Alert 03.20.19
China Enacts New Foreign Investment Law
Amid stark slowdown in output growth and trade disputes with U.S., PRC authorities speed up issuance of legislation to encourage investment from abroad.
Alert
Alert
06.16.20
On May 28, 2020, the National People’s Congress of the People’s Republic of China (PRC or China) passed the first Civil Code of the PRC. The Civil Code, which will become effective on January 1, 2021, consists of 1,260 articles. The promulgation of the Civil Code marks the end of PRC’s decades of efforts to formulate a comprehensive and unified civil code since 1954. The Civil Code is the most extensive legislation in the history of the PRC and is the first and only legislation named “code” in China.
The new Civil Code is considered as an amalgamation of the existing civil and tort related laws and regulations as well as certain judicial interpretations issued by the Supreme People’s Court of the PRC. The Code covers various dimensions of civil society, including without limitation, private property, contracts, personal privacy, marriage and family, inheritance, and torts, etc. Upon its coming into effect by January 1, 2021, the currently effective Civil Law General Principles, Civil Law General Rules, Contract Law, Property Ownership Law, Torts Law, Marriage Law, Inheritance Law, Adoption Law and Guarantee Law (Existing Civil Laws) will be simultaneously abolished.
The Civil Code aims to combine and replace the Existing Civil Laws. Further, the new Civil Code has incorporated existing judicial practices established by the PRC court system and made certain changes to the existing PRC’s civil law system that may have profound influence on business operations in the PRC.
The Civil Code consists of eight key parts:
- General principles and provisions of the Civil Code.
- Ownership, usufructs and security interest over real property and personal property.
- General contract law rules, including conclusion, validity, performance, modification and assignment, termination of contracts, liability for breach of contracts, etc.
- Special provisions applicable to nineteen types of typical contracts, such as sales contracts, gift contracts, guarantee contracts, etc.; and
- Quasi-contracts: negotiorum gestio (the management of or interference with the business or affairs of another without authority; 无因管理 in Chinese) and unjust enrichment.
- life, body, and health rights;
- name and title rights;
- portrait rights;
- rights of reputation and honor; and
- privacy right
- General principles and rules of tort liability, such as liable persons, compensation, etc.; and
- Special rules applicable to certain tort cases, such as traffic accidents, medical accidents, environment pollution, etc.
We summarize the following key highlights that may be of interest to foreign investors and foreign-invested enterprises incorporated in the PRC:
- Types of Contracts: The existing Contract Law lists 15 types of typical contracts and provides specific stipulations applicable to such contracts. The Contract Part of the Civil Code lists 19 types of typical contracts, adding four new types of contracts: Guarantee Contract, Factoring Contract, Property Management Service Contract, and Partnership Contract.
- Electronic Contracts: The Civil Code specifies rules for execution and performance of electronic contracts. It specifies that making an online order for e-commerce goods is the execution of an electronic contract. A customer’s receipt of e-commerce goods through express delivery marks completion of delivery of goods.
- Force Majeure and Material Adverse Change: The current Contract Law allows change or termination of a contract in case that any force majeure event or material adverse change leads to (i) obvious unfairness for a contractual party or (ii) failure to fulfill the purpose of the contract. Under the Civil Code, failure to fulfill the contact purpose is no longer a cause for invoking the Force Majeure and Material Adverse Change clause, and contractual parties must negotiate for a reasonable period of time before change or termination of the contract.
- Contract Termination: The Civil Code revises the existing Contract Law’s provisions regarding termination of a contract. For example, the Civil Code allows termination of a contract with unfixed contractual term at any time without cause.
- In case the form of a guarantee is not specified or not clearly specified in a contract, under the current Chinese law, the guarantee relationship will be considered as a joint and several guarantee, meaning that the creditor may choose to enforce the debt towards the debtor or the guarantor. After the Civil Code becomes effective, such guarantee will be considered as a general guarantee, meaning that the creditor may only claim for debt payment with the guarantor after it claims with the debtor and exhausts the remedies by the debtor.
- Transfer of mortgaged property is subject to the prior consent by the creditor under the current Guarantee Law. Under the Civil Code, unless otherwise agreed by the parties, the mortgaged property can be transferred with a prior notice to (rather than prior consent by) the creditor. The ownership transfer of the mortgaged assets will not impact the creditor’s mortgage rights over the mortgaged assets.
Suggestions:
The Civil Code does not fundamentally or substantially change the civil law regime or the administrative system affecting business of foreign investors and foreign-invested enterprises in China.
However, the Civil Code’s amalgamation of existing civil laws leads to numerous changes to the detailed civil law provisions governing companies doing business in China. Many of such changes may cast substantial change to certain business, legal or compliance models and practices foreign companies are adopting in China. For example, the new mortgage rules as discussed in detail above may be carefully vetted by banks, auto finance companies and other financial institutions.
Foreign investors and foreign-invested enterprises should review the new Civil Code against their current business, legal or compliance models and practices in relation to the PRC, and prepare for the changes brought by the coming Civil Code before January 1, 2021.