• Measures for the Supervision and Handling of Contract-Related Violations
  • December 8, 2010 | Authors: John V. Grobowski; Yiqiang Li; Wendy Yan
  • Law Firm: Faegre & Benson LLP - Shanghai Office
  • In an effort to regulate commercial markets and protect the rights and interests of consumers, China's State Administration for Industry and Commerce (SAIC) has released new rules cracking down on three types of contract-related violations, such as contract fraud, in China. The Measures for the Supervision and Handling of Contract-Related Violations (Contract Violation Measures), which were issued on October 13, 2010, and came into effect a month later, fill a vacuum in the country's contract law.

    Prior to 2008, the SAIC regulated contact-related violations mainly through the Interim Provisions on Investigating and Penalizing Illegal Activities Involving Contracts, which were issued in November 1995. The SAIC abolished those interim provisions in April 2008, however, leaving a legal vacuum that led to abuses such as "bully" clauses in consumer and labor contracts. With issuance of the Contract Violation Measures, the SAIC resumes its oversight of contracts in China.

    The Contract Violation Measures regulate violations of laws and administrative regulations by means of contracts that result in illegal benefits to individuals, legal persons, and other organizations that jeopardize national interests, the public interest, or other individuals' interests. The new regulations generally prohibit three types of violations: fraud; jeopardizing of national or public interests; and violations in standard contracts.

    Fraud

    The Contract Violation Measures prohibit any party to engage in any of the following types of contract-related fraud:

    • falsifying a contract;
    • fabricating a party to a contract, or concluding a contract in another party's name without authorization or by impersonating another party;

    • fabricating the subject matter of a contract or fabricating the sources of goods or sales channels to induce another person into concluding or performing a contract;

    • releasing or using false information to convince another party to conclude a contract;
    • concealing a material fact in order to deceive another party into expressing his intent to conclude a contract or trick the other party into performing a contract;
    • deceiving another party into concluding or performing a contract by first performing a petty contract, or by partially performing a contract, while in fact not having the ability to actually perform the contract signed by the parties;
    • acting in bad faith to include a non-performable clause in a contract, which then results in the other party's failure to perform the contract;
    • fabricating a cause to suspend or terminate a contract in order to cheat another person of property;
    • providing any false security; or

    • concluding or performing a contract by other fraudulent means.

    Contracts Jeopardizing National or Public Interests

    The Contract Violation Measures prohibit any party to enter into or perform any of the following types of contract, which the measures deem to jeopardize national or public interests:

    • concluding or performing a contract by bribery, coercion, or any other illegal means;

    • concluding or performing a contract in collusion with any other party;

    • illegally purchasing or selling any property that is prohibited or restricted from purchase or sale by the state;

    • failing to perform any contractual obligation dictated by the state without a justifiable reason; or

    • other contract-related violations that jeopardize national or public interests.

    The Contract Violation Measures also prohibit entities or individuals who know or should have known that another person committed any of the abovementioned violations to provide that violating person any certificate, license, seal, account, or other convenience.

    Violations Relating to Standard Contracts

    Where a business operator and consumer adopt standard clauses in a contract, the business operator shall not exempt itself from the following liabilities:

    • for personal injury to the consumer;

    • for the consumer's property loss caused deliberately or by gross negligence;

    • warranty legally assumed, by law, for the commodities or services provided;

    • legally assumed liability for breach of contract; and

    • other liabilities imposed by law.

    Where any business operator and consumer adopt standard clauses in a contract, the business operator shall not increase the liabilities of the consumer:

    • by setting an amount of liquidated damages or compensatory damages that exceeds the statutory amount or an amount that is reasonable;

    • by requiring the consumer to assume any operational risk that should be assumed by the provider of the standard clauses; or

      by imposing on the consumer any liability that shall not be assumed by the consumer in accordance with laws and regulations.

    Where any business operator and consumer adopt standard clauses in a contract, the business operator shall not exclude the following rights of the consumer:

    • the right to modify or rescind the contract in accordance with law;

    • the right to make a claim for payment of liquidated damages;

    • the right to make a claim for compensation for damages;

    • the right to interpretation of the standard clauses;

    • the right to file a lawsuit for disputes over the standard clauses; and

    • other rights to which the consumer is entitled in accordance with law.

    Liabilities

    Where any party violates any of the above-mentioned provisions of the Contract Violation Measures, if any other law or administrative regulation has provided for a penalty for such a violation, such a law or regulation shall prevail; if not, the SAIC or its local agencies, in light of the seriousness of the case, may give a warning or impose a fine on the violating party of no more than three times the illegal gains (not exceeding a total of RMB30,000); or in the absence of illegal gains, a fine of no more than RMB10,000.

    Conclusion

    The Contract Violation Measures are primarily aimed at halting so-called "bully clauses" in commercial contracts so as to protect the rights and interests of consumers. Particularly since repeal of the Interim Provisions on Investigating and Penalizing Illegal Activities Involving Contracts in 2008, however, there have also been reports of employers inserting coercive clauses in contracts with employees. The Contract Violation Measures may also affect other agreements and contracts, such as those which give employers' the right to unilaterally adjust employees' posts, deprive the employee of the right to sue, or attempt to impose large liquidated damages if the employee leaves a job. With promulgation of these new rules by the State Administration for Industry and Commerce, the validity and effectiveness of such clauses will face further challenge, possibly increasing employers' legal risks.