McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai. This China Law Alert was authored by MWE China Law Offices lawyers Henry (Litong) Chen and Steven Fei.
The State Administration for Industry and Commerce (SAIC) of China recently published new Measures for the Supervision and Punishment of Illegal Contractual Acts, which impose an immediate compliance risk in contracting with consumers using standard contractual clauses. Business operators that use such clauses may be subject to an administrative penalty after 13 November 2010. All businesses that entered into fine-print contracts with consumers must therefore have such contracts cleansed immediately or face an administrative fine by the Chinese government.
All entities doing business in the People’s Republic of China should be aware of an immediate compliance risk with regard to contracting with consumers using standard contractual clauses. In particular, a business operator that reserves its right to interpret a standard contractual clause when dealing with consumers may expose itself to an administrative penalty, effective 13 November 2010. All businesses that entered into fine-print contracts with consumers must therefore have such contracts cleansed immediately or face an administrative fine by the Chinese government.
The State Administration for Industry and Commerce (SAIC) of China recently published the Measures for the Supervision and Punishment of Illegal Contractual Acts (the Measures). The SAIC (including its branches) is the governmental authority of China responsible for, among other duties, supervising and administering the business activities of companies and enterprises, upholding and maintaining the competitive orders of markets, and protecting the interests and rights of consumers.
The Measures fight against three types of actions. The first type of action is contractual fraud, which means obtaining money or valuables by means of fabricating facts or concealing truth for the purpose of possessing the money or valuables of other persons. The second type is to seek an illegitimate benefit by means of bribery, coercion or collusion with another person (or persons) in the use of a contract. The third type is to infringe upon the interests and rights of consumers by using a standard contractual clause to aggravate the liability of consumers while mitigating the liability of the concerned business operator dictating the standard contractual clause.
The Measures will come into force effective 13 November 2010. Before the Measures take effect, a standard contractual clause would make the party dictating the clause disadvantaged in interpretation of the clause if the clause is disputable. However, after the Measures come into force, a standard contractual clause may trigger administrative liability.
According to the Contract Law of China, standard contractual clauses are clauses that are formulated in advance by a party for the purpose of repeated usage and that are not a result of consultation with the other party in the making of the contract. As the party dictating the standard clauses may embed clauses in its own favour and cause unfairness, the Contract Law explicitly requires the party dictating the standard clauses to call, in a reasonable manner, the other party’s attention to the exemptible and restrictive clauses regarding its liability and to give explanations of such clauses at the other’s request. The Contract Law also forbids the party from taking advantage of the standard clauses to evade its own liability in personal injuries, losses to property to the other party by intention or gross negligence, and other behaviours causing harm to a third party, society or the State. If the party dictating the standard clauses exempts itself from liability, imposes heavier liability on the other party, or precludes the other party from its main rights, such clauses are deemed invalid (see Articles 39, 40 and 41 of the Contract Law of the People’s Republic of China). However, after the Measures come into force, the party that dictates a standard contractual clause will face administrative punishments even if the concerned clause may not be automatically voidable under the Contract Law.
According to the Measures, a business operator may not, by means of standard contract clause, opt out of its liabilities resulting from the following:
- Causing personal injuries to consumers
- Causing losses to property to the other party by intention or due to gross negligence
- Warranties on goods and services the business operator shall assume by law
- Breaches of contract
- Other liabilities that a business operator shall assume (Article 9 of the Measures)
According to the Measures, a business operator shall not aggravate the liabilities of consumers as follows:
- A contract-breaching penalty or compensation (imposed on a consumer) exceeds the amount allowed by law or what is reasonable.
- The business operator shifts its operational risks, which should be borne by the business operator, to consumers,.
- The business operator requires consumers to bear liability that shall not be borne by a consumer (Article 10 of the Measures).
According to the Measures, a business operator shall not eliminate the following rights of a consumer:
- To change or eliminate a contract in accordance with law
- To claim a contract-breaching penalty
- To claim damages
- To interpret a standard contractual clause
- To sue in a dispute related to a standard contractual clause
- To exercise other rights consumers should have according to law (Article 11 of the Measures)
A violation of the above provisions of the Measures can subject the concerned business operator to a fine of up to three times the illegitimate benefit. However, the maximum fine is capped at RMB 30,000 (about US$ 4,500). In cases in which a business operator does not obtain an illegitimate benefit, a fine of up to RMB 10,000 (about US$ 1,500) shall be imposed. Please note that a fine will also be imposed on the concerned business operator if the business operator engages in contractual fraud or seeks an illegitimate benefit by means of bribery, coercion or collusion with another person (or persons) in the use of a contract (see above).
Given the newly provided administrative penalties, the Measures cause greater compliance risks to business operators than before, if the business operators use standard contractual clauses to mitigate their contractual liability.
In addition, the compliance risk becomes unpredictable because certain provisions of the Measures are ambiguous. For example, Article 10.2 of the Measures prohibits a business operator from shifting its operational risks to consumers. Because Chinese law is not clear about what constitutes an operational risk, the ambiguity leaves great room for interpretation by the SAIC (or its branches).
In the end, it remains to be seen whether or not the Measures will be enforced selectively. Because State-owned enterprises dominate many industries that affect people’s (i.e., consumers’) lives, the Measures should have a great impact on State-owned enterprises, as well as on other private or foreign-related enterprises whose immediate clients are also consumers.