the contract is invalid only on the ground that the transferor has no ownership or right to dispose of the subject matter at the time of contracting, the people's court shall not uphold the contention; if the contract cannot be performed because of the failure to obtain ratification from the real holder of property rights or the transferor's subsequent failure to obtain the right to dispose, and the transferee requests rescission of the contract with the transferor being held liable for compensation for breach of contract, the people's court shall uphold the request in accordance with the law.

If the contract specified in the preceding paragraph is determined valid, the transferor has delivered the property or made a registered transfer to the transferee, and the real holder of property rights requests a determination that property rights remain unchanged or requests restitution of property, the people's court shall uphold the request, unless the transferee acquires property rights in good faith in accordance with Article 311 of the Civil C......