China’s new contract law has been passed by the second session of the Ninth National People’s Congress and will take effect as from 1 October 1999. The new contract law replaces the current three pillar contract laws contained in the Domestic Economic Contract Law, the Foreign Economic Law and the Technology Contract Law. The new contract law brings regulation in line with international treaties, international trade regulations and international practice and treats domestic and foreign-related contracts on an equal basis. The law also clarifies the rights and obligations of contracting parties.
The overall impact of the contract law on foreign investors should be positive as a result of improved clarity. The acceptance of the principle of “offer and acceptance” in the new contract law closes a glaring loophole in previous regulation.
One of the provisions most likely to impact on domestic and foreign companies alike is the change in relation to the current agent system for international trade. Under the current system, most domestic companies contracting with a foreign company must do so through a company with a relevant licence which acts as the domestic company’s agent. In the event of dispute, foreign companies can only sue the agent but not the domestic company. Under the new contract law the contract entered into between the agent and the foreign company will directly bind the domestic company. However, not all the changes to the new contract law assist the foreign company. Most notably, article 5 of the Foreign Economic Law provides that where the laws of the PRC have no provision on a particular issue, international practice may be followed. Unfortunately, the new contract law does not contain such a provision.
If you would like to know more about this topic please contact Aili Zhao on +8610 6590 0389 or by e-mail aiz@cms-cmck.com
