Clarity obligations of standardised clauses under Civil Code

By Zhang Guanglei and Chen Cheng, Jingtian & Gongcheng
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The Civil Code comes into effect on 1 January 2021, and article 496 revises article 39 of the Contract Law on the obligation of presentation and explanation of standardised clauses, which is expected to have a significant impact on the conclusion of contracts concerning cross-border transactions.

Zhang Guanglei
Partner
Jingtian & Gongcheng

Article 39 of the Contract Law provides that, “the party providing the standardised clauses shall … call the attention of the other party to the clause exempting or limiting its liability”; while article 496 of the Civil Code provides that, “the party providing the standardised clauses shall … remind the other party of … the clauses in which the other party has material interests”, so expanding the scope of the obligation of presentation and explanation.

Before the implementation of the Civil Code, laws, regulations and rules related to consumer protection have broken through the scope of “clauses exempting or limiting its liabilities”, and the parties providing standardised clauses are required to fulfil the obligation of presentation and explanation based on the existence of “material interest”.

For example, article 26 of the Consumer Protection Law provides that, “business operators shall adopt conspicuous means to call consumers’ attention to … in which consumers have material interests”. Article 17 of the Measures for the Administration of Online Transactions provides that, “online commodity operators and related service operators … [shall] call consumers’ attention to clauses in which consumers have material interests”. Article 31 of the Judicial Interpretation of the Civil Procedure Law provides that, “if the operator uses the standardised clauses to conclude a jurisdiction agreement with the consumer, and fails to take reasonable measures to remind the consumer, and the consumer claims that the jurisdiction agreement is invalid, the people’s court shall support the claim”.

On the contrary, in civil and commercial contract disputes outside the field of consumer protection, clauses unrelated to liability are usually not recognised as “clauses exempting or limiting its liabilities”, and are included in the scope of the obligation of presentation and explanation.

For example, in the dispute over loan contracts of Yue 03 Min Xia Zhong Case No. 3565 [2017] and Wan Min Shen Case No. 1351 [2020], the court held that the standardised clauses stipulating jurisdiction, interest and attorney’s fees were not clauses exempting or limiting liabilities, and so did not support the party’s claim that the obligation of presentation and explanation was not fulfilled.

陈程, Chen Cheng, Associate, Jingtian & Gongcheng
Chen Cheng
Associate
Jingtian & Gongcheng

After the implementation of the Civil Code, the court’s examination of “clauses involving material interest” will not only be limited to consumer-related contracts. As for the specific type of “clauses involving material interests”, further observation on the judgments after the implementation of the Civil Code is needed.

At this stage, the authors interpret the definition of “clauses involving material interest” according to the cases made after the Civil Code is promulgated, and before its implementation (from 28 May to 31 December 2020), so as to provide reference for laws and business practice.

In Hu 01 Min Zhong Case No.8107 [2020], the letter of intent for equity transfer provides that, “this letter of intent has no legal effect, and any party who withdraws from, or violates, this letter of intent does not need to bear any liability to the other party”. Shanghai No. 1 Intermediate People’s Court held that this letter of intent was a preliminary contract, and involved the trust and reasonable expectation formed between the parties. However, as the provider had not taken reasonable measures to draw the attention of the other party, the above clause was void.

In Hu 0115 Min Chu Case No. 22233 [2020], Shanghai Pudong Court held that the clauses involved were not binding, on the grounds that the intermediary party failed to explain and call the other party’s attention to the settlement method of intermediary service fees in the contract.

The standardised clauses in the above-mentioned cases involved various clauses such as the validity, nature, performance period and price settlement method of the contract, which were not directly related to the distribution and assumption of liabilities. However, the courts all considered them to be “clauses involving material interests”, incorporated them within the scope of obligation of presentation and explanation, and denied the validity of the clauses.

Although article 496 of the Civil Code, which was not implemented at that time, cannot be directly quoted as the basis of judgment in the above-mentioned cases, considering that the judgments were made at the time of the alternation of old and new laws, and were consistent with the provisions of the new law, the judgment viewpoints on the scope of obligation of presentation and explanation have certain reference significance for cases after the implementation of the Civil Code.

In addition, article 9 of the Several Provisions on the Time Validity of Applying the Civil Code, implemented at the same time as the Civil Code, provides that, “If the party providing standardised clauses of the contract concluded before the implementation of the Civil Code fails to perform the obligation of presentation or explanation, which involves the determination of the effectiveness of the standardised clauses, the provisions of article 496 of the Civil Code shall apply”.

In view of the wide application of standardised clauses in different fields, and the further strengthening of the obligation of presentation and explanation in law, the party providing standardised clauses will undoubtedly bear greater risk in terms of validity of the clauses while gaining advantages in the contract.

To control risk, the party providing standardised clauses shall present or explain the main contract terms in a clear and definite way, and can provide a risk notice (like the following) outside the contract, which should be executed by the recipient of the standardised clauses for confirmation: “The party providing standardised clauses has clearly presented or explained the main contract terms to the other party, and each party has clearly understood the meaning of the terms and corresponding legal risks. The execution is made voluntarily.”

Zhang Guanglei is a partner at Jingtian & Gongcheng, and also an arbitrator of Hong Kong International Arbitration Centre. Chen Cheng is an associate at the law firm

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