In review: commercial contract interpretation in China

Bizar Male

All questions

Contract interpretation

i Choice-of-law principles

Domestic contracts shall be governed by PRC laws. Unless explicitly provided, parties are not allowed to choose the governing laws of domestic contracts. According to Article 6 of Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Law of the People’s Republic of China on Foreign-Related Civil Relations (I), where it is not explicitly provided that parties may choose applicable laws for foreign-related civil relation, the choice of such laws by the parties shall be deemed as invalid.

For foreign-related contracts, the parties may expressly select the law applicable in accordance with laws. Once selected, the court shall not support the claim that the choice of law is invalid on the grounds that the law chosen by the parties in the contract has no actual connection with the foreign-related civil relation in dispute. Where the application of foreign laws may harm the social and public interests of China, the relevant Chinese laws shall apply. Detailed rules are mainly provided in the PRC Contract law, the People’s Republic of China on Application of Law in Foreign-related Civil Relations, and Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Law of the People’s Republic of China on Foreign-Related Civil Relations (I).

ii Contract interpretation

Article 125 of the PRC Contract provides the basic principle of contract interpretation. Where disputes arose between the parties on the understanding of any clause of the contract, the meaning of the clause shall be determined according to the words and terms used, the relevant clauses, the purpose of the contract, commercial practices and the principle of good faith.

If a dispute arose over the understanding of a standard term, the term shall be interpreted based on general understanding. Where there are two or more interpretations for such term, the interpretation unfavourable to the party providing such term shall prevail. Where the standard terms are inconsistent with non-standard terms, the latter shall be adopted.

Where there are no clauses or no explicit clauses on the quality, price or remuneration or place of performance in an effective contract, the parties may reach a supplementary agreement. If the parties failed to reach a supplementary agreement, the content shall be determined in accordance with the relevant clauses of the contract or commercial practices. Article 62 of the PRC Contract Law provides rules on clarifying these clauses.

Based on the principle provided by the PRC Contract Law, the courts have developed some rule in interpreting contracts.

Where parties dispute on the clauses of a contract, the true meaning of the parties shall be explored, the first of which is to explore the meaning of the words and terms used. This is the contextual interpretation. Other methods of interpretation might be used only when the contextual interpretation fails to determine the explicit and real meaning of the parties.

The interpretation of a contract shall never go against the true meaning of the parties. It is the basis and an important source for judgements to respect to the agreement of the parties and the original intention.

The interpretation of a contract may provide a criterion for the court the determine whether one party has breached the contract. Considering the purpose of private lending, if the borrower refuses to provide financial statements and relevant materials, the lender will not be able to supervise the use of the loan. Therefore, such behaviours of the borrowers constitute a breach of contract.

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