Thursday, June 7, 2007

Freedom of Contract in China: Not So Fast Yet (III)

To continue my musing on the topic of governmental, executive intrusion to the freedom of contract in China, I intend to discuss the origin of such power to regulate contract formation, and to shed a little on how the power has been exercised in some locales in China.

Legislative Designation of Executive Power to Regulate Contracts

Article 127 of the Contract Law of the P. R. China designates contract enforcement authorities to departments of the Industry and Commerce Administration and other relevant administrative agencies. However, such authority and power is restricted to “monitoring and handling illegal acts that harm the State or public interests through the conclusion of a contract, in accordance with the relevant laws and regulations.” See 16 Minn. J. Int’l L. 115, 142.


In other words, these administrative institutions and agencies are granted a restrictive authority to monitor and handle illegal activities associated with contracts. By inference, they do not have the power to invalidate either contracts or contract clauses unless a crime or illegal acts are involved which injure the State or public interests.

The Exercise of Executive Power in Regulating Contracts

In practice, however, local Industry and Commerce Administration departments enjoy greater power and authority than what is defined in Article 127 of the Contract Law. “Monitor” and “handle” were the two key words that define powers designated, but the power and authority exercised by the Beijing Municipal Department of Industry and Commerce, to my mind, far exceed powers granted by the Contract Law.

For instance, the Circular Regarding Intensifying the Supervision of Contract Terms and Provisions (“Beijing Order”) mandates the usage of form contracts drafted by Department of Industry and Commerce alone or along with other administrative agencies. Such form contracts cover a wide range of commercial agreements:
1. landlord-tenant contracts;
2. home renovation contracts;
3. utilities contracts;
4. business operations training contracts;
5. TV, communications services contracts;
6. Consumer loans, life and property insurance contracts;
7. Travel, transportation contracts;
8. Automobile purchase, lease, and repairs contracts;
9. franchise contracts;
10. Supermarkets transactions contracts.

These contracts, according to the Beijing Order, are under scrutiny. And the governmental scrutiny manifests in two ways. First, contracting parties are encouraged to adopt the form contracts already drafted and circulated for use. Second, parties engaged in the above-list commercial activities can expect to be targeted in inspection. Violations of local enforcement regulations can result in heavy penalties.


The People’s Congress through the Contract Law grants Industry and Commerce Administration and other agencies the power to monitor and handle illegal acts associated with contracts. In reality, however, the power has been expanded beyond its designated sphere of law enforcement. It morphed into the power to draft form contracts for use in a wide range of commercial transactions. Although the use of such draft contracts is not yet mandatory, it surely would not surprise a business person in China when they do some day.

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