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Foreign Economic Contract Law
(Adopted on March 21, 1985 at the 10th Session of the Standing Committee of the 6th National People’s Congress)
CHAPTER I General Provisions
Article 1. This law is enacted with a view to protect the lawful rights and interests of the concerned parties to foreign economic contracts and promote the development of China’s foreign economic relations.
Article 2. This law applies to economic contracts (hereinafter referred to as contracts), concluded between enterprises or other economic organizations of the People’s Republic of China and foreign enterprises, other foreign economic organizations or individuals, but with the exception of the international transport contracts.
Article 3. Contracts should be made in conformity with the principles of equality and mutual benefit, and of achieving unanimity through consultations.
Article 4. Contracts must be made in accordance with the law of the People’s Republic of China and without prejudice to the public interests of the People’s Republic of China.
Article 5. The parties to a contract may choose the law to be applied to the settlement of the disputes arising from the contract. In the absence of such a choice by the parties, the law of the country which has the closest connection with the contract applies.
Contracts for Chinese-foreign equity joint ventures, Chinese-foreign co-operative enterprises and for Chinese-foreign co-operative exploitation and development of natural resources to be performed within the territory of the People’s Republic of China shall be governed by the law of the People’s Republic of China.
The international practice may apply in case no relevant provision is stipulated in the law of the People’s Republic of China.
Article 6. When an international treaty that relates to a contract and which the People’s Republic of China has concluded or participated in has provision(s) that differ from the law of the People’s Republic of China, the provision(s) of the said treaty shall be applied, but with the exception of clauses to which the People’s Republic of China has declared reservation.
CHAPTER II Formation of Contract
Article 7. A contract is formed when the clauses of contract are agreed in written form and signed by the parties. In case one party requests to sign a confirmation letter when the agreement is reached by the means of letter, telegram or telex, the contract is only formed upon the confirmation letter being signed.
Contracts, which are under the provisions of the law and administrative regulations of the People’s Republic of China, shall be approved by the competent authorities of the state. They are only formed when the approval is granted.
Article 8. Appendices specified in a contract are integral parts of the contract.
Article 9. Contracts that violate the law or the public interests of society of the People’s Republic of China are invalid.
In a case where any clauses in a contract violate the law or the public interests of society of the People’s Republic of China, the validity of the contract is not derogated if such clauses are canceled or revised by the parties through consultations.
Article 10. Contracts concluded by means of fraud or under duress are invalid.
Article 11. The party who bears responsibility for the invalidity of the contract is obligated to pay the other party for the loss arising from the invalidity of the contract.
Article 12. Contracts should generally contain the following items:
(1) The corporate or personal names of the contract parties and their nationalities, principal place of business or residence addresses;
(2) Date and place of signature of the contract;
(3) Type of contract and the kind, scope of the subject matter of the contract;
(4) Technical conditions, quality, standard, specifications and quantities of the subject matter of the contract;
(5) Time limit, place and method of performance;
(6) Terms of price, amount and way of payment, and various additional changes;
(7) Whether the contract could be assigned or conditions for assignment;
(8) Compensation and other liabilities for breach of the contract;
(9) Ways for settlement of disputes in case of disputes arising from the contract;
(10) Languages to be used in the contract and their effectiveness.
Article 13. The limits of risks borne by the parties for the subject matter to be performed should be specified in the contract according to its requirement; and the coverage of insurance for the subject matter should be specified when it is necessary.
Article 14. With regard to a contract that needs to be performed continuously in a rather long period, the parties should set a valid term of the contract and may also set conditions for extension and early termination of the contract.
Article 15. A guarantee clause may be agreed upon in the contract by parties. The guarantor shall undertake responsibility within the agreed scope of the guarantee.
CHAPTER III Performance of Contracts and Liabilities for Breach of Contract
Article 16. A contract formed in accordance with law is legally binding. The parties should fulfil their obligations stipulated in the contract. No party should arbitrarily alter or terminate the contract.
Article 17. A party may suspend performance of his obligations temporarily if it is proved by conclusive evidence that the other party cannot perform his obligations. However, the party who suspends performance should promptly inform the other party. When the other party provides a full guarantee of performance of the contract, the party shall perform the contract. The party who suspends performance of contract, in case of no conclusive evidence for proving the other party is not able to perform the contract, shall be responsible for breach of contract.
Article 18. If a party does not perform the contract or its performance of the contractual obligations does not conform to the agreed conditions, that is in breach of contract, and the other party is entitled to demand compensation for losses or to adopt other reasonable remedial measures.
If the losses suffered by the other party still cannot be made up completely after taking remedial measures, the other party retains the right to claim for damages.
Article 19. The liability for damages by a party for breach of contract should be equal to the loss suffered by the other party as a consequence of the breach. However, such damages may not exceed the loss which the party in breach ought to have foreseen at the time of the conclusion of the contract as a possible consequence of the breach of contract.
Article 20. The parties may agree upon in a contract that a certain amount of liquidated damages will be paid to the other party if one party breaches the contract; and may also agree upon a method for calculating the damages arising over such a breach of contract.
The above-mentioned liquidated damages shall be regarded as compensation for the loss caused by breach of contract. However, if the liquidated damages agreed upon in the contract is much more or less than the loss, the parties may request an arbitration body or court to cut or increase it appropriately.
Article 21. In a case where both parties are in breach of the contract, each shall bear corresponding liabilities respectively.
Article 22. A party who suffers losses arising from a breach of contract by the other party should take appropriate measures in time to prevent the loss from aggravating. If he fails to adopt appropriate measures and that aggravates the loss, he shall have no right to claim damages for the aggravated part of the loss.
Article 23. If a party fails to pay on time the due amount agreed upon in the contract or any other due amount related to the contract, the other party is entitled to interest on the amount in arrears. The method for calculating the interest may be specified in the contract.
Article 24. A party should be exempted from his obligations in whole or in part in case he fails to perform all or part of his obligations as a result of a force majeure event.
In case a party cannot perform his obligations within the time limit set in the contract due to a force majeure event, he should be relieved from the liability for delayed performance during the period of continued influence of the effects of the event. An event of force majeure means the event that the parties could not foresee at the time of conclusion of the contract and its occurrence and consequences cannot be avoided and cannot be overcome.
The scope of force majeure events may be specified in the contract.
Article 25. The party who fails to perform all or part of the obligations of the contract because of an event of force majeure should inform the other party in time so as to mitigate the loss which might possibly occur to the other party, and should also provide a certificate issued by the relevant agencies within a reasonable period.
CHAPTER IV Assignment of Contract
Article 26. When a party intends to assign all or a part of his contractual rights and obligations to a third party, consent should be obtained from the other party.
Article 27. As for a contract which, as provided by the law or administrative regulations, is formed only after getting approval from the competent authority of the state, the assignment of the rights and obligations of such contract should be subject to the approval from the original approval authority, but with the exception of already approved contracts in which it is otherwise agreed.
CHAPTER V Modification, Cancellation and Termination of Contract
Article 28. A contract may be modified by the parties through consultations.
Article 29. A party is entitled to inform the other party to cancel the contract if one of the following situations occurs:
(1) The expected economic interests are infringed seriously for the breach of the contract by the other party;
(2) The other party fails to perform a contract within the time limit agreed upon in a contract, and still fails again within a reasonable period of time allowed for delayed performance;
(3) The whole obligations of the contract cannot be performed due to the occurrence of a force majeure event;
(4) The conditions agreed upon in the contract for cancellation of the contract have arisen.
Article 30. For a contract containing several independent parts, some of them may be canceled and the others shall remain valid according to the provisions of the previous article.
Article 31. A contract should be terminated if one of the following situations occurs:
(1) The contract has already been performed in accordance with the agreed conditions;
(2) The arbitration body or the court decides to terminate the contract;
(3) The parties agree to terminate the contract through consultations.
Article 32. Notices or agreements for modification or cancellation of the contract should be made in written form.
Article 33. Contracts that under the provisions of the law and administrative regulations of the People’s Republic of China, are only formed after getting approval from the competent authority of the State, the significant modification of such contracts should be approved by the original approval authority and the cancellations of such contracts should be filed with the original approval authority.
Article 34. Modification, cancellation or termination of a contract does not deprive a party of the rights to claim for damages.
Article 35. The clauses agreed to in a contract on the settlement of disputes shall not become invalid because of the cancellation or termination of the contract.
Article 36. The clauses agreed to in a contract on settlement of account and winding-up shall not become invalid because of the cancellation or termination of the contract.
CHAPTER VI Settlement of Disputes
Article 37. Any disputes arising from a contract ought to be settled by the parties, if possible, through consultations or mediation of a third party.
In case the parties are unwilling to solve a dispute through consultation or mediation, or fail to do so, the dispute may, in accordance with the arbitration clause provided in the contract or the written arbitration agreement reached by the parties afterwards, be submitted to a Chinese arbitration body or other arbitration body.
Article 38. In case neither an arbitration clause is provided in the contract nor a written arbitration agreement is reached afterwards, the parties may bring suit in the People’s Court.
CHAPTER VII Supplementary Provisions
Article 39. The limitation of action for litigation or arbitration concerning disputes over a contract of purchase and sale of goods is four years from the time the party knew or ought to know his rights are infringed. The limitation of action for litigation or arbitration concerning disputes over other contracts shall be separately stipulated by the law.
Article 40. Even if the law makes new provisions, contracts for Chinese-foreign equity joint ventures, Chinese-foreign co-operative enterprises and for Chinese-foreign co-operative exploitation and development of natural resources to be performed within the territory of the People’s Republic of China, which have already been approved by a competent authority of the State and made, may still be performed according to the stipulations of those contracts.
Article 41. Contracts made before the enforcement of this law may be governed by this law in cases where the parties so agree through consultations.
Article 42. Rules for the implementation of this law shall be formulated by the State Council in accordance with this law.
Article 43. This law shall enter into force on July 1, 1985.
