jurisdiction

The People’s Republic of China (“PRC”) is a jurisdiction in which statutory law is the primary source of law, and the PRC has adopted a legislative model combining civil and commercial law. 

The legal framework governing contractual limitations or exclusions of liability between commercial parties is centred on the Civil Code of the People's Republic of China (the “Civil Code”), particularly Book Three (Contracts), and is supplemented by relevant judicial interpretations, such as the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Provisions of the Contract Book of the Civil Code of PRC (“Contract Book Interpretation”), and other specific legislation, including the Maritime Code and Civil Aviation Act. 

As a general principle, PRC law respects freedom of contract, subject to mandatory provisions, public order and good morals, and specific rules applicable to standard terms.

2. Are there any mandatory provisions that make certain limitations or exclusions of liability void or unenforceable (for example, liability for gross negligence, wilful misconduct, personal injury, death, fraud, or statutory warranties)?

Yes. According to Article 506 of the Civil Code, a contractual provision would be invalid if it purports to exclude liability for personal injury to the other party or excludes property damage to the other party as a result of an intentional act or gross negligence. Additionally, according to Articles 153 and 156 of the Civil Code, any civil legal act (including a contract) that violates mandatory provisions of laws or administrative regulations, or public order and good morals, is void, while the remaining parts of the contract may remain valid if they are severable. 

Further, according to Article 148 of the Civil Code, a civil legal act (including a contract) reached by means of fraud can be rescinded by the defrauded party.

In addition to the above, there are also circumstances in which standard terms are null and void. Under Articles 496 and 497 of the Civil Code, where the party providing the standard terms fails to draw the other party’s attention to and explain any terms that impose significant obligations or limit their own liability, resulting in the other party failing to note or understand the clauses in which it has a material interest, the other party may claim that the term does not form part of the contract. In particular, a standard term is invalid if it unreasonably excludes or limits the liability of the party providing the standard term, increases the other party’s liability, restricts the other party’s main rights, or excludes the other party’s main rights.

Further, certain types of contracts, such as contracts of sea carriage and air carriage may be subject to mandatory restrictions imposed by specific legislation and international treaties.

3. To what extent may parties validly exclude liability for consequential, indirect or special losses? 

The term “consequential loss” is not legally defined and is not recognised under PRC law. However, under Article 584 of the Civil Code, recoverable contractual losses include the benefits that could have been obtained after performance of the contract, provided that it shall not exceed the probable losses caused by the breach of contract which have been foreseen or ought to have been foreseen by the breaching party when the contract is concluded. 

The Contract Book Interpretation provides further clarification under Article 60 as to what losses fall within a foreseeable receivable benefit, including losses of production profits, losses of operational profits and losses of resale profits, minus the expenses and other reasonable costs incurred by the non-breaching party in entering into and performing the contract.

The Civil Code does not impose special restrictions on the exclusion of such foreseeable loss of profit. Parties may generally agree to exclude or limit such losses, provided that the relevant clause complies with the general rules on the civil legal act and contractual limitations or exclusions of liability.

4. Is it permissible to exclude liability for loss of profit, revenue, data, goodwill or anticipated savings? 

Generally, yes, subject to the statutory limitations under PRC law.

Loss of profit and revenue may be classified as “the benefits that could have been obtained after performance of the contract”, as referred to in Article 584 of the Civil Code and Article 60 of Contract Book Interpretation. Such losses may generally be excluded by agreement between commercial parties, provided that the exclusion is clear and complies with the general rules on the civil legal act and contractual limitations or exclusions of liability.

Loss of goodwill is not expressly defined as a separate statutory category under PRC law, but it may be recoverable if it is sufficiently proven, causally connected to the breach and reasonably foreseeable. In principle, commercial parties may agree to exclude liability for such loss, subject to the same statutory limitations.

The term “anticipated savings” is not legally defined or recognised under PRC law. However, generally speaking, based on freedom of contract, the parties are permitted to exclude liability for such losses by agreement, subject to the abovementioned limitations under PRC law.

Data loss should be analysed separately. As between the contracting parties, loss, corruption, destruction or unavailability of data may constitute contractual loss, and the parties may in principle limit or exclude liability for such loss, provided that the general rules on the civil legal act and contractual limitations or exclusions of liability are complied with and there is no breach of the mandatory laws and regulations. However, such contractual limitation or exclusion only operates between the contracting parties and should not prejudice claims by affected individuals or other third parties whose rights or interests are infringed due to such data loss. 

In particular, the Personal Information Protection Law of the People's Republic of China (the “PIPL”), the Data Security Law of the People's Republic of China, and other relevant laws and regulations may apply in case of data loss or data breach.

Under Article 69 of the PIPL, where personal information processing infringes upon personal information rights and interests and causes damage, the personal information processor shall bear liability for damages and other tort liabilities if it cannot prove that it is not at fault. Accordingly, although parties may allocate or limit contractual liability between themselves, they cannot contract out of statutory liability owed to affected individuals or other third parties.

5. Are financial caps on liability commonly upheld?

Generally, yes, subject to the statutory limitations under PRC law.

As noted above, PRC law generally respects the freedom of contract; financial caps on liability agreed between contractual parties are deemed a form of limitation or exemption of liability and are generally valid, provided that they do not violate general rules on the civil legal act and contractual limitations or exclusions of liability. 

6. Are “exclusive remedy” clauses enforceable, and under what circumstances might a court refuse to treat an exclusive remedy as exhaustive?

Yes, with exceptions.

PRC law does not contain explicit provisions regarding “exclusive remedy” clauses, and cases involving such clauses are extremely rare. An exclusive remedy clause may be treated as an agreed allocation of contractual remedies or a form of liability limitation. Similar to the above, such clauses should be enforceable between commercial parties in principle, provided that they are clear and comply with the general rules on the civil legal act and contractual limitations or exclusions of liability.

If the exclusive remedy is structured as liquidated damages, pursuant to Article 585 of the Civil Code, the court or arbitral tribunal may, upon request, adjust the amount of such damages if it is lower or significantly higher than the actual loss. That said, this does not necessarily invalidate the exclusive remedy clause.

7. Where a limitation or exclusion is deemed partially unenforceable, is a court permitted to apply severance or blue-pencil rules to preserve the remaining wording?

Generally, yes.

Pursuant to Article 156 of the Civil Code, where a civil legal act is partially invalid but does not affect the validity of the remaining parts, those remaining parts shall remain valid. Generally, the invalidity or unenforceability of part of a limitation or exclusion clause does not necessarily affect the validity of the remaining parts of the contract, provided that the remaining parts can stand independently.

That said, in practice, as a matter of prudence and best practice, parties are advised to include a severability clause to make clear that any invalidity or unenforceability of part of the contract should not affect the validity or enforceability of the remaining provisions.

8. Can the parties contractually shorten or extend statutory limitation periods for bringing claims? If so, what constraints apply?

No.

According to Article 197 of the Civil Code, the period of limitation, the method of its calculation, and the grounds for its suspension and interruption are prescribed by law; any agreement to the contrary by the parties is void.

9. Are there any public policy considerations that override contractual limitation or exclusion of liability clauses in business to business contracts?

Yes. As noted above, pursuant to Article 153 of the Civil Code, civil legal acts that contravene the public order and good morals are void. This concept under PRC law is broadly similar to that of public policy in the common law. 

Further, Article 17 of the Contract Book Interpretation sets out the criteria for determining what constitutes a violation of public order and good morals, namely contracts that affect national/economic/military security, undermine social stability or the order of fair competition, or harm the public interest, or those that deviate from social morality or family ethics, or undermine human dignity, shall be void. However, it further provides that, in determining whether a contract violates public order and good morals, the court or tribunal shall comprehensively consider factors such as the parties’ subjective motives and transaction purposes, the intensity of governmental regulation, the frequency with which the parties have engaged in similar transactions within a certain period, and the social consequences of the conduct. Where the transaction was genuinely entered into for living needs, has not caused a material impact on public order, does not affect national security, and does not violate good morals, the court or the tribunal should not find the contract invalid.

10. Are limitation or exclusion of liability clauses treated differently in cross-border contracts: (a) governed by the law in your jurisdiction but the supply of goods/services is performed abroad; or (b) governed by a foreign law (i.e. not local law) but the supply of goods/services is performed in your jurisdiction.

Yes, potentially, depending primarily on the governing law of the contract and any applicable mandatory rules.

According to Article 41 of the Law of the People's Republic of China on the Application of Laws to Foreign-related Civil Relations (“Conflict Act”), the parties may choose the law applicable to a contract. In the absence of such choice, the contract shall be governed by the law of the habitual residence of the party whose performance best reflects the characteristics of the contract, or by the law most closely connected with the contract.

If the contract is governed by PRC law, the enforceability of limitation and exclusion of liability clauses will generally be determined under PRC law, regardless of whether the goods or services are supplied in or outside the PRC. In that case, the same principles as those applicable to domestic contracts will generally apply.

If the contract is governed by foreign law, a PRC court or tribunal will generally assess the limitation or exclusion clause by reference to the chosen foreign law. The fact that the goods or services are supplied in the PRC does not, by itself, mean that PRC law governs the clause.

However, under Articles 4 and 5 of the Conflict Act, where PRC law contains mandatory rules on the matter, or where the application of foreign law would be detrimental to the public interest of the PRC, the relevant PRC law shall apply. In practice, such directly applicable mandatory provisions are interpreted relatively narrowly, typically covering matters involving important public interests, such as labour protection, food or public health safety, environmental safety, foreign exchange control, financial security, antitrust and anti-dumping, or other circumstances that should be regarded as mandatory provisions.