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PRC Civil Code Amends the Rule on Change of Circumstances

  • Legal Development 5 August 2020 5 August 2020
  • Asia Pacific

  • International Arbitration

PRC Civil Code Amends the Rule on Change of Circumstances

The Civil Code of the People's Republic of China (《中华人民共和国民法典》, hereinafter referred to as the "PRC Civil Code"), which took five years to compile, was published on May 28th this year and will be put  into force on January 1st 2021. It has attracted wide attention from various circles of society, and experts and scholars have in turn analysed and interpreted its various provisions. This article will offer an analysis of the amendment to the "Rule on Change of Circumstances" based on the current laws and judicial interpretation and the 19th Section of the book Application and Judicial Practice of the Civil Code (《<民法典>适用与司法实务》)1.

Based on Article 26 of the Supreme People's Court's Interpretation of Several Issues Concerning the Application of PRC Contract Law (II) (《最高人民法院关于适用<中华人民共和国合同法>若干问题的解释(二)》, hereinafter referred to as "Judicial Interpretation II of PRC Contract Law"), Article 533 of the PRC Civil Code has revised the definition of Change of Circumstances and the remedies available to the parties affected by it.

1. Deleting the restrictive provisions of "not caused by force majeure" and "unable to achieve the purpose of the contract"

Firstly, the differences and connections between "Change of Circumstances" and "Force Majeure" can be summed up as follows:

  Change of Circumstances Force Majeure
Differences "Circumstances" refer to the objective facts or basis on which the contract is concluded, which usually include the legal order, the economic order, the specific purchasing power of the currency and the usual transaction conditions2. "Force" refers to the force of nature and the force of society3.
"Change" includes military, political, policy changes, social events, etc. as well as government administrative actions, changes in market/economic environment, and pure third-party reasons, which lead to the loss of the contractual basis or a difficulty in performance4. “Majeure” refers to unforeseeable, unavoidable and insurmountable.
Connections: The "circumstance" in Change of Circumstance includes the objective situation that cannot be foreseen, avoided or overcome. Force Majeure is one of the situations of the Change of Circumstance5.

Secondly, in accordance with Article 94 (1) of PRC Contract Law, it is not sufficient for a party to be affected by force majeure for this to constitute legal grounds for the termination of the contract. Only where the purpose of the contract cannot be fulfilled due to the force majeure event, can the contract be terminated according to Article 94(1) of PRC Contract Law. Further, pursuant to Article 117 (1) of PRC Contract Law, if a contract cannot be performed due to a force majeure event, the party affected by the force majeure may be partially or wholly exempted from liability in proportion with the causative effect of the force majeure. To sum up the two articles above, the party/parties concerned may seek to terminate the contract if the purpose of the contract cannot be fulfilled due to a force majeure event; and the party affected by the force majeure may seek to reduce all or part of its liability up to the extent that the force majeure event was causative of the inability to perform the contract.

However, where a party suffers force majeure, if the impact of the force majeure event neither prevents the fulfilment of the purpose of the contract, nor results in the non-performance of the contract, but only causes certain difficulties in the performance of the contract, the party affected by the force majeure will face a dilemma where it can neither exercise the statutory right of termination in accordance with Article 94 (1) of PRC Contract Law, nor be partially or wholly exempted from liability according to Article 117 (1) of PRC Contract Law.

Article 533 of the PRC Civil Code addresses such a situation and provides a possible solution for the party affected by force majeure under the above circumstance by deleting the restrictive wording "not caused by force majeure" and "unable to fulfil the purpose of the contract" from Article 26 of the Judicial Interpretation II of PRC Contract Law.

2. Adding a pre-set negotiation procedure and arbitration as an alternative method of dispute resolution

Firstly, Article 533 of the PRC Civil Code adds that "the party adversely affected may renegotiate with the other party". The word "may" here seems to give the affected party the right to choose, either to negotiate with the other party or not. However, combined with the content of the second half of the clause - "if negotiation fails within a reasonable period of time, the parties may request the Court or the arbitration institution to change or terminate the contract" -it appears that the newly added wording of this clause provides a pre-set negotiation procedure for the party adversely affected by the change of circumstance by seeking a remedy from the Court or arbitration institution. On the one hand, it encourages the continued performance of the contract, yet, on the other, if the party affected by the force majeure does not negotiate with its counterpart, it may, in practice, encounter some obstacles when seeking relief from the Court or arbitration institution.

Secondly, Article 533 of the PRC Civil Code also invokes arbitration institutions as an alternative method of dispute resolution, which in our view is based on the principle of contractual autonomy. If the parties have explicitly selected an arbitration centre as the dispute resolution institution in the contract or in the relevant arbitration agreement, the parties do not need to seek relief from the Court in accordance with Article 26 of the Judicial Interpretation II of PRC Contract Law, but may seek remedy directly from the selected arbitration institution.

Attached is a comparison between the provisions of "Change of Circumstances" in the Judicial Interpretation II of PRC Contract Law and the PRC Civil Code:

Judicial Interpretation II
of PRC Contract Law
PRC Civil Code
Article 26 - Where the objective circumstance undergoes significant changes, which are not commercial risks and were unforeseeable when the parties signed the contract, and not caused by force majeure after the conclusion of the contract, if the continued performance of the contract is obviously unfair to one party or the purposes of the contract cannot be realized and a party applies to the Court for modification or termination of the contract,  the Court shall decide whether to modify or terminate the contract subject to the principle of justice and the actual facts of the case.

Article 533 - Where the basic conditions of a contract undergo significant changes, which are not commercial risks and were unforeseeable when the parties signed the contract, if the continued performance of the contract is obviously unfair to one party, the party adversely affected may renegotiate with the other party; if the negotiation fails within a reasonable period, the party/parties may apply to the Court or arbitration institution for modification or termination of the contract.

The Court or arbitration institution shall decide whether to modify or terminate the contract subject to the principle of justice and the actual facts of the case.

1.Mao Ronghua, chief editor: Application and Judicial Practice of the Civil Code, Law Press, July 2020, 1st Edition, pp. 335-350.

2.Han Shiyuan: System of Irregularities of Performance, Law Press, 2006 Edition, Page 44.

3.Liu Kaixiang, Zhang Haixia: Opinion on Force Majeure, published in the Legal Research, 6th Issue of 2020.

4.Han Qiang: Typological Study on the Principle of Change of Circumstances, published in the Legal Research, 4th Issue of 2010.

5.According to Article 26 (3) of PRC Labor Law, the "situation" of termination of a labor contract due to change of circumstances includes force majeure and other circumstances that prevent all or part of the provisions of the labor contract from being performed. Please refer to the Interpretation on Several Articles of PRC Labor Law issued by the former Ministry of Labor (LBF [1994] No. 289).

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