Contractual obligations in the field of entrepreneurship under the law of the People's Republic of China: execution, termination, liability for violation
The article is devoted to the analysis of the legal regulation of contractual obligations arising between persons engaged in entrepreneurial activity in the People's Republic of China. The author aims to investigate the proper fulfillment of contractual obligations in the field of entrepreneurship under the law of the People's Republic of China, to consider the liability measures established for their non-fulfillment or improper fulfillment, as well as to analyze the grounds for termination of obligations. Based on the results of the study, the author concludes that the principles of honesty and trust are essential for contractual obligations in the field of entrepreneurial activity. The parties are obliged to cooperate fully, including in addition to fulfilling the obligations stipulated in the contract. Moreover, such an obligation remains even after the termination of all contractual obligations. The conditions for liability for violation of obligations in the field of entrepreneurial activity are also established.
Keywords: commercial law of the People's Republic of China, contract law of the People's Republic of China, business contract under the law of the People's Republic of China, contractual obligations under the law of the People's Republic of China.
Business cooperation between Russia and China is increasing every year, and with it the need for a deeper study of Chinese commercial law, in particular contract law governing contracts concluded by Russian and Chinese entrepreneurs, is increasing. The legal regulation of contractual obligations occupies an important place in the commercial law of the People's Republic of China. This is due to the role and importance of contracts in regulating relations with the participation of entrepreneurs. They cover foreign trade exchange, investment projects, the performance of works, the provision of services, and relationships in the financial and credit sphere. Nevertheless, in modern Russian science there are no studies devoted to the analysis of entrepreneurial contractual obligations under the law of the People's Republic of China. This work is intended to fill this gap. It seems relevant to analyze what is the proper fulfillment of contractual obligations in the field of entrepreneurship under the law of the People's Republic of China, what liability measures are established for their non-fulfillment or improper fulfillment, as well as to investigate the grounds for termination of obligations.
According to article 60 of the Law of the People's Republic of China on Contracts dated March 15, 1999 <1> (hereinafter - the Law of the People's Republic of China on Contracts), obligations must be fulfilled properly and in full in accordance with the terms of the contract. Execution in a proper manner implies execution by a proper debtor to a proper creditor in respect of a proper item at the appropriate time, in the appropriate place and in the appropriate manner <2>.
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<1> The Law of the People's Republic of China on Contracts of March 15, 1999
<2> Ying G. Commercial and Economic Law in China. 2nd ed. Alphen aan den Rijn: Wolters Kluwer, Law & Business, 2015. P. 123.
In fulfilling their obligations, the parties should be guided by the principles of honesty and trust, and, in addition to fulfilling the obligations stipulated in the contract, they are also obliged to cooperate, namely, to ensure confidentiality, if necessary, notify the other party in a timely manner and provide it with full support.
The Law of the People's Republic of China on Contracts enshrines the principle of real fulfillment of obligations, however, with a number of exceptions. In case of non-fulfillment by a party of a monetary obligation, the creditor has the right to demand compulsory execution. In case of non-fulfillment or improper fulfillment of a non-monetary obligation, the creditor may demand performance in kind, except in cases where:
- legally or practically, such execution is impossible;
- the subject of the contract is unsuitable for compulsory collection or such collection is associated with excessive expenses;
- the creditor did not demand execution within a reasonable period of time.
If, during the performance of obligations, the parties have disagreements regarding the interpretation of the terms of the agreement on quality, price, place of performance, etc., and they cannot resolve them by mutual agreement, then such disagreements are resolved in accordance with the articles of the agreement or established trade practice. If it is not possible to resolve the differences in this way, then the rules of Article 62 of the Law of the People's Republic of China on Contracts apply, namely:
- the condition of the quality agreement must be interpreted in accordance with state and industry standards, and in the absence of state and industry standards - in accordance with generally accepted or specially established standards that correspond to the objectives of the agreement;
- the condition of the price agreement is determined in accordance with the market prices in force at the time of conclusion of the agreement, and if by law the price is regulated by the state - in accordance with the established prices;
- the condition of the contract on the place of performance of the obligation is determined:
a) for contracts related to payments, the location of the party that is the recipient of payments;
b) for contracts on the transfer of real estate - the location of the real estate;
c) for contracts on other subjects - the location of the party carrying obligations under the contract;
- the condition of the contract on the term of performance of obligations is determined by:
a) for the debtor - at any time;
b) for the creditor - at any time upon request, however, providing the other party with the necessary time to prepare;
- the condition of the contract on the method of fulfilling the obligation is established by determining the most favorable way to achieve the purpose of the contract;
- the condition of the contract on the party to whom the costs should be imposed is determined based on which party fulfills the obligation.
Article 63 of the Law of the People's Republic of China on Contracts provides for a special rule for the fulfillment of obligations for the supply of goods, the price of which is set by the state. If there has been a price change during the performance of obligations, the calculation is carried out at the prices current at the time of payment. In case of late delivery of goods in case of price increase, the calculation is made at the prices specified in the contract, and in case of price decrease - at new prices. In case of late receipt of goods in case of price increase, the calculation is carried out at new prices, and in case of price decrease - at prices specified in the contract.
Articles 66-69 of the Law of the People's Republic of China on Contracts establish the following rules regarding the possibility to unilaterally refuse to fulfill an obligation.
If the obligations of the parties are mutual and there is no pre-agreed procedure for their execution, the parties are obliged to carry out the execution simultaneously. Either party has the right to reject the other party's demand for performance before the latter fulfills its obligations. Either party has the right to reject the other party's demand for performance if the latter does not fulfill its obligations.
If the obligations of the parties are mutual and there is a pre-agreed procedure for their execution, the party has the right to reject the demand of the party that is the first to perform, for execution before the latter properly fulfills its obligations. In this case, the party that must first perform the execution may suspend it if there is reliable information confirming that the other party has:
- the market situation has seriously deteriorated;
- there is a withdrawal of assets in order to avoid repayment of debts;
- the business reputation has deteriorated;
- there are other situations that have led or are capable of leading to the inability to properly fulfill their obligations.
The party that has suspended the execution for one of the above reasons is obliged to notify the other party in a timely manner. If the other party provides appropriate guarantees, the execution is resumed. If the other party is unable to start the proper performance of the obligation or provide appropriate guarantees at a reasonable time, the party that suspended the performance has the right to terminate the contract.
If a party suspends performance without appropriate reliable information, then it is responsible for the violation of the contract.
The Law of the People's Republic of China on Contracts allows the fulfillment of obligations not to the creditor, but to a third party, as well as the fulfillment of obligations for the debtor by a third party, but only by agreement of the parties (Articles 64, 65). The debtor is responsible to the creditor for non-performance or improper performance by a third party or a third party.
If the creditor has not informed the debtor about the reorganization or change of location, which led to the inability of the debtor to fulfill its obligations, the debtor has the right to suspend performance or deposit the subject of the obligation.
Early fulfillment of obligations by the debtor is allowed only if it does not harm the interests of the creditor (Article 71 of the Law of the People's Republic of China on Contracts). Additional expenses related to early execution are charged to the debtor's account. The above norm protects entrepreneurs from unjustified expenses. A similar rule applies to the performance of obligations in parts (Article 72 of the Law of the People's Republic of China on Contracts).
According to article 176 of the Basic Provisions of the Civil Law of the People's Republic of China dated March 15, 2017 <3>, a person is responsible for non-fulfillment or improper fulfillment of obligations in accordance with the norms of the law and the agreement of the parties. The general provisions on liability for non-fulfillment or improper fulfillment of contractual obligations are enshrined in Chapter 7 of the Law of the People's Republic of China on Contracts. The specifics of liability for violation of obligations from the named contracts are fixed in the relevant chapters of the law.
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<3> The main provisions of the Civil law of the People's Republic of China dated March 15, 2017
A party that does not fulfill or improperly fulfills its obligations under the contract is obliged to be responsible for such behavior. The forms of liability are the continuation of the fulfillment of obligations, taking measures to remedy the situation, and compensation for losses. It is noteworthy that prosecution is possible even before the deadline for the fulfillment of the obligation, if the debtor declares or by his actions clearly demonstrates his intention not to fulfill the contract.
In case of improper performance of the obligation by the debtor, the latter is liable in accordance with the terms of the contract. If such conditions are not clearly defined in the contract, are not defined and are not agreed upon by the parties in the future, then the creditor has the right to require the debtor to take one of the measures to remedy the situation. The creditor must choose the appropriate measure reasonably and with an eye to the substance of the subject matter of the contract and the degree of default. Such measures include repair, replacement, re-performance of work or services, return of what was received under the contract, reduction of the amount of payment under the contract.
The creditor may claim damages only if such losses still exist after the debtor has properly fulfilled the obligation or taken measures to remedy the situation. The Law of the People's Republic of China on Contracts enshrines the principle of full compensation for damages. Article 113 states that the amount of compensation for losses caused by non-fulfillment or improper fulfillment of obligations by the debtor must correspond to the amount of losses of the creditor, including lost profits. At the same time, the amount of such compensation may not exceed the amount stipulated by the parties in the contract. Thus, a deviation from the principle of full compensation for damages in the direction of their limitation can be fixed in the contract. This situation meets the needs of commercial turnover.
When there is a default or improper fulfillment of obligations by the debtor, the creditor is obliged to take all possible measures to prevent an increase in its losses. If such measures have not been taken, the creditor has no right to claim compensation for the increased part of the losses. Reasonable expenses incurred by the creditor to prevent an increase in losses are borne by the breaching debtor.
The main provisions of the Civil law of the People's Republic of China dated March 15, 2017 and the Law of the People's Republic of China on Contracts do not name guilt as a condition for the onset of civil liability. However, Article 121 of the Law of the People's Republic of China on Contracts stipulates that if the debtor's violation of its obligations from the contract occurred in connection with a third party, i.e. without the fault of the breaching party, the debtor is liable to the creditor, and then, in accordance with the law or the contract, makes a claim against a third party. Thus, it can be concluded that the condition for liability for breach of obligations is a violation of contractual obligations, and for liability in the form of damages - a causal relationship between the violation of contractual obligations and the resulting losses.
In accordance with Article 180 of the Basic Provisions of the Civil Law of the People's Republic of China dated March 15, 2017, circumstances of force majeure - force majeure - are the basis for exemption from civil liability, unless otherwise provided by a special law. Force majeure is an objective situation, unforeseen, inevitable and insurmountable. The Law of the People's Republic of China on Contracts also names force majeure as the basis for full or partial exemption from liability for violations of obligations from the contract (Articles 117, 118). However, in the case when force majeure occurs after the delay in execution, the relevant circumstances cannot serve as a basis for exemption from liability. A party faced with the impossibility of proper execution due to force majeure is obliged to notify the other party in a timely manner in order to reduce the losses that may be caused to the other party and provide appropriate evidence within a reasonable period of time.
The grounds for termination of obligations are fixed in Article 91 of the Law of the People's Republic of China on Contracts, but the relevant list is not exhaustive. Thus, it can be concluded that in the field of entrepreneurial activity, any grounds for termination of obligations provided for by law or contract can be applied.
The normal basis for termination of an obligation is its proper performance.
Obligations are terminated in case of termination of the contract.
It is possible to terminate obligations by offset, except in cases where offset is not provided for by the nature of the contract or in accordance with the law (Articles 99-100 of the Law of the People's Republic of China on Contracts). For example, it is impossible to set off obligations secured by collateral, obligations from harm; the Law of the People's Republic of China on Bankruptcy establishes a number of cases where set-off is prohibited <4>. Termination of the obligation by offset is possible if a number of conditions are met. It is necessary that the claims be counterclaims, i.e. those for one of which the party is the creditor, and for the other - the debtor. The deadline for fulfilling the requirements must come. As a general rule, the requirements must be homogeneous, i.e. identical in type and basic characteristics. The offset of heterogeneous claims is possible only by agreement of the parties. For homogeneous requirements, such consent is not required. It is only necessary to notify the other party of the intention to make a set-off. The notification should not specify any additional conditions or deadlines. The notification shall enter into force from the moment it is received by the other party.
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<4> Chinese Civil Law / ed. Bu. Yuanshi. Munchen: C.H. Beck; Hart; Nomos, 2013. P. 63.
The obligation is terminated if the debtor deposits the subject of the obligation in cases provided for by law - escrow (Articles 101-104 of the Law of the People's Republic of China on Contracts).
The debtor has the right to deposit the property constituting the subject of the obligation if the fulfillment of the obligation is difficult for him under one of the following circumstances:
- the creditor refuses to accept the execution without proper reasons;
- the location of the creditor is unknown;
- the creditor has died or lost his legal capacity, and an heir or guardian has not been identified;
- other circumstances established by law.
If the property constituting the subject of the obligation is unsuitable for deposit or the deposit fee is extremely high, the debtor may sell such property at auction or sell it in another way provided for by law and deposit the proceeds.
After depositing the property, the debtor is obliged to notify the creditor or his heir, guardian, except in cases where the location of the creditor is unknown.
The costs of depositing the property are borne by the creditor. He also bears all the risks associated with damage or loss of property. The fruits and income received from the property during the period of its deposit belong to the creditor by right of ownership.
As a general rule, the creditor has the right to receive the deposited property. However, if the creditor has obligations to the debtor that have expired, the depositary, at the request of the debtor, may refuse the creditor to receive the deposited property until the creditor fulfills its obligations to the debtor or issues guarantees. If the creditor has not exercised the right to receive the deposited property within five years from the date of deposit, this right is lost. The deposited property, minus the cost of depositing, becomes the property of the state.
Obligations are terminated by full or partial debt forgiveness, if this does not violate the rights of third parties (Article 105 of the Law on Contracts), by the coincidence of the debtor and the creditor in one person (Article 106 of the Law of the People's Republic of China on Contracts).
Even after the termination of all contractual obligations, the parties, based on the principle of honesty and trust, guided by established commercial practice, are obliged to notify, assist the other party and ensure confidentiality. If the non-fulfillment or improper fulfillment of such an obligation by one of the parties has caused losses, the injured party may file a claim for their recovery <5>.
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<5> Chinese Civil Law / ed. Bu. Yuanshi. Munchen: C.H. Beck; Hart; Nomos, 2013. P. 64.
Thus, it can be concluded that the principles of honesty and trust are essential for contractual obligations in the field of entrepreneurial activity. Thus, when fulfilling obligations, the parties should be guided by these principles and, in addition to fulfilling the obligations stipulated in the contract, they are also obliged to cooperate, namely, to ensure confidentiality, if necessary, notify the other party in a timely manner and provide it with full support. Even after the termination of all contractual obligations, the parties, on the basis of these principles, guided by established commercial practice, are obliged to notify, assist the other party and ensure confidentiality.
The only condition for liability for violation of obligations in the field of entrepreneurial activity is the violation of contractual obligations. To be held liable in the form of damages, a second condition is necessary - a causal relationship between the violation of contractual obligations and the resulting losses. Guilt is not a condition for the onset of civil liability. It is possible to bring to responsibility even before the deadline for fulfilling the obligation, if the debtor declares or clearly demonstrates by his actions his intention not to fulfill the contract.
In the field of entrepreneurial activity, any grounds for termination of obligations provided for by law or contract may be applied.
