International Business Lawyer, Business Attorney, Fukuda Law Firm, San Francisco, California

CONTRACT LAW OF THE PEOPLE'S REPUBLIC OF CHINA

(Adopted and Promulgated by the Second Session of the Ninth National People's Congress March 15, 1999)

SUBJECT: CONTRACTS; ENTERPRISES WITH FOREIGN INVESTMENT
ISSUING-DEPT: NATIONAL PEOPLE'S CONGRESS
ISSUE-DATE: March 15, 1999
EFFECTIVE DATE: October 1, 1999

PART 1: Chapters 1 - 8

Continued on Chapters 9 - 17 in Part 2

GENERAL PRINCIPLES

Chapter One - General Provisions

Article 1 Purpose

This Law is formulated in order to protect the lawful rights and interests of contract parties, to safeguard social and economic order, and to promote socialist modernization.

Article 2 Definition of Contract; Exclusions

For purposes of this Law, a contract is an agreement between natural persons, legal persons or other organizations with equal standing, for the purpose of establishing, altering, or discharging a relationship of civil rights and obligations.
An agreement concerning any personal relationship such as marriage, adoption, guardianship, etc. shall be governed by other applicable laws.

Article 3 Equal Standing of Parties

Contract parties enjoy equal legal standing and neither party may impose its will on the other party.

Article 4 Right to Enter into Contract Voluntarily

A party is entitled to enter into a contract voluntarily under the law, and no entity or individual may unlawfully interfere with such right.

Article 5 Fairness

The parties shall abide by the principle of fairness in prescribing their respective rights and obligations.

Article 6 Good Faith

The parties shall abide by the principle of good faith in exercising their rights and performing their obligations.

Article 7 Legality

In concluding or performing a contract, the parties shall abide by the relevant laws and administrative regulations, as well as observe social ethics, and may not disrupt social and economic order or harm the public interests.

Article 8 Binding Effect; Legal Protection

A lawfully formed contract is legally binding on the parties. The parties shall perform their respective obligations in accordance with the contract, and neither party may arbitrarily amend or terminate the contract. A lawfully formed contract is protected by law.

Chapter Two - Formation of Contracts

Article 9 Capacity; Contract through Agent

In entering into a contract, the parties shall have the appropriate capacities for civil rights and civil acts. A party may appoint an agent to enter into a contract on its behalf under the law.

Article 10 Forms of Contract; Writing Requirement

A contract may be made in a writing, in an oral conversation, as well as in any other form.
A contract shall be in writing if a relevant law or administrative regulation so requires. A contract shall be in writing if the parties have so agreed.

Article 11 Definition of Writing

A writing means a memorandum of contract, letter or electronic message (including telegram, telex, facsimile, electronic data exchange and electronic mail), etc. which is capable of expressing its contents in a tangible form.

Article 12 Terms of Contract

The terms of a contract shall be prescribed by the parties, and generally include the following:

(i) names of the parties and the domiciles thereof;
(ii) subject matter;
(iii) quantity;
(iv) quality;
(v) price or remuneration;
(vi) time, place and method of performance;
(vii) liabilities for breach of contract;
(viii) method of dispute resolution.

The parties may enter into a contract by referencing a model contract for the relevant contract category.

Article 13 Offer-Acceptance

A contract is concluded by the exchange of an offer and an acceptance.

Article 14 Definition of Offer

An offer is a party's manifestation of intention to enter into a contract with the other party, which shall comply with the following:

(i) Its terms are specific and definite;
(ii) It indicates that upon acceptance by the offeree, the offeror will be bound thereby.

Article 15 Invitation to Offer

An invitation to offer is a party's manifestation of intention to invite the other party to make an offer thereto. A delivered price list, announcement of auction, call for tender, prospectus, or commercial advertisement, etc. is an invitation to offer.
A commercial advertisement is deemed an offer if its contents meet the requirements of an offer.

Article 16 Effectiveness of Offer, Offer through Electronic Message

An offer becomes effective when it reaches the offeree.
When a contract is concluded by the exchange of electronic messages, if the recipient of an electronic message has designated a specific system to receive it, the time when the electronic message enters into such specific system is deemed its time of arrival; if no specific system has been designated, the time when the electronic message first enters into any of the recipient's systems is deemed its time of arrival.

Article 17 Withdrawal of Offer

An offer may be withdrawn. The notice of withdrawal shall reach the offeree before or at the same time as the offer.

Article 18 Revocation of Offer

An offer may be revoked. The notice of revocation shall reach the offeree before it has dispatched a notice of acceptance.

Article 19 Irrevocable Offer

An offer may not be revoked:

(i) if it expressly indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable;
(ii) if the offeree has reason to regard the offer as irrevocable, and has undertaken preparation for performance.

Article 20 Extinguishment of Offer

An offer is extinguished in any of the following circumstances:

(i) The notice of rejection reaches the offeror;
(ii) The offeror lawfully revokes the offer;
(iii) The offeree fails to dispatch its acceptance at the end of the period for acceptance;
(iv) The offeree makes a material change to the terms of the offer.

Article 21 Definition of Acceptance

An acceptance is the offeree's manifestation of intention to assent to an offer.
Article 22 Mode of Acceptance; Acceptance by Conduct

An acceptance shall be manifested by notification, except where it may be manifested by conduct in accordance with the relevant usage or as indicated in the offer.

Article 23 Timely Dispatch of Acceptance

An acceptance shall reach the offeror within the period prescribed in the offer.
Where the offer does not prescribe a period for acceptance, the acceptance shall reach the offeror as follows:

(i) Where the offer is made orally, the acceptance shall be dispatched immediately, unless otherwise agreed by the parties;
(ii) Where the offer is made in a non-oral manner, the acceptance shall reach the offeror within a reasonable time.

Article 24 Commencement of the Period for Acceptance

Where an offer is made by a letter or a telegram, the period for acceptance commences on the date shown on the letter or the date on which the telegram is handed in for dispatch. If the letter does not specify a date, the period commences on the posting date stamped on the envelop. Where the offer is made through an instantaneous communication device such as telephone or facsimile, etc., the period for acceptance commences once the offer reaches the offeree.

Article 25 Contract Formed upon Effectiveness of Acceptance

A contract is formed once the acceptance becomes effective.

Article 26 Effectiveness of Acceptance

A notice of acceptance becomes effective once it reaches the offeror. Where the acceptance does not require notification, it becomes effective once an act of acceptance is performed in accordance with the relevant usage or as required by the offer.
Where a contract is concluded by the exchange of electronic messages, the time of arrival of the acceptance shall be governed by Paragraph 2 of Article 16 hereof.

Article 27 Withdrawal of Acceptance

An acceptance may be withdrawn. The notice of withdrawal shall reach the offeror before or at the same time as the acceptance.

Article 28 Late Acceptance

An acceptance dispatched by the offeree after expiration of the period for acceptance constitutes a new offer, unless the offeror timely advises the offeree that the acceptance is valid.

Article 29 Delayed Transmission of Acceptance

If the offeree dispatched its acceptance within the period for acceptance, and the acceptance, which would otherwise have reached the offeror in due time under normal circumstances, reaches the offeror after expiration of the period for acceptance due to any other reason, the acceptance is valid, unless the offeror timely advises the offeree that the acceptance has been rejected on grounds of the delay.

Article 30 Acceptance Containing Material Change

The terms of the acceptance shall be identical to those of the offer. A purported acceptance dispatched by the offeree which materially alters the terms of the offer constitutes a new offer. A change in the subject matter, quantity, quality, price or remuneration, time, place and method of performance, liabilities for breach of contract or method of dispute resolution is a material change to the terms of the offer.

Article 31 Acceptance Containing Non-material Changes

An acceptance containing nonmaterial changes to the terms of the offer is nevertheless valid and the terms thereof prevail as the terms of the contract, unless the offeror timely objects to such changes or the offer indicated that acceptance may not contain any change to the terms thereof.

Article 32 Time of Formation in Case of Memorandum of Contract
Where the parties enter into a contract by a memorandum of contract, the contract is formed when it is signed or sealed by the parties.

Article 33 Time of Formation in Case of Letters or Electronic Messages; Confirmation Letter

Where the parties enter into a contract by the exchange of letters or electronic messages, one party may require execution of a confirmation letter before the contract is formed. The contract is formed upon execution of the confirmation letter.

Article 34 Place of Formation; Electronic Messages

The place where the acceptance becomes effective is the place of formation of a contract.
Where a contract is concluded by the exchange of electronic messages, the recipient's main place of business is the place of formation of the contract; if the recipient does not have a main place of business, its habitual residence is the place of formation of the contract. If the parties have agreed otherwise, such agreement prevails.

Article 35 Place of Formation in Case of Memorandum of Contract

Where a contract is concluded by a memorandum of contract, its place of formation is the place where the parties sign or seal the contract.

Article 36 Effect of Failure to Conclude Contract in Writing

Where a contract is to be concluded by a writing as required by the relevant law or administrative regulation or as agreed by the parties, if the parties failed to conclude the contract in writing but one party has performed its main obligation and the other party has accepted the performance, the contract is formed.

Article 37 Effect of Failure to Sign in Case of Memorandum of Contract

Where a contract is to be concluded by a memorandum of contract, if prior to signing or sealing of the contract, one party has performed its main obligation and the other party has accepted the performance, the contract is formed.

Article 38 Contract under State Mandatory Plan

Where the state has, in light of its requirements, issued a mandatory plan or state purchase order, the relevant legal persons and other organizations shall enter into a contract based on the rights and obligations of the parties prescribed by the relevant laws and administrative regulations.

Article 39 Standard Terms; Duty to Call Attention

Where a contract is concluded by way of standard terms, the party supplying the standard terms shall abide by the principle of fairness in prescribing the rights and obligations of the parties and shall, in a reasonable manner, call the other party's attention to the provision(s) whereby such party's liabilities are excluded or limited, and shall explain such provision(s) upon request by the other party.

Standard terms are contract provisions which were prepared in advance by a party for repeated use, and which are not negotiated with the other party in the course of concluding the contract.

Article 40 Invalidity of Certain Standard Terms

A standard term is invalid if it falls into any of the circumstances set forth in Article 52 and Article 53 hereof, or if it excludes the liabilities of the party supplying such term, increases the liabilities of the other party, or deprives the other party of any of its material rights.

Article 41 Dispute Concerning Construction of Standard Term

In case of any dispute concerning the construction of a standard term, such term shall be interpreted in accordance with common sense. If the standard term is subject to two or more interpretations, it shall be interpreted against the party supplying it. If a discrepancy exists between the standard term and a non-standard term, the non-standard term prevails.

Article 42 Pre-contract Liabilities

Where in the course of concluding a contract, a party engaged in any of the following conducts, thereby causing loss to the other party, it shall be liable for damages:

(i) negotiating in bad faith under the pretext of concluding a contract;
(ii) intentionally concealing a material fact relating to the conclusion of the contract or supplying false information;
(iii) any other conduct which violates the principle of good faith.

Article 43 Trade Secrets; Liability for Disclosure or Improper Use

A party may not disclose or improperly use any trade secret which it became aware of in the course of negotiating a contract, regardless of whether a contract is formed. If the party disclosed or improperly used such trade secret, thereby causing loss to the other party, it shall be liable for damages.

Chapter Three - Validity of Contracts

Article 44 Effectiveness of Contract

A lawfully formed contract becomes effective upon its formation.
Where effectiveness of a contract is subject to any procedure such as approval or registration, etc. as required by a relevant law or administrative regulation, such provision applies.

Article 45 Conditions Precedent; Conditions Subsequent; Improper Impairment or Facilitation

The parties may prescribe that effectiveness of a contract be subject to certain conditions. A contract subject to a condition precedent becomes effective once such condition is satisfied. A contract subject to a condition subsequent is extinguished once such condition is satisfied.
Where in order to further its own interests, a party improperly impaired the satisfaction of a condition, the condition is deemed to have been satisfied; where a party improperly facilitated the satisfaction of a condition, the condition is deemed not to have been satisfied.

Article 46 Contract Term

The parties may prescribe a term for a contract. A contract subject to a time of commencement becomes effective at such time. A contract subject to a time of expiration is extinguished at such time.

Article 47 Contract by Person with Limited Capacity

A contract concluded by a person with limited capacity for civil act is valid upon ratification by the legal agent thereof, provided that a contract from which such person accrues benefits only or the conclusion of which is appropriate for his age, intelligence or mental health does not require ratification by his legal agent.

The other party may demand that the legal agent ratify the contract within one month. If the legal agent fails to manifest his intention, he is deemed to have declined to ratify the contract. Prior to ratification of the contract, the other party in good faith is entitled to cancel the contract. Cancellation shall be effected by notification.

Article 48 Contract by Unauthorized Agent

Absent ratification by the principal, a contract concluded on his behalf by a person who lacked agency authority, who acted beyond his agency authority or whose agency authority was extinguished is not binding upon the principal unless ratified by him, and the person performing such act is liable.
The other party may demand that the principal ratify the contract within one month. Where the principal fails to manifest his intention, he is deemed to have declined to ratify the contract. Prior to ratification of the contract, the other party in good faith is entitled to cancel the contract. Cancellation shall be effected by notification.

Article 49 Contract by Person with Apparent Agency Authority

Where the person lacking agency authority, acting beyond his agency authority, or whose agency authority was extinguished concluded a contract in the name of the principal, if it was reasonable for the other party to believe that the person performing the act had agency authority, such act of agency is valid.

Article 50 Contract Executed by Legal Representative

Where the legal representative or the person-in-charge of a legal person or an organization of any other nature entered into a contract acting beyond his scope of authority, unless the other party knew or should have known that he was acting beyond his scope of authority, such act of representation is valid.

Article 51 Unauthorized Disposal of Property through Contract

Where a piece of property belonging to another person was disposed of by a person without the power to do so, such contract is nevertheless valid once the person with the power to its disposal has ratified the contract, or if the person lacking the power to dispose of it when the contract was concluded has subsequently acquired such power.

Article 52 Invalidating Circumstances

A contract is invalid in any of the following circumstances:

(i) One party induced conclusion of the contract through fraud or duress, thereby harming the interests of the state;
(ii) The parties colluded in bad faith, thereby harming the interests of the state, the collective or any third party;
(iii) The parties intended to conceal an illegal purpose under the guise of a legitimate transaction;
(iv) The contract harms public interests;
(v) The contract violates a mandatory provision of any law or administrative regulation.

Article 53 Invalidity of Certain Exculpatory Provisions

The following exculpatory provisions in a contract are invalid:

(i) excluding one party's liability for personal injury caused to the other party;
(ii) excluding one party's liability for property loss caused to the other party by its intentional misconduct or gross negligence.

Article 54 Contract Subject to Amendment or Cancellation

Either of the parties may petition the People's Court or an arbitration institution for amendment or cancellation of a contract if:

(i) the contract was concluded due to a material mistake;
(ii) the contract was grossly unconscionable at the time of its conclusion.

If a party induced the other party to enter into a contract against its true intention by fraud or duress, or by taking advantage of the other party's hardship, the aggrieved party is entitled to petition the People's Court or an arbitration institution for amendment or cancellation of the contract. Where a party petitions for amendment of the contract, the People's Court or arbitration institution may not cancel the contract instead.

Article 55 Extinguishment of Cancellation Right

A party's cancellation right is extinguished in any of the following circumstances:

(i) It fails to exercise the cancellation right within one year, commencing on the date when the party knew or should have known the cause for the cancellation;
(ii) Upon becoming aware of the cause for cancellation, it waives the cancellation right by express statement or by conduct.

Article 56 Effect of Invalidation or Cancellation; Partial Invalidation or Cancellation

An invalid or canceled contract is not legally binding ab initio. Where a contract is partially invalid, and the validity of the remaining provisions thereof is not affected as a result, the remaining provisions are nevertheless valid.

Article 57 Independence of Dispute Resolution Provision

The invalidation, cancellation or discharge of a contract does not impair the validity of the contract provision concerning the method of dispute resolution, which exists independently in the contract.

Article 58 Remedies in Case of Invalidation or Cancellation

After a contract was invalidated or canceled, the parties shall make restitution of any property acquired thereunder; where restitution in kind is not possible or necessary, allowance shall be made in money based on the value of the property. The party at fault shall indemnify the other party for its loss sustained as a result. Where both parties were at fault, the parties shall bear their respective liabilities accordingly.

Article 59 Remedies in Case of Collusion in Bad Faith

Where the parties colluded in bad faith, thereby harming the interests of the state, the collective or a third person, any property acquired as a result shall be turned over to the state or be returned to the collective or the third person.

Chapter Four - Performance of Contracts

Article 60 Full Performance; Performance in Good Faith

The parties shall fully perform their respective obligations in accordance with the contract.
The parties shall abide by the principle of good faith, and perform obligations such as notification, assistance, and confidentiality, etc. in light of the nature and purpose of the contract and in accordance with the relevant usage.

Article 61 Indeterminate Terms; Supplementary Agreement

If a term such as quality, price or remuneration, or place of performance etc. was not prescribed or clearly prescribed, after the contract has taken effect, the parties may supplement it through agreement; if the parties fail to reach a supplementary agreement, such term shall be determined in accordance with the relevant provisions of the contract or in accordance with the relevant usage.

Article 62 Gap Filling

Where a relevant term of the contract was not clearly prescribed, and cannot be determined in accordance with Article 61 hereof, one of the following provisions applies:

(i) If quality requirement was not clearly prescribed, performance shall be in accordance with the state standard or industry standard; absent any state or industry standard, performance shall be in accordance with the customary standard or any particular standard consistent with the purpose of the contract;
(ii) If price or remuneration was not clearly prescribed, performance shall be in accordance with the prevailing market price at the place of performance at the time the contract was concluded, and if adoption of a price mandated by the government or based on government issued pricing guidelines is required by law, such requirement applies;
(iii) Where the place of performance was not clearly prescribed, if the obligation is payment of money, performance shall be at the place where the payee is located; if the obligation is delivery of immovable property, performance shall be at the place where the immovable property is located; for any other subject matter, performance shall be at the place where the obligor is located;
(iv) If the time of performance was not clearly prescribed, the obligor may perform, and the obligee may require performance, at any time, provided that the other party shall be given the time required for preparation;
(v) If the method of performance was not clearly prescribed, performance shall be rendered in a manner which is conducive to realizing the purpose of the contract;
(vi) If the party responsible for the expenses of performance was not clearly prescribed, the obligor shall bear the expenses.

Article 63 Performance at Government Mandated Price

Where a contract is to be implemented at a price mandated by the government or based on government issued pricing guidelines, if the government adjusts the price during the prescribed period of delivery, the contract price shall be the price at the time of delivery. Where a party delays in delivering the subject matter, the original price applies if the price has increased, and the new price applies if the price has decreased. Where a party delays in taking delivery or making payment, the new price applies if the price has increased, and the original price applies if the price has decreased.

Article 64 Performance toward a Third Person

Where the parties prescribed that the obligor render performance to a third person, if the obligor fails to render its performance to the third person, or rendered non-conforming performance, it shall be liable to the obligee for breach of contract.

Article 65 Performance by a Third Person

Where the parties prescribed that a third person render performance to the obligee, if the third person fails to perform or rendered non-conforming performance, the obligor shall be liable to the obligee for breach of contract.

Article 66 Simultaneous Performance

Where the parties owe performance toward each other and there is no order of performance, the parties shall perform simultaneously. Prior to performance by the other party, one party is entitled to reject its requirement for performance. If the other party rendered non-conforming performance, one party is entitled to reject its corresponding requirement for performance.

Article 67 Consecutive Performance

Where the parties owe performance toward each other and there is an order of performance, prior to performance by the party required to perform first, the party who is to perform subsequently is entitled to reject its requirement for performance. If the party required to perform first rendered non-conforming performance, the party who is to perform subsequently is entitled to reject its corresponding requirement for performance.

Article 68 Right to Suspend Performance

The party required to perform first may suspend its performance if it has conclusive evidence establishing that the other party is in any of the following circumstances:

(i) Its business has seriously deteriorated;
(ii) It has engaged in transfer of assets or withdrawal of funds for the purpose of evading debts;
(iii) It has lost its business creditworthiness;
(iv) It is in any other circumstance which will or may cause it to lose its ability to perform.

Where a party suspends performance without conclusive evidence, it shall be liable for breach of contract.

Article 69 Notification upon Suspension of Performance; Termination

If a party suspends its performance in accordance with Article 68 hereof, it shall timely notify the other party.
If the other party provides appropriate assurance for its performance, the party shall resume performance. After performance was suspended, if the other party fails to regain its ability to perform and fails to provide appropriate assurance within a reasonable time, the suspending party may terminate the contract.

Article 70 Difficulty in Rendering Performance Due to Combination

Where after effecting combination, division, or change of domicile, the obligee failed to notify the obligor, thereby making it difficult to render performance, the obligor may suspend its performance or place the subject matter in escrow.

Article 71 Right to Reject Early Performance; Exception

The obligee may reject the obligor's early performance, except where such early performance does not harm the obligee's interests.
Any additional expense incurred by the obligee due to the obligor's early performance shall be borne by the obligor.

Article 72 Right to Reject Partial Performance; Exception

An obligee may reject the obligor's partial performance, except where such partial performance does not harm the obligee's interests.
Any additional expense incurred by the obligee due to the obligor's partial performance shall be borne by the obligor.

Article 73 Subrogation; Limitation

Where the obligor delayed in exercising its creditor's right against a third person that was due, thereby harming the obligee, the obligee may petition the People's Court for subrogation, except where such creditor's right is exclusively personal to the obligor.
The scope of subrogation is limited to the extent of the obligee's right to performance. The necessary expenses for subrogation by the obligee shall be borne by the obligor.

Article 74 Obligee's Right to Cancel Manifestly Unreasonable Act by Obligor

Where the obligor waived its creditor's right against a third person that was due or assigned its property without reward, thereby harming the obligee, the obligee may petition the People's Court for cancellation of the obligor's act. Where the obligor assigned its property at a low price which is manifestly unreasonable, thereby harming the obligee, and the assignee was aware of the situation, the obligee may also petition the People's Court for cancellation of the obligor's act.

The scope of cancellation right is limited to the extent of the obligee's right to performance. The necessary expenses for the obligee's exercise of its cancellation right shall be borne by the obligor.

Article 75 Time Limit for Exercising Obligee's Cancellation Right

The obligee's cancellation right shall be exercised within one year, commencing on the date when it became, or should have become, aware of the cause for cancellation. Such cancellation right is extinguished if not exercised within five years, commencing on the date of occurrence of the obligor's act.

Article 76 A Party's Internal Change Not Excuse for Nonperformance

Once a contract becomes effective, a party may not refuse to perform its obligations thereunder on grounds of any change in its name or change of its legal representative, person in charge, or the person handling the contract.

Chapter Five - Amendment and Assignment of Contracts

Article 77 Amendment; Amendment Subject to Approval

A contract may be amended if the parties have so agreed. Where amendment to the contract is subject to any procedure such as approval or registration, etc. as required by a relevant law or administrative regulation, such provision applies.

Article 78 Ambiguous Amendment Not Effective

A contract term is construed not to have been amended if the parties failed to clearly prescribe the terms of the amendment.

Article 79 Assignment of Rights; Exceptions

The obligee may assign its rights under a contract in whole or in part to a third person, except where such assignment is prohibited:
(i) in light of the nature of the contract;
(ii) by agreement between the parties;
(iii) by law.

Article 80 Duty to Notify When Assigning Rights; Revocation of Assignment Subject to Assignee's Consent
Where the obligee assigns its rights, it shall notify the obligor. Such assignment is not binding upon the obligor if notice was not given. A notice of assignment of rights given by the obligee may not be revoked, except with the consent of the assignee.

Article 81 Assumption of Incidental Right in Case of Assignment

Where the obligee assigns a right, the assignee shall assume any incidental right associated with the obligee's right, except where such incidental right is exclusively personal to the obligee.

Article 82 Assigned Rights Subject to Accrued Defenses of Obligor

Upon receipt of the notice of assignment of the obligee's right, the obligor may, in respect of the assignee, avail itself of any defense it has against the assignor.

Article 83 Availability of Set-off to Obligor

Upon receipt of the notice of assignment of the obligee's right, if the obligor has any right to performance by the assignor which is due before or at the same time as the assigned obligee's right, the obligor may avail itself of any set-off against the assignee.

Article 84 Delegation of Obligations Subject to Consent by Obligee

Where the obligor delegates its obligations under a contract in whole or in part to a third person, such delegation is subject to consent by the obligee.

Article 85 Availability of Defenses to New Obligor

Where the obligor has delegated an obligation, the new obligor may avail itself of any of the original obligor's defenses against the obligee.

Article 86 Assumption of Incidental Obligation in Case of Delegation

Where the obligor delegates an obligation, the new obligor shall assume any incidental obligation associated with the main obligation, except where such incidental obligation is exclusively personal to the original obligor.

Article 87 Assignment Subject to Approval

Where the obligee's assignment of a right or the obligor's delegation of an obligation is subject to any procedure such as approval or registration, etc. as required by a relevant law or administrative regulation, such provision applies.

Article 88 Concurrent Assignment and Delegation

Upon consent by the other party, one party may concurrently assign its rights and delegate its obligations under a contract to a third person.

Article 89 Provisions Applicable to Concurrent Assignment

Where a party concurrently assigns its rights and delegates its obligations, the provisions in Article 79, Articles 81 to 83, and Articles 85 to 87 apply.

Article 90 Effect of Combination or Division of Contract Party

Where a party has effected combination after it entered into a contract, the legal person or organization of any other nature resulting from the combination assumes the rights and obligations thereunder. Where a party has effected division after it entered into a contract, unless otherwise agreed by the obligee and obligor thereunder, the legal persons or other organizations resulting from the division jointly and severally assume the rights and obligations thereunder.

Chapter Six - Discharge of Contractual Rights and Obligations

Article 91 Conditions for Discharge

The rights and obligations under a contract are discharged in any of the following circumstances:

(i) The obligations were performed in accordance with the contract;
(ii) The contract was terminated;
(iii) The obligations were set off against each other;
(iv) The obligor placed the subject matter in escrow in accordance with the law;
(v) The obligee released the obligor from performance;
(vi) Both the obligee's rights and obligor's obligations were assumed by one party;
(vii) Any other discharging circumstance provided by law or prescribed by the parties occurred.

Article 92 Post-discharge Obligations

Upon discharge of the rights and obligations under a contract, the parties shall abide by the principle of good faith and perform obligations such as notification, assistance and confidentiality, etc. in accordance with the relevant usage.

Article 93 Termination by Agreement; Termination Right

The parties may terminate a contract if they have so agreed.
The parties may prescribe a condition under which one party is entitled to terminate the contract. Upon satisfaction of the condition for termination of the contract, the party with the termination right may terminate the contract.

Article 94 Legally Prescribed Conditions Giving Rise to Termination Right

The parties may terminate a contract if:

(i) force majeure frustrated the purpose of the contract;
(ii) before the time of performance, the other party expressly stated or indicated by its conduct that it will not perform its main obligations;
(iii) the other party delayed performance of its main obligations, and failed to perform within a reasonable time after receiving demand for performance;
(iv) the other party delayed performance or otherwise breached the contract, thereby frustrating the purpose of the contract;
(v) any other circumstance provided by law occurred.

Article 95 Time Limit for Termination; Extinguishment of Termination Right

Where the law or the parties prescribe a period for exercising termination right, failure by a party to exercise it at the end of the period shall extinguish such right.

Where neither the law nor the parties prescribe a period for exercising termination right, failure by a party to exercise it within a reasonable time after receiving demand from the other party shall extinguish such right.

Article 96 Termination by Notification; Termination Subject to Approval

The party availing itself of termination of a contract in accordance with Paragraph 2 of Article 93 and Article 94 hereof shall notify the other party. The contract is terminated when the notice reaches the other party. If the other party objects to the termination, the terminating party may petition the People's Court or an arbitration institution to affirm the validity of the termination.

Where termination of a contract is subject to any procedure such as approval or registration, etc. as required by a relevant law or administrative regulation, such provision applies.

Article 97 Remedies in Case of Termination

Upon termination of a contract, a performance which has not been rendered is discharged; if a performance has been rendered, a party may, in light of the degree of performance and the nature of the contract, require the other party to restore the subject matter to its original condition or otherwise remedy the situation, and is entitled to claim damages.

Article 98 Settlement and Winding-up Provisions Not Affected by Discharge

Discharge of contractual rights and obligations does not affect the validity of contract provisions concerning settlement of account and winding-up.

Article 99 Set-off; Set-off Not Subject to Condition

Where each party owes performance to the other party that is due, and the subject matters of the obligations are identical in type and quality, either party may set off its obligation against the obligation of the other party, except where set-off is prohibited by law or in light of the nature of the contract.
The party availing itself of set-off shall notify the other party. The notice becomes effective when it reaches the other party. Set-off may not be subject to any condition or time limit.

Article 100 Set-off Involving Non-identical Subject Matters

Where each party owes performance to the other party that is due, and the subject matters of the obligations are not identical in type and quality, the parties may effect set-off by mutual agreement.

Article 101 Conditions Giving Rise to Right to Place Subject Matter in Escrow

Where any of the following circumstances makes it difficult to render performance, the obligor may place the subject matter in escrow:

(i) The obligee refuses to take delivery of the subject matter without cause;
(ii) The obligee cannot be located;
(iii) The obligee is deceased or incapacitated, and his heir or guardian is not determined;
(iv) Any other circumstance provided by law occurs.

Where the subject matter is not fit for escrow, or the escrow expenses will be excessive, the obligor may auction or liquidate the subject matter and place the proceeds in escrow.

Article 102 Duty to Notify in Case of Escrow

After placing the subject matter in escrow, the obligor shall timely notify the obligee or his heir or guardian, except where the obligee cannot be located.

Article 103 Risk of Loss; Fruits of Subject Matter Accrued during Escrow

Once the subject matter is in escrow, the risk of its damage or loss is borne by the obligee. The fruits of the subject matter accrued during escrow belong to the obligee. Escrow expenses shall be borne by the obligee.

Article 104 Taking Delivery of Subject Matter in Escrow Conditional upon Performance; Time Limit

The obligee may take delivery of the subject matter in escrow at any time, provided that if the obligee owes performance toward the obligor that is due, prior to the obligee's performance or provision of assurance, the escrow agent shall reject the obligee's attempt to take delivery of the subject matter in escrow as required by the obligor.

The right of the obligee to take delivery of the subject matter in escrow is extinguished if not exercised within five years, commencing on the date when the subject matter was placed in escrow. After deduction of escrow expenses, the subject matter in escrow shall be turned over to the state.

Article 105 Release

Where the obligee released the obligor from performance in part or in whole, the rights and obligations under the contract are discharged in part or in whole.

Article 106 Merger of Rights and Obligations

If the same party assumed all the rights and obligations under a contract, the rights and obligations thereunder are discharged, except where the contract involves the interests of a third person.

Chapter Seven - Liabilities for Breach of Contracts

Article 107 Types of Liabilities for Breach

If a party fails to perform its obligations under a contract, or rendered non-conforming performance, it shall bear the liabilities for breach of contract by specific performance, cure of non-conforming performance or payment of damages, etc.

Article 108 Anticipatory Breach

Where one party expressly states or indicates by its conduct that it will not perform its obligations under a contract, the other party may hold it liable for breach of contract before the time of performance.

Article 109 Monetary Specific Performance

If a party fails to pay the price or remuneration, the other party may require payment thereof.

Article 110 Non-monetary Specific Performance; Exceptions

Where a party fails to perform, or rendered non-conforming performance of, a non-monetary obligation, the other party may require performance, except where:

(i) performance is impossible in law or in fact;
(ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive;
(iii) the obligee does not require performance within a reasonable time.

Article 111 Liabilities in Case of Quality Non-compliance

Where a performance does not meet the prescribed quality requirements, the breaching party shall be liable for breach in accordance with the contract. Where the liabilities for breach were not prescribed or clearly prescribed, and cannot be determined in accordance with Article 61 hereof, the aggrieved party may, by reasonable election in light of the nature of the subject matter and the degree of loss, require the other party to assume liabilities for breach by way of repair, replacement, remaking, acceptance of returned goods, or reduction in price or remuneration, etc.

Article 112 Liability for Damages Notwithstanding Subsequent Performance or Cure of Non-conforming Performance

Where a party failed to perform or rendered non-conforming performance, if notwithstanding its subsequent performance or cure of non-conforming performance, the other party has sustained other loss, the breaching party shall pay damages.

Article 113 Calculation of Damages; Damages to Consumer

Where a party failed to perform or rendered non-conforming performance, thereby causing loss to the other party, the amount of damages payable shall be equivalent to the other party's loss resulting from the breach, including any benefit that may be accrued from performance of the contract, provided that the amount shall not exceed the likely loss resulting from the breach which was foreseen or should have been foreseen by the breaching party at the time of conclusion of the contract.

Where a merchant engages in any fraudulent activity while supplying goods or services to a consumer, it is liable for damages in accordance with the Law of the People's Republic of China on Protection of Consumer Rights.

Article 114 Liquidated Damages; Adjustment; Continuing Performance Notwithstanding Payment of Liquidated Damages

The parties may prescribe that if one party breaches the contract, it will pay a certain sum of liquidated damages to the other party in light of the degree of breach, or prescribe a method for calculation of damages for the loss resulting from a party's breach.

Where the amount of liquidated damages prescribed is below the loss resulting from the breach, a party may petition the People's Court or an arbitration institution to increase the amount; where the amount of liquidated damages prescribed exceeds the loss resulting from the breach, a party may petition the People's Court or an arbitration institution to decrease the amount as appropriate.

Where the parties prescribed liquidated damages for delayed performance, the breaching party shall, in addition to payment of the liquidated damages, render performance.

Article 115 Deposit

The parties may prescribe that a party will give a deposit to the other party as assurance for the obligee's right to performance in accordance with the Security Law of the People's Republic of China. Upon performance by the obligor, the deposit shall be set off against the price or refunded to the obligor. If the party giving the deposit failed to perform its obligations under the contract, it is not entitled to claim refund of the deposit; where the party receiving the deposit failed to perform its obligations under the contract, it shall return to the other party twice the amount of the deposit.

Article 116 Election Between Deposit or Liquidated Damages Clauses

If the parties prescribed payment of both liquidated damages and a deposit, in case of breach by a party, the other party may elect in alternative to apply the liquidated damages clause or the deposit clause.

Article 117 Force Majeure

A party who was unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurred after the party's delay in performance, it is not exempted from liability.

For purposes of this Law, force majeure means any objective circumstance which is unforeseeable, unavoidable and insurmountable.

Article 118 Duty to Notify in Case of Force Majeure

If a party is unable to perform a contract due to force majeure, it shall timely notify the other party so as to mitigate the loss that may be caused to the other party, and shall provide proof of force majeure within a reasonable time.

Article 119 Non-Breaching Party's Duty to Mitigate Loss in Case of Breach

Where a party breached the contract, the other party shall take the appropriate measures to prevent further loss; where the other party sustained further loss due to its failure to take the appropriate measures, it may not claim damages for such further loss.
Any reasonable expense incurred by the other party in preventing further loss shall be borne by the breaching party.

Article 120 Bilateral Breach

In case of bilateral breach, the parties shall assume their respective liabilities accordingly.

Article 121 Breach Due to Act of Third Person

Where a party's breach was attributable to a third person, it shall nevertheless be liable to the other party for breach. Any dispute between the party and such third person shall be resolved in accordance with the law or the agreement between the parties.

Article 122 Election of Remedy in Tort or in Contract

Where a party's breach harmed the personal or property interests of the other party, the aggrieved party is entitled to elect to hold the party liable for breach of contract in accordance herewith, or hold the party liable for tort in accordance with any other relevant law.

Chapter Eight - Other ProvisionsArticle

123 Applicability of Other Laws

Where another law provides otherwise in respect of a certain contract, such provisions prevail.

Article 124 Applicability to Non-categorized Contracts

Where there is no express provision in the Specific Provisions hereof or any other law concerning a certain contract, the provisions in the General Principles hereof apply, and reference may be made to the provisions in the Specific Provisions hereof or any other law applicable to a contract which is most similar to such contract.

Article 125 Contract Interpretation; Language Versions

In case of any dispute between the parties concerning the construction of a contract term, the true meaning thereof shall be determined according to the words and sentences used in the contract, the relevant provisions and the purpose of the contract, and in accordance with the relevant usage and the principle of good faith.

Where a contract was executed in two or more languages and it provides that all versions are equally authentic, the words and sentences in each version are construed to have the same meaning. In case of any discrepancy in the words or sentences used in the different language versions, they shall be interpreted in light of the purpose of the contract.

Article 126 Choice of Law in Foreign-related Contracts; Contracts Subject to Mandatory Application of Chinese Law
Parties to a foreign related contract may select the applicable law for resolution of a contractual dispute, except otherwise provided by law. Where parties to the foreign related contract failed to select the applicable law, the contract shall be governed by the law of the country with the closest connection thereto.

For a Sino-foreign Equity Joint Venture Enterprise Contract, Sino-foreign Cooperative Joint Venture Contract, or a Contract for Sino-foreign Joint Exploration and Development of Natural Resources which is performed within the territory of the People's Republic of China, the law of the People's Republic of China applies.

Article 127 Role of Regulatory Authorities
Within the scope of their respective duties, the authority for the administration of industry and commerce and other relevant authorities shall, in accordance with the relevant laws and administrative regulations, be responsible for monitoring and dealing with any illegal act which, through the conclusion of a contract, harms the state interests or the public interests; where such act constitutes a crime, criminal liability shall be imposed in accordance with the law.

Article 128 Dispute Resolution

The parties may resolve a contractual dispute through settlement or mediation.
Where the parties do not wish to, or are unable to, resolve such dispute through settlement or mediation, the dispute may be submitted to the relevant arbitration institution for arbitration in accordance with the arbitration agreement between the parties. Parties to a foreign related contract may apply to a Chinese arbitration institution or another arbitration institution for arbitration. Where the parties did not conclude an arbitration agreement, or the arbitration agreement is invalid, either party may bring a suit to the People's Court. The parties shall perform any judgment, arbitral award or mediation agreement which has taken legal effect; if a party refuses to perform, the other party may apply to the People's Court for enforcement.

Article 129 Time Limit for Action

For a dispute arising from a contract for the international sale of goods or a technology import or export contract, the time limit for bringing a suit or applying for arbitration is four years, commencing on the date when the party knew or should have known that its rights were harmed. For a dispute arising from any other type of contract, the time limit for bringing a suit or applying for arbitration shall be governed by the relevant law.

Continued on Chapters 9 - 17 in Part 2