Price Increases in Commercial Contracts in China

No. In the context of existing B2B agreements without an explicit price adjustment clause, the supplier generally does not have the right to unilaterally increase prices under the Civil Code of the People’s Republic of China (the “PRC Civil Code”).  

The PRC Civil Code stipulates that a contract is legally binding upon its establishment. Changes to the contract, including price adjustments, are substantial alterations that require consensus from both parties. In light of this, if a price adjustment clause is not included in the original contract, the supplier cannot unilaterally increase prices. 

There are exceptions where price adjustments might be possible, but unilaterally raising the price is still not permitted under such exceptional circumstances: 

1. Unclear agreement on the price: In situations where the contract does not clearly define the price or price calculation method, the PRC Civil Code provides that the parties can supplement the contract by mutual agreement, and if an agreement cannot be reached, the price shall be determined according to relevant contract terms or trade customs. If these do not provide a clear indication, the market price at the place and time of contract formation should be applied. The supplier cannot unilaterally raise the price in this instance. 
2. Change of Circumstances: Under Article 533 of the PRC Civil Code, if unforeseeable and non-commercial risk-related major changes in the basic conditions of the contract occur after its establishment, creating a clear unfairness to one party, that party can request to renegotiate the contract. If renegotiation is unsuccessful, they can seek a change or termination of the contract from the People’s Court or an arbitration institution. This might include scenarios such as a substantial increase in raw material prices. However, the application of this rule requires all the elements under Article 533 of the PRC Civil Code to be satisfied and is typically treated with caution by the court. 
3. Prices adjustments under specific circumstances stipulated by laws and regulations: please see the answer to question Q2 (c) below.  

In conclusion, while a unilateral price increase is generally not permissible, in exceptional cases related to unclear prices or significant changes in circumstances, a supplier might be able to adjust prices under Chinese law. However, such adjustments typically require agreement from both parties, or a ruling from a legal or arbitration institution.

In existing B2B agreements without an explicit price adjustment clause, if a supplier proposes a (extreme) price increase, it can be interpreted as an invitation to amend the existing contractual pricing terms. However, if the customer does not agree to this proposal, no agreement on the price change is reached, and the contract continues to be performed according to the original price; the contract will not be terminated due to this disagreement. 

Yet, a unique situation arises if the supplier refuses to continue to perform the contract and deliver goods at the originally agreed price. In this case, the customer has a statutory right to terminate the contract. As per Article 563 of the PRC Civil Code, if one party, in this instance, the supplier, clearly indicates through their actions that they will not fulfil their primary obligations before the expiration of the performance period stipulated in the contract, the other party has the right to terminate the contract. For the supplier, delivering the goods as stipulated in the contract is considered their primary obligation. Therefore, if the supplier refuses to continue delivering goods at the price previously agreed as per the terms of the contract, they are in violation of their primary contractual obligations, thus granting the customer the right to terminate the agreement. 

Yes. Based on the PRC Civil Code, price/pricing term is subject to the autonomy of the contractual parties and can be agreed upon between the parties. Therefore, it is permissible to include an explicit price adjustment clause in the contract as long as it does not violate any prohibitive provisions of laws and regulations. 

In practice, price adjustment clauses are widely applied in construction contracts. The currently valid Construction Contract (Model Template), issued by the Ministry of Housing and Urban-Rural Development of the People’s Republic of China (the “PRC”) and the State Administration for Industry and Commerce (now the State  Administration for Market Regulation) in 2017, includes a price adjustment clause.  

Additionally, price adjustment clauses are also widespread in other types of contracts such as sales, lease, and agency contracts. Here are some main types of clauses: 

1. Market Price Fluctuation Adjustment Clause: It stipulates that if market prices fluctuate beyond an agreed range, the price will be adjusted. Specific methods of adjustment may include a price adjustment formula or a provisional price difference. 
2. Cost Change Adjustment Clause: This provides for price adjustments in response to changes in costs such as labour and materials. Depending on the actual circumstances, the parties can agree on price adjustment reference indicators and adjustment formulas. 
3. Change in the Content and Time of Performance Adjustment Clause: If changes occur in the actual performance requirements/contents or the timeframe for performance during the contract, this clause stipulates that the price for the changed parts will be determined in reference to the price agreed for other parts. Alternatively, an adjustment formula can be agreed upon based on the specific circumstances of the contract, or other adjustment methods can be arranged. 
4. Change of Law Adjustment Clause: This clause allows for adjustments when changes in law lead to expenses exceeding the cost agreed in the contract. The contract will stipulate which party bears the risk of such cost changes. 
5. Government Pricing Change Adjustment Clause: This applies to items subject to government pricing, such as water and electricity. For instance, under the Regulations on Power Supply and Usage, power companies must charge for electricity according to the price approved by the government. The Urban Water Supply Regulations state that the price of urban water supply is set by the provincial, autonomous regional, and municipal governments. Parties can agree on a price adjustment clause for items subject to government pricing. 
6. Energy Price Change Adjustment Clause: For agreements involving the use of energy, parties can agree to include an energy price adjustment clause. These clauses allow for price adjustments when there are changes in energy market prices. 

There are several aspects that parties need to consider to ensure that the price adjustment clause in their contract is enforceable: 

1. Clarity of Price Adjustment Clause: Based on how the price adjustment clause is drafted/structured, some price adjustment clauses can be seen as terms subject to conditions, so both the conditions under which the clause can be applied (e.g., under what circumstances the clause can be invoked) and the ways in which the price will be adjusted if the conditions are met need to be explicitly defined. For example, parties may agree that a price adjustment can be made if market prices change by more than a certain percentage, and the contract may specify the formula or reference for such an adjustment. If the clause is vague, it may not be directly applicable, and the parties would need to renegotiate, potentially leading to disputes. 
2. Effective Date of Price Adjustment: The contract should stipulate when the adjusted price will take effect, such as after the other party has been notified of the price change. If there is no agreement on when the new price will take effect, this can cause disputes. 
3. Compliance with Laws and Regulations: Price adjustment clauses must not violate laws or regulations, otherwise, they will be deemed invalid. Several regulations should be taken into account: 

• For contracts involving tenders and bids, according to Articles 46 and 59 of the PRC Bidding Law, the main terms of the contract must be consistent with the tender documents and bid documents. If the bidding documents have agreed on a fixed price, the contract cannot further stipulate a price adjustment clause, otherwise, it would be considered invalid due to the violation of mandatory requirements. 
• According to the PRC Price Law, for products and/or services that are subject to government-guided prices, government-set prices, and statutory price intervention measures and emergency measures, the operators should implement these prices or measures. For price set by the operator independently, when setting prices, the operators should follow the principles of fairness, legality, and good faith. They must not engage in unfair pricing practices, such as collusion to manipulate market prices, selling below cost to eliminate competitors or monopolize the market, or using false or misleading pricing means to induce other operators to trade with them. If a price adjustment clause violates these mandatory provisions of the PRC Price Law, as well as other mandatory provisions, the clause may be deemed invalid and subject to corresponding administrative penalties. 

When formulating a price adjustment clause, parties should consider the following additional issues: 

1. Sector-Specific Regulations: Various industries in China are subject to specific regulations that can impact the formulation of a price adjustment clause. For instance, in the construction industry, specific judicial interpretations and policies provide rules for price adjustments in construction contracts. These rules encompass different provisions for construction contracts with or without an explicit price adjustment clause. The Administrative Measures for Commercial Banks on Service Prices provides a set of comprehensive rules regulating the pricing of service fees by commercial banks. The power, water, and energy sectors are also subject to regulations around pricing, particularly where prices are set by the government.  
2. Market Volatility: Depending on the nature of the goods or services involved, industries significantly affected by market prices fluctuations should pay particular attention to this factor, especially commodity-based industries such as oil and gas, metals, or agricultural products. Contracts in these sectors may include clauses that allow for price adjustments based on specified market indices or benchmarks. 
3. Inflation and Currency Fluctuations: If the contract will be in effect over a long period, it is worthwhile to consider including provisions for adjustments based on inflation or currency exchange rates. This is particularly important for contracts involving international trade. 
4. Fairness and Reasonableness: A price adjustment clause should be fair and reasonable. A clause that disproportionately favours one party over the other might be considered unenforceable. 

Yes, there are additional considerations and rules that apply to the inclusion of price adjustment clauses in B2C agreements in China, reflecting the legal regulations designed to protect the interests of consumers, which are stricter than those applicable to B2B contracts. Here are some legal provisions and disputes related to price adjustment clauses in B2C agreements that are worth noting: 

1. Clarity of Price Adjustment Clauses: As per the Regulations on Clear Pricing and Prohibition of Price Fraud enforced since July 1, 2022, operators must display prices in a prominent way that specifies the corresponding goods or services. If operators implement different prices according to different trading conditions, they should indicate the trading conditions and their corresponding prices. Price adjustment clauses should be clear and must not be misleading.  
2. Fairness of Price Adjustment Clauses: B2C contracts are governed by the PRC Civil Code and the PRC Consumer Rights Protection Law, the latter of which protects consumers given their vulnerable position in transactions. According to Article 10 of the PRC Consumer Rights Protection Law, when purchasing goods or receiving services, consumers have the right to fair trade conditions such as quality assurance, reasonable price and correct measurement. 
3. Highlighting Price Adjustment Clauses in Standard Contracts: As per the PRC Consumer Rights Protection Law, operators should use a prominent method to draw consumers’ attention to the provisions of the standard contract that are of significant interests to the customers, including the price adjustment clause. If operators fail to do so, consumers can claim the invalidity of the price adjustment clause. 
4. Compliance with sector-specific requirement: There are some sector specific requirements for to-C services or products when it comes to pricing adjustment. For example, the Administrative Measures for Commercial Banks on Service Prices and Administrative Measures for the Protection of Consumers’ Rights and Interests by Banking and Insurance Institutions provide comprehensive and detailed rules in relation to the pricing of service fees to consumers.   
5. Government-Priced Goods and Services Cannot Adjust Prices Arbitrarily: The PRC Price Law stipulates that for government-priced goods and services, such as certain property service fees, residential water and electricity fees, their price adjustments should not contradict the government’s guidance price or fixed price.