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Form Contracts In China. You've Got To Fight The Powers That Be.....

By Dan Harris and Steve Dickinson

This is the second in a series of posts on Chinese contract law by co-blogger Steve Dickinson. The first post, "China Contract Law: Going All Clear On Us Now," discussed recently issued PRC Supreme Court explanations on various aspects of contract law. This post discusses how Chinese law tends to disfavor contractual disclaimers of liability. US courts tend to disfavor them as well, but workarounds are usually possible. This is not the case in China and we are finding that most of our US and European clients (particularly those in the shipping/freight business) do not realize this. In my recent post concerning the PRC Contract Law, I noted that restrictions on disclaimers of liability in form contracts are a particular concern. As I mentioned, form contracts are often used for cargo and other carriage contracts. The primary function of such contracts is normally to limit the liability of the carrier. This runs directly against the form contract provisions of the Contract Laws, which are designed to prevent such limitation of liability. In this post, I will describe a recent case concerning this issue that clearly illustrates the Chinese approach and the dangers for foreign carriers who intend to operate within China. The relevant provisions of the Contract Law are as follows:

Article 39 Where standard terms are adopted in concluding a contract, the party which supplies the standard terms shall establish the rights and obligations between the parties in accordance with the principle of equality; shall use reasonable means to clearly identify any provision that limits his own liability or increases the liability of the other party; and upon the request of the other party shall explain such provisions.Standard terms are clauses which are prepared in advance for general and repeated use by one party and which are not negotiated with the other party in concluding a contract. Article 40 When standard terms fall within the provisions of Article 52 and Article 53 of this Law, or in the case where the party which supplies the standard terms exempts itself from its own liability, or increases the liability of the other party or eliminates the rights of the other party, the terms shall be null and void. Article 41 If a dispute over the understanding of the standard terms occurs, it shall be interpreted according to general understanding. Where there are two or more possible interpretations, the interpretation unfavorable to the party supplying the standard terms shall be used. Where the standard terms are inconsistent with specifically negotiated terms, the latter shall be adopted. Article 53 The following exculpatory clauses in a contract shall be null and void: (1) those that concern personal injury to the other party; (2) those that concern property damage to the other party as a resulting of intentional acts or gross negligence.

These provisions were applied in the following case. (Taken from ???????? (2009) pp. 27?29): Company A is located in Nanjing. On July 21, 2006, it received an order from Company B, located in Nantong, for an IBM notebook computer. Since Nantong is 300 km from Nanjing, company A engaged the services of a package delivery company to make the delivery. Upon accepting the order, the Delivery Company provided a freight bill to Company A, stating the particulars of the transaction and providing for a delivery fee of ten RMB (about $1.50 US). Below the signature line, the freight bill included the following statement: ?If this package requires insurance, please provide advance notice.? Below this statement was the further notice: ?Before signing this document, please read the explanation on the reverse of this document. Your signature confirms that you understand and accept the provisions of this explanation.? After signing the document, the delivery company took away the package. Company A notified Company B that the product had been shipped and Company B paid the purchase price of RMB 17,450 (roughly $2,000 US). The package never reached Company B. As a result, Company A shipped a replacement computer to Company B and sued the delivery company to seek compensation for its loss. After investigation, it was determined that an employee of the delivery company had subcontracted the delivery to a third company. An employee of that third company stole the computer before it could be delivered to Company B. At trial, the delivery company argued that the exclusion provision of the delivery contract limited its liability. Provisions printed on the reverse side of the delivery contract provided the following: 1. In the case of expensive items, the customer is required to state the actual value and to purchase insurance. 2. In the case where the customer has not done the above, the liability of the carrier is limited to 30 times the delivery fee. In this case, the delivery fee was 10 RMB. The delivery company therefore argued that its liability was limited to 300 RMB. The court rejected the argument of the delivery company and held that it was liable for the entire damage in the amount of RMB 17,450. The court did not discuss the requirement of prominent disclaimer language or the requirement to explain, as required by Contract Law Article 39. The court instead based its decision on Article 40, which provides that any standard term that limits the liability of a contracting party for its intentional or grossly negligent conduct is simply void. The court held that it was grossly negligent for the delivery company to subcontract to an unsupervised third party and stopped its analysis at this point. This decision suggests that in the context of form contracts it is not possible for a party to limit its liability for negligent or willful conduct. This is true even if the exculpatory language is clearly stated and even if the other party acknowledges the provision. This issue must be considered carefully. The delivery company in this case charged only a nominal sum (10 RMB) for this delivery. It charged this low price presumably on the assumption that the exculpatory provisions of its contract would limit its liability to no more than 300 RMB. Instead, it was held liable for the entire 17,450 RMB loss, an amount it clearly had not considered in setting its delivery fee. Many foreign carriers operate within China under the same assumption. They believe their limitation of liability provisions allow them to safely charge a modest freight charge. This case shows that this assumption is misplaced and that far more care in this issue must be taken in delivery, freight and related contracts in China. The Chinese form contract provisions are far different from anything encountered in the common law and they must be considered carefully. China's tendency not to enforce limitation of liability provisions applies much more broadly than just to freight contracts. They apply in any warranty situation where a seller or service provider seeks to limit liability. The normal waiver of warranty in bold print does not appear to be a viable solution in China. The entire issue of disclaimer of warranty/disclaimer of liability must therefore be approached with extreme care in China, particularly when using a form contract.

Full post as published by China Law Blog on June 09, 2009 (boomark / email).