Legal term for payments in China

No, there are no specific legal requirements in this respect under PRC law except the following provisions in the PRC Civil Code (“CC”). 

According to the Part III – Contracts of the CC, the content of a contract including, among others, price or remuneration, time limit of performance, etc. shall be agreed upon by the parties (Article 470, CC). The relevant provisions of the CC provide that, if the parties have not (clearly) agreed on certain issues like the quality, price, place of performance, etc. after the effectiveness of the contract, they may enter into a supplementary agreement in this regard. If no supplementary agreement can be reached, the concerned issues shall be determined according to the related contractual terms or the trade practice (Article 510, CC).

In case of an unclear price stipulation, if it cannot be determined according to the related contractual terms or the trade practice, the contract shall be performed in accordance with the market price at the place of the contractual performance at the time of the making of the contract, or according to the government-set price or government-guided price if so required by law. Further, if the term of the contractual performance, e.g. payment term, can still not be determined according to the related contractual terms or the trade practice, the debtor may perform his/her payment obligation at any time, and the creditor may require the debtor to perform his/her payment obligation at any time. However, the creditor shall give the debtor reasonable time for preparation (Article 511, CC). 

The Subpart II – Typical Contracts of the CC contain in “Chapter 9 – Sales Contract” the following 2 stipulations on the term of the purchase price payment:

• Article 626: the buyer shall pay the purchase price in the agreed amount and according to the agreed payment method. If there is no agreement in the contract on the amount or the payment method or such agreement is unclear, the provisions of Article 510 and Item 2 and 5 of Article 511, CC shall apply;
• Article 628: the buyer shall pay the purchase price at the agreed time. If the parties have not (clearly) agreed on the time of the payment which can neither be determined according to Article 510, CC, the buyer shall pay the purchase price simultaneously when it receives the subject matter or the document for taking delivery thereof.  
• Article 634: in case the seller and the buyer have agreed on payment of the purchase price by instalments, and the buyer has failed to make the respective payments due and the overdue instalments reach 20% of the total purchase price, the seller may either request the buyer to pay the total purchase price or terminate the sales contract.

No, there is no standard statutory payment term. Contractual parties are free to agree to payment terms on the basis of  their business decisions.

Not applicable under PRC law. Contractual parties are free to agree to payment terms on the basis of  their business decisions.

Not applicable under PRC law.

No, there are no such penalties other than a civil claim of the seller. Under the PRC legal regime, penalties for breach of contract including breach of any agreed payment terms are always subject to a civil claim of the seller. The law, i.e. the CC, only provides for certain general principles on the scope of the liability for breach of contract. For instance, according to Article 584, CC, if one party fails to perform his/her contractual obligation and by this causes losses to the other party, the amount of loss compensation shall be equal to the losses caused by the breach of contract, including benefits which should have been received if the contract had been duly performed. However, the compensation must not exceed the probable losses caused by the breach of contract which were foreseeable or ought to have been foreseen by the breaching party at the time of conclusion of the contract.

Furthermore, the delayed or failed performance of payment obligations may lead to penalties being paid by the buyer, if so agreed. Under PRC law, penalties and liquidated damages are the same. According to the CC, the parties to a contract may agree, in the event  of a contract breach by one party, on a fixed amount of liquidated damages according to the status of the breach or on a method to calculate the compensation resulting from the breach. In case of a breach of monetary obligations (e.g. a late purchase price payment), such compensation is usually agreed in the form of liquidated damages, i.e. a penalty to be calculated as a certain percentage of the relevant base amount.

In general, the parties are free to agree on the amount of the penalty or liquidated damages. In case of lack of such agreement, if the seller makes a claim for damages resulting from the buyer’s delayed payment, the People’s Courts may refer to the penalty interest rates based on the 1-year Loan Prime Rate (LPR) as announced by the PRC People’s Bank (中国人民银行-货币政策司-货币政策工具-利率政策-贷款市场报价利率LPR (pbc.gov.cn)) at the time of the breach of contract, plus 30%-50% . The 1-year LPR as of September 2021 is 3.85%, i.e. the maximum liquidated damages for delayed payments would be: [3.85% x 150% = 5.775% (p.a.)]

It is to be further noted that according to an old judicial interpretation of the PRC Supreme People’s Court ("SPC"), if the agreed liquidated damages are higher than 130% of the actual damages, they may be deemed excessively high so that the breaching party may apply to the People’s Court or the arbitration tribunal for appropriate reduction of the liquidated damages. Although such interpretation was abolished on 31 December 2020, new interpretation of the SPC with a similar definition for "excessively high" is to be expected soon. Also, if the liquidated damages are much lower than the actual damages, the damaged party may apply to the People’s Court or the arbitration tribunal for an appropriate increase of the liquidated damages. Since in the case of monetary obligations it is often difficult to prove the “actual damages” caused by any delayed or failed payment, in practice some People’s Courts tend to apply the following formula to calculate the maximum penalty interest rate (p.a.): [the applicable 1-year LPR x 150% x 130%] unless the damaged party is able to prove a higher amount of losses due to the delayed or failed payment (e.g. it could have used the funds for financing purpose).

There has  so far not been any special legislation specifically regarding commercial payment obligations in respect of the COVID-19 situation.

However, on 16 April and 15 May 2020, the SPC released respectively the Guiding Opinions (I) and (II) on Several Issues concerning the Proper Trial of Civil Cases Related to the Novel Coronavirus Pneumonia (COVID-19) Epidemic According to the Law (respectively the "Opinions (I)" and "Opinions (II)"). While the Opinions (I) provide guidance to the respective local People’s Courts in the PRC on how to deal with certain aspects of COVID-19 related civil cases, including dispute resolution, Force Majeure, performance of contracts, etc., the Opinions (II) focus a bit more on a few specific types of contracts (e.g. sales contracts) which performance is affected by COVID-19. Although “guiding opinions” of the PRC Supreme People’s Court are not laws or judicial interpretations in technical sense, they are very important ruling criteria which have binding effect for the respective lower levels of the PRC People’s Courts in practice.  

The Opinions (I) stipulate that, inter alia, if a party is unable to perform his/her contractual obligation directly due to COVID-19, the related prevention and control measures (the “COVID-19 Situation”), the relevant statutory provisions under PRC law on Force Majeure (e.g. Article 180 of the PRC General Rules of the Civil Law, Article 117 and 118 of the PRC Contract Law) shall apply. The consequence is that liabilities for breach of contract shall be exempted in part or in whole according to the degree of the impact of the COVID-19 Situation. The party claiming Force Majeure, however, bears the burden of proof that Force Majeure had directly caused the concerned party’s incapability of performance, as well as that the concerned party had timely notified the other party of the existence and impact of the claimed Force Majeure. 

The Opinions (I) further define and differentiate “mere difficulties” to perform a contract from a Force Majeure event due to the COVID-19 Situation and generally encourage the parties to continue the performance by re-negotiation or alteration of the contract (e.g. change of payment terms or price amounts), unless a party requests to terminate the contract based on the reason that the contractual purpose cannot be realized due to the COVID-19 Situation. 

In case of a monetary obligation, it is often difficult for the debtor to argue that he/she has no money due to Force Majeure. However, it may be more likely that the debtor is so affected by the COVID-19 Situation that it would be obviously unfair for him/her to perform the payment obligation according to the originally agreed term or amount. In such case, both the Opinions (I) and (II) provide that the People’s Court shall determine whether or not to support the debtor’s plea for change of the payment term or amount according to the individual situation and the principle of equity. 

For more details of the Opinions (I) and their relevance to payment obligations, please refer to our newsletter: PRC Supreme People's Court Announces Guiding Opinions on Trial of Civil Cases concerning COVID-19 dated 23 April 2020.