Highlights of SPC’s New Interpretations on PRC Civil Code

Written by:Li Zhenghao Zhou Jiaxin（Dispute Resolution）

 

 

 

 

Introduction

On February 25, 2022, China’s Supreme People’s Court (“SPC”) issued the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code (“Interpretation”).  The Interpretation consists of 39 articles in nine sections, covering general rules, capacity for civil rights and for civil conducts, juridical acts, agency, civil liability, statute of limitations, etc.  The Interpretation was drafted on the basis of extensive research on judicial practice, responding to a number of issues reflected in judicial practice, which will provide valuable guidance for future judicial practice.  This article will discuss relevant parts of the Interpretation that further clarify or interpret previous provisions or practice, based on the relevant provisions before its promulgation and our experience in relevant legal practice.

Ⅰ.Major changes in the criteria of gross misunderstanding

Article 147 of the Civil Code stipulates that where a juridical act is performed based on gross misunderstanding, the actor shall be entitled to request a people’s court or an arbitration institution to revoke the act.  Under the Interpretation, Article 19 further elaborates on how to determine gross misunderstanding, which presents significant changes in comparison with previous provisions and interpretations.  In terms of previous provisions, neither the Civil Code, nor the General Provisions of Civil Law (expired), General Principles of Civil Law (expired) or Contract Law (expired) provided further instructions or explanations on the definition of “gross misunderstanding”.  Article 71 of the Opinions on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People’s Republic of China (for Trial Implementation) (“Opinions on General Principles of the Civil Law”, expired on January 1, 2021) stipulates that gross misunderstanding refers to the situation where a person performs an act based on false understanding of the nature of the act, the opposite party, the variety, quality, specification or quantity of the subject matter, etc., which leads to the consequence of the conduct going against his will and results in considerably large damages.

The interpretation of Contract Law by the National People’s Congress further explains that revocable contracts for gross misunderstanding normally have the following elements: (i) Misunderstanding generally arises from the negligence of aggrieved party.  (ii) The gross misunderstanding must be on the contents of the contract.  In China’s judicial practice, whether the misunderstanding is gross or not is mainly assessed from two aspects.  First, there is misunderstanding on the important matters of the contract such as the essence or nature of the subject matter. Misunderstanding of insignificant details of the contract will not constitute gross misunderstanding.  Second, whether misunderstanding has resulted in significant adverse consequence to the party or not.  (iii) Such contract shall have a direct bearing on the rights and obligations of the parties, to the extent that once the contract is performed, the interests of the misunderstanding party will be damaged.  (iv) There is a causal relationship between the gross misunderstanding and the conclusion or conditions of the contract.

The explanations given by the National People’s Congress also sums up several common situations of gross misunderstandings in China’s judicial practice: (i) Misunderstanding of the nature of the contract.  For example, the party misunderstood the rental as a sale.  (ii) Misunderstanding of the counterpart of the contract.  (iii) Misunderstanding of the type of subject matter, for example, beans are mistaken for soybeans and purchased.  (iv) Misunderstanding of the quality of the subject matter directly related to the purpose or significant interests of the parties to the contract.  For example, if a counterfeit product is mistaken for a genuine product.  In addition, any misunderstanding concerning the quantity of the subject matter, the place, period, or manner of performance, which is sufficient to cause significant damage to the interests of the parties can also be regarded as a contract with gross misunderstanding. [1]

Article 19 of the Interpretation stipulates, “Where a person has false understanding of the nature of the conduct, the opposite party, the variety, quality, specification, price or quantity of the subject matter, etc., and without such false understanding, the person would have not made the corresponding declaration of will, the people’s court may determine the situation to constitute gross misunderstanding under Article 147 of the Civil Code.  If the actor proves his or her material mistake made in the performance of the juridical act, and requests revocation of the juridical act, the people’s court shall uphold the request in accordance with the law, unless the actor is determined to have no right to request revocation based on transaction practice, among others.”  Comparing with the previous provisions and interpretations, the Interpretation makes the following major adjustments to the criteria of gross misunderstanding.

First, misunderstanding regarding the price of the subject matter is listed as a typical case that may constitute gross misunderstanding.  Prior to the Interpretation, gross misunderstanding typically includes the misunderstanding of the nature of the conduct, the opposite party, the variety, quality, specification or quantity of the subject matter, location and manner of performance, etc., while price has never been particularly mentioned.  As introduced by experts from the SPC Research Office, Article 19 of the Interpretation responds to relevant needs in legal practice and takes into account merchants’ claims of contract revocation arising from buyers’ “making a fortune by taking advantage” where merchants mislabel commodities’ prices.  As a result, Article 19 of the Interpretation lists price misunderstanding as a typical case of gross misunderstanding.[2]  The situations where the buyers “making a fortune by taking advantage” during price error incidents have occurred from time to time in e-commerce businesses in recent years.  Due to the negligence of the merchants in marking the price, the marked price shown to buyers is far lower than normal price.  With the publicity and incitation of online media, the buyers intend to take advantage of such error by quickly placing several orders at the abnormally low price.  In addition to correcting the price timely, merchants may also claim to revoke the contracts placed at abnormally low price for gross misunderstanding.  For the first time, Article 19 of the Interpretation explicitly includes the misunderstanding regarding “price” as a typical case that may constitute gross misunderstanding, which further confirms the merchants’ right to revoke the contract formed at wrong price and implements the principle of good faith.[3]

Second, causing considerably large losses to the misunderstanding party is no longer a constituting element of gross misunderstanding.  As mentioned above, Article 71 of Opinions on General Principles of the Civil Law stipulates that gross misunderstanding shall “cause considerably large losses”.  The interpretation of the Contract Law by National People’s Congress also suggests that “gross” in the context of “gross misunderstanding” has the meaning of resulting in significant adverse consequence to the party.  In response, the Interpretation appropriately adjusted the criteria for “gross”.  In the first paragraph of Article 19, “causing considerably large losses” is modified to “without such false understanding the party would have not made the corresponding declaration of will”.  This explains that when determining gross misunderstanding, causing or being likely to cause considerably large losses is no longer a constituting element.  Rather, courts should determine the impact on the party’s declaration of will through a “but for” hypothetical situation.[4]  For example, “where a seller confuses the color of certain souvenir or mistakes the varieties of bouquets that have special meanings during festival.  Although such mistakes will not result great losses to the buyer, they are against buyer’s purpose of the transaction, which can also constitute gross misunderstanding.”[5]

Third, the Interpretation clarifies the burden of proof for claiming gross misunderstanding and the circumstance where gross misunderstanding cannot be claimed.  According to the second paragraph of Article 19 of the Interpretation, if a person requests to revoke the juridical act based on gross misunderstanding, he/she shall bear the burden of proof for the existence of the gross misunderstanding when he/she performed the act.  This provision is the first one in the PRC’s legal system regarding the burden of proof particularly for gross misunderstanding.  It is also in line with the general principle of burden of proof in civil litigations, i.e., the party claiming the change or termination of legal relationship or the impairment of right shall bear the burden of proof for the basic facts of change or termination of legal relationship or the impairment of rights.[6]  In addition, the paragraph also provides for a proviso that courts may determine that a person has no right to request for revocation according to trading habits etc.  Trading habits here may include those applicable in antique trading and other situations.[7]

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Ⅱ.Adding the conditions for fraud by concealment

The Interpretation supplements and improves the rules for determining fraud based on the Opinions on General Principles of the Civil Law.  Article 68 of the Opinions on General Principles of the Civil Law stipulates that where a party purposely conveys any false information to the other party, or purposely conceal any fact so as to induce the other party into making any false declaration of will, such act shall be determined as a fraudulent act.  In judicial practice, this definition plays an important role as the guidance for courts to analyze and determine civil fraud, consumer fraud and other controversial issues.

In line with the Opinions on General Principles of the Civil Law, the Interpretation also provides that “intentional misrepresentation of fact” is a form of fraud.  However, for the case of “intentional concealment of facts”, the Interpretation adds a prerequisite condition that the party should “have the obligation to disclose”.  From another perspective, if the party does not have the obligation to disclose to the other party, the law should not make a negative evaluation of his/her silence.  The source of the obligation to disclose here includes legal provisions.  For example:

• Article 618 of the Civil Code stipulates that where the parties agree to limit or exempt the liability for any defect in the subject matter, and the seller fails to notify the buyer of the defect in the subject matter intentionally or due to gross negligence, the seller shall have no right to claim limitation or exemption of the liability.
• Article 20 of the Law on the Protection of Consumer Rights and Interests stipulates that business operators shall provide consumers with true and complete information on the quality, performance, use, and useful life, among others, of commodities or services; and shall not conduct any false or misleading promotion.
• Article 23 of the Personal Information Protection Law stipulates that a personal information processor that provides any other personal information processor with the personal information it or he processes shall notify individuals of the recipient’s name, contact information, purposes and methods of processing, and categories of personal information, and obtain the individuals’ separate consent.

In addition to legal provisions, the obligation to disclose may also come from the agreement of the parties, trading habits and the principle of good faith.[8]  Therefore, the obligation to disclose should not be simply understood as a statutory duty of disclosure.  Some scholars pointed out that this article clearly limits “fraud by concealing” to the situation where the party has the duty to disclose, which helps to promote the balancing of interests between the parties. [9]

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Ⅲ.The determining standard and rules of proof for apparent authority are further clarified

Apparent authority is an important theory in civil law, which often causes disputes in legal practice.  According to statistics, from January 1, 2019 to December 31, 2021, there were 67,665 civil cases involving apparent authority.[10]  Pursuant to Article 172 of the Civil Code, an act performed by a person without authority, beyond the authority, or after the authority is terminated is effective if the counterparty has reasons to believe that the said person has authority.  Among them, “the counterparty has reasons to believe that the agent has authority” is one of the characteristics of apparent authority and also the core distinction between a lack of authority and apparent authority.

In response, the first paragraph of Article 28 of the Interpretation stipulates that if the following conditions are fulfilled concurrently, people’s courts may rule that “the counterparty has reasons to believe that the agent has authority” under Article 172 of the Civil Code: (i) there is appearance of authority, and (ii) the counterparty did not know that the agent acted without authority, and was not at fault.  The second paragraph further stipulates that in the event of a dispute over whether there is apparent authority or not, the counterparty shall bear the burden of proof that the act performed without authority meets the condition under subparagraph (i) of the preceding paragraph.  While the principal shall bear the burden of proof concerning the fact that the counterparty does not meet the condition under subparagraph (ii) of the preceding paragraph. .

According to experts from the SPC Research Office, the first paragraph of Article 28 of the Interpretation comes from Article 13 of Guiding Opinions of the Supreme People’s Court on Several Issues concerning the Trial of Cases of Disputes over Civil and Commercial Contracts under the Current Situation (“Guiding Opinions”).  This paragraph makes it clear that there are two conditions in determining whether the counterparty has reasons to believe that the agent has authority” i.e., “there is appearance of authority” and “the counterparty did not know that the agent acts without authority, and was not at fault”.[11]  With regard to the second condition, according to the interpretation of experts from the SPC, during their research, there were different opinions on whether or not to adopt the “no gross negligence” standard or the “no negligence” standard.  Finally, the SPC accepts the “no negligence” standard.[12]  Compared with “no gross negligence”, the “no negligence” standard imposes stricter requirements on the counterparty, and strikes a balance between the security of the transaction and the rights and interests of the principal.

In the meantime, the second paragraph of Article 28 of the Interpretation further refines and adjusts the allocation of the burden of proof when the parties have disputes concerning apparent authority.  Article 13 of the Guiding Opinions stipulates that the party claiming the constitution of apparent authority shall bear the burden of proof, and shall not only prove the existence of objective manifestations of agency authority such as contract, official seal, specimen signature, etc., but also he or she was in good faith and without any fault.  In comparison, the second paragraph of Article 28 of the Interpretation separated the burden of proof with regard to the two conditions.  It makes it clear that the counterparty shall bear the burden of proof for the appearance of authority while the principal shall bear the burden of proof for the counterparty’s lack of good faith.  In other words, according to the Interpretation, the counterparty does not need to prove that he did not know or had no fault.  Rather, the principal should prove that the counterparty “knew” the lack of authority or did not know the lack of authority due to the counterparty’s “negligence”.  This is consistent with the principle of “presumption of good faith” in civil legal relations.

Moreover, the experts of SPC Research Office further elaborated on the main factors for analyzing and determining whether the counterparty has reasons to believe that the agent has authority in disputes over apparent authority.  Courts need to assess comprehensively the following factors: on the one hand, the objective manifestations of agency authority such as contract, official seal and specimen signature; and on the other hand, factors including contract execution time, in whose name the contract was executed, whether the contract was sealed, the authenticity of the seal, the delivery method and location of the subject matter.[13]  Therefore, in legal practices concerning apparent authority, the parties should collect evidence on various factors and situations related to the transaction, pay attention to details before and after the transaction and argue whether the counterparty has reasons to believe that the agent has authority in a comprehensive manner.

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Thanks to Cai Lingke for her input to this article.

[1] See Interpretation of Contract Law of the PRC, published on the website of the National People’s Congress on March 9, 2022.  Available at http://www.npc.gov.cn/npc/c2196/200011/69ac54df531f48609e318513ba387e67.shtml.

[2] Guo Feng, Chen Longye, Jiang Jiadi, Liu Ting, Understanding and Application of the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, published on the WeChat account “People’s Justice”.

[3] Reply to Questions by the Representative of Research Office of the Supreme People’s Court, published on the official website of the Supreme People’s Court on February 25, 2022.  Available at https://www.court.gov.cn/zixun-xiangqing-347211.html.

[4] Shen Weixing, Developments to the Provisions of Juridical Acts Reflected under the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, the People’s Court Daily, March 1 2022, p.5.

[5] Guo Feng, Chen Longye, Jiang Jiadi, Liu Ting, Understanding and Application of the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, published on the WeChat account “People’s Justice”.

[6] Article 91 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the PRC (2020).

[7] Guo Feng, Chen Longye, Jiang Jiadi, Liu Ting, Understanding and Application of the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, published on the WeChat account “People’s Justice”.

[8] Reply to Questions by the Representative of Research Office of the Supreme People’s Court, published on the official website of the Supreme People’s Court on February 25, 2022.  Available at https://www.court.gov.cn/zixun-xiangqing-347211.html.

[9] Shen Weixing, Developments to the Provisions of Juridical Acts Reflected under the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, the People’s Court Daily, March 1 2022, p.5.

[10] Guo Feng, Chen Longye, Jiang Jiadi, Liu Ting, Understanding and Application of the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, published on the WeChat account “People’s Justice”.

[11] Reply to Questions by the Representative of Research Office of the Supreme People’s Court, published on the official website of the Supreme People’s Court on February 25, 2022.  Available at https://www.court.gov.cn/zixun-xiangqing-347211.html.

[12] Guo Feng, Chen Longye, Jiang Jiadi, Liu Ting, Understanding and Application of the Interpretation of Several Issues Concerning the Application of the General Provisions of the Civil Code, published on the WeChat account “People’s Justice”.

[13] Reply to Questions by the Representative of Research Office of the Supreme People’s Court, published on the official website of the Supreme People’s Court on February 25, 2022.  Available at https://www.court.gov.cn/zixun-xiangqing-347211.html.