Judgment trends of disputes related to contracts under Civil Code

By Yang Guang and Yuan Yuhui, Lantai Partners
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The significance of the book on contracts in the Civil Code to financial dispute cases lies not only in the settlement of financial disputes, but more importantly, in how the parties should design the contract terms and perform the contract as agreed to avoid any financial disputes under the Civil Code. Therefore, the authors sum up the following four key clauses in the book on contracts to predict the judgment trend of the categorised focus of financial disputes.

杨光, Yang Guang, Partner, Lantai Partners
Yang Guang
Partner
Lantai Partners

Adding rules of preliminary contract

The rules of preliminary contract first appeared in article 2 of the Judicial Interpretation of Sales Contracts. Article 495 of the Civil Code formally incorporated the preliminary contract into the Chinese contract system and upgraded article 2.

In Zui Gao Fa Min Zhong Case No.813 [2018], the Supreme People’s Court (SPC) could only identify the preliminary contract based on the basic principles of civil law and consistent understanding in judicial practice, as the Contract Law does not provide for preliminary contracts. After the effectiveness of the Civil Code, article 495 will directly provide basis of adjudication for the disputes of preliminary contracts. In judicial practice, the dispute of a preliminary contract often focuses on the identification of the preliminary contract, and the distinction between the preliminary contract and the contract, but the Civil Code fails to clarify this.

Moreover, article 495 of the Civil Code deletes the means of claiming liability for breach of contract by “terminating the preliminary contract and claiming damages” in article 2 of the Judicial Interpretation of Sales Contracts, and only retains the content of “assuming the liability for breach of the preliminary contract”, which is too broad. In practice, there is still much room for discussion on the remedy.

Revising provisions on the validity of contracts subject to approval

Article 502 of the Civil Code provides on the validity of contracts subject to approval. The provision on registration in article 44 of the Contract Law is deleted to distinguish the validity of approval and registration. The severability of the effectiveness of the approval clauses and related clauses is affirmed, and the legal remedy for violating the obligation of submitting for approval is constructed on the liability for breach of contract.

In the SPC’s Zui Gao Fa Min Zhong No.802 [2016] Gazette, the court, according to article 8 of Interpretation II of the Contract Law, identified the party’s failure to fulfil the obligation of submitting for approval in violation of the contract, and failure to submit relevant material as required by the competent authorities, as a fault in contracting, ruling that the party shall compensate the other party for direct losses arising in the contracting process.

After the effectiveness of the Civil Code, clauses on the obligation of submitting for approval, and relevant clauses on breach of contract, are endowed with severability. If the applicant fails to perform the obligation of submitting for approval, the other party may request it to bear the liability for breach of contract.

It is more beneficial to protect the legitimate rights and interests of the non-default party by shifting from culpa in contrahendo (fault in conclusion of a contract) to liability for breach of contract. However, the Civil Code does not provide on the consequences of the party’s failure to perform the obligation of submitting for approval after the court rules. Whether there will be different judgment standards in judicial practice in the future remains to be tested in practice.

原宇辉, Yuan Yuhui, Associate, Lantai Partners
Yuan Yuhui
Associate
Lantai Partners

Clarifying provisions on the validity of sales contracts without disposal right

The Civil Code abandons the rule that the validity of contracts without disposal power is to be determined, which was established in article 51 of the original Contract Law, and adopts the provision in article 3 of the Judicial Interpretation of Sales Contracts that contracts without disposal right are effective. Article 597 of the Civil Code provides the legal consequences of non-transferability of real rights caused by unauthorised disposal, that is, the sales contract where the seller fails to obtain the right of disposal is valid, and the buyer may rescind the contract and claim liability against the seller for breach of contract.

In Zui Gao Fa Min Zhong Case No. 75 [2016], the SPC, in accordance with articles 51 and 52 of the Contract Law and article 3 of the Judicial Interpretation of Sales Contracts, decided that the contract where a person without the disposal right disposed of other persons’ property was not necessarily void. As long as such contract is the true intention of both parties, the sales contract is valid, but the seller’s transferring the ownership of the subject matter to the buyer is to be determined, and will take effect when it is ratified by the right holder, or the seller obtains the disposal right afterwards. The Civil Code also adopts this view, and clarifies that if the ownership of the subject matter cannot be transferred, the buyer may rescind the contract and claim liability for breach of contract.

Revising the rules on assignment of monetary claims

In article 545, paragraph 2 of the Civil Code, assignments of claims are treated differently, actually changing the regulation direction of the current law on the practice of assignment of claims completely. In accordance with article 79 of the current Contract Law, both monetary claim and non-monetary claim are subject to agreement on prohibiting assignment of claims. The Civil Code relaxes this restriction, providing that if creditor and debtor agree that a monetary claim shall not be assigned, the agreement shall not be effective against a third party, regardless of whether the third party is bona fide or not.

In Yue 01 Min Zhong Case No.1321 [2019], the contract between the creditor and the debtor stipulated that the creditor “shall not transfer or grant to a third party in any way, or let the third party assume the rights and obligations arising from this contract”, and, as the contractor under the contract, the creditor’s main contractual right is to collect the contract payment.

Therefore, the court decided that the monetary claim shall not be assigned as agreed, which was in line with article 79(2) of the Contract Law. Thus, the creditor’s assignment of claim was void and the assignee did not obtain the claim at issue. However, if the case occurred after effectiveness of the Civil Code, an opposite judgment might be obtained, relying on whether the assignee is bona fide or not.

Yang Guang is a partner and Yuan Yuhui is an associate at Lantai Partners

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