OF CHINA ON ECONOMIC CONTRACTS

INVOLVING FOREIGN INTEREST

(Adopted at the Tenth Session of the Standing Committee of the Sixth National Peoples Congress, promulgated by Order No. 22 of the President of the Peoples Republic of China on March 21, 1985, and effective as of July 1, 1985)

Contents

Article 1 This Law is formulated with a view to protecting the lawful rights and interests of the parties to Chinese-foreign economic contracts and promoting the development of Chinas foreign economic relations.

Article 2 This Law shall apply to economic contracts concluded between enterprises or other economic organizations of the Peoples Republic of China and foreign enterprises, other economic organizations or individuals (hereinafter referred to as contracts). However, this provision shall not apply to international transport contracts.

Article 3 Contracts shall be concluded according to the principle of equality and mutual benefit and the principle of achieving agreement through consultation.

Article 4 In concluding a contract, the parties must abide by the law of the Peoples Republic of China and shall not harm the public interest of the Peoples Republic of China.

Article 5 The parties to a contract may choose the proper law applicable to the settlement of contract disputes. In the absence of such a choice by the parties, the law of the country which has the closest connection with the contract shall apply.

The law of the Peoples Republic of China shall apply to contracts that are to be performed within the territory of the Peoples Republic of China, namely contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and contracts for Chinese-foreign cooperative exploration and development of natural resources.

For matters that are not covered in the law of the Peoples Republic of China, international practice shall be followed.

Article 6 Where an international treaty which is relevant to a contract, and to which the Peoples Republic of China is a contracting party or a signatory, has provided differently from the law of the Peoples Republic of China, the provisions of the international treaty shall prevail, with the exception of those clauses on which the Peoples Republic of China has declared reservation.

Chapter II The Conclusion of Contracts

Article 7 A contract shall be formed as soon as the parties to it have reached a written agreement on the terms and have signed the contract. If an agreement is reached by means of letters, telegrams or telex and one party requests a signed letter of confirmation, the contract shall be formed only after the letter of confirmation is signed.

Contracts which are subject to the approval of the state, as provedid for by the laws or administrative regulations of the Peoples Republic of China, shall be formed only after such approval is granted.

Article 8 Appendices specified in a contract shall be integral parts of the contract.

Article 9 Conracts that violate the law or the public interest of the Peoples Republic of China shall be void.

In case any terms in a contract violate the law or the public interest of the Peoples Republic of China, the validity of the contract shall not be affected if such terms are cancelled or modified by the parties through consultations.

Article 10 Contracts that are concluded by means of fraud or duress shall be void.

Article 11 A party which is responsible for the invalidity of a contract shall be liable for the losses suffered by the other party as a result of the contracts becoming invalid.

Article 12 A contract shall, in general, contain the following terms:

(1) The corporate or personal names of the contracting parties and their nationalities and principal places of business or domicile;

(2) The date and place of the signing of the contract;

(3) The type of contract and the kind and scope of the object of the contract;

(4) The technical conditions, quality, standard, specifications and quantity of the object of the contract.

(5) The time limit, place and method of performance;

(6) The price, amount and method of payment, and various incidental charges;

(7) Whether the contract is assignable and, if it is, the conditions for its assignment;

(8) Lability to pay compensation and other liabilities for breach of contract;

(9) The ways for settling contract disputes; and

(10) The language (s) in which the contract is to be written and its validity.

Article 13 So far as it may require, a contract shall provide for the limits of the risks to be borne by the parties in performing the object; if necessary, it shall provide for the coverage of insurance for the object.

Article 14 Where a contract needs to be performed continuously over a long period, the parties shall set a period of validity for the contract and may also stipulate conditions for its extension and its termination before its expiry.

Article 15 In the contract the parties may agree to provide a guaranty. The guarantor shall be held liable within the agreed scope of guaranty.

Chapter III The Performance of Contracts and Liability

Article 16 A contract shall be legally binding as soon as it is established in accordance with the law. The parties shall perform their obligations stipulated in the contract, No party shall unilaterally modify or rescind the contract.

Article 17 A party may temporarily suspend its performance of the contract if it has conclusive evidence that the other party is unable to perform the contract. However, it shall immediately inform the other party of such suspension. It shall perform contract if and when the other party provides a sure guarantee for performance of the contract. If a party suspends performance of the contract without conclusive evidence of the other partys inability to perform the contract, it shall be liable for breach of contract.

Article 18 If a party fails to perform the contract or its performance of the contractual obligations does not conform to the agreed terms, which constitutes a breach of contract, the other party is entitled to claim damages or demand other reasonable remedial measures. If the losses suffered by the other party cannot be completely made up after the adoption of such remedial measures, the other party shall still have the right to claim damages.

Article 19 The liability of a party to pay compensation for the breach of a contract shall be equal to the loss suffered by the other party as a consequence of the breach. However, such compensation may not exceed the loss which the party responsible for the breach ought to have foreseen at the time of the conclusion of the contract as a possible consequence of a breach of contract.

Article 20 The parties may agree in a contract that, if one party breaches the contract, it shall pay a certain amount of breach of contract damages to the other party; they may also agree upon a method for calculating the damages resulting from such a breach.

The breach of contract damages as stipulated in the contract shall be regarded as compensation for the losses resulting from breach of contract. However, if the contractually agreed breach of contract damages are far more or far less than is necessary to compensate for the losses resulting from the breach, the party concerned may request an arbitration body or a court to reduce or increase them appropriately.

Article 21 If both parties breach the contract, each shall be commensurately liable for the breach of contract that is its responsibility.

Article 22 A party which suffers losses resulting from a breach of contract by the other party shall promptly take appropriate measures to prevent the losses from becoming severer. If the losses are aggravated as a result of its failure to adopt appropriate measures, it shall not be entitled to claim compensation for the aggravated part of the losses.

Article 23 If a party fails to pay on time any amount stipulated as payable in the contract or any other amount related to the contract that is payable, the other party is entitled to interest on the amount in arrears. The method for calculating the interest may be specified in the contract.

Article 24 If a party is prevented from performing all or part of its obligations owing to force majeure, it shall be relieved of all or part of its obligations.

If a party cannot perform its obligations within the contractually agreed time limit owing to force majeure, it shall be relived of the liability for delayed performance during the aftereffect of the event.

Force majeure means an event that the parties could not have foreseen at the time of conclusion of the contract, both parties being unable to either avoid or overcome its occurrence and consequences.

The scope of force majeure may be specified in the contract.

Article 25 The party which fails to perform wholly or in part its contractual obligationsowing to force majeure shall promptly inform the other party so as to mitigate possible losses inflicted on the other party, and shall also provide a certificate issued by the relevant agency within a reasonable period of time.

Chapter IV The Assignment of Contracts

Article 26 When a party assigns, wholly or in part, its contractual rights and obligations to a third party, it must obtain the consent of the other party.

Article 27 In the case of a contract which, according to the laws or administrative regulations of the Peoples Republic of China, is to be formed with the approval of the State, the assignment of the contractual rights and obligations shall be subject to the approval of the authority which approved the contract, unless otherwise stipulated in the approved contract.

Chapter V The Modification, Rescission and Termination of Contracts

Article 28 A contract may be modified if both parties agree through consultation.

Article 29 A party shall have the right to notify the other party that a contract is rescinded in any of the following situations:

(1) If the other party has breached the contract, thus adversely affecting the economic benefits they expected to receive at the time of the conclusion of the contract;

(2) If the other party fails to perform the contract within the time limit agreed upon in the contract, and again fails to perform it within the reasonable period of time allowed for delayed performance;

(3) If all the obligations under the contract cannot be performed owing to force majeure; or

(4) If the contractually agreed conditions for the rescission of the contract are present.

Article 30 For a contract consisting of several independent parts, some may be rescinded according to the provisions of the preceding article while the other parts remain valid.

Article 31 A contract shall be terminated in any one of the following situations:

(1) If the contract has already been performed in accordance with the agreed terms;

(2) If an arbitration body or a court has decided that the contract shall be terminated; or

(3) If the parties agree through consultation to terminate the contract.

Article 32 Notices or agreements on the modification or rescission of contracts shall be made in writing.

Article 33 In the case of a contract which according to the laws or administrative regulations of the Peoples Republic of China, is to be established with the approval of the State, and significant modification of the contract shall be subject to the approval of the authority which approved the contract, and the rescission of the contract shall be filed with the same authority for the record.

Article 34 The modification, rescission or termination of a contract shall not affect rights of the parties to claim damages.

Article 35 The contractually agreed terms for the settlement of disputes shall not become invalid because of the rescission or termination of a contract.

Article 36 The contractually agreed terms for the settlement of accounts and liquidation of a contract shall not become invalid because of the rescission or termination of the contract.

Chapter VI The Settlement of Disputes

Article 37 If disputes over a contract develop, the parties shall, as far as possible, settle them through consultation, or through mediation by a third party.

If the parties are unwilling to settle their dispute through consultation or mediation, or if consultation or mediation proves unsuccessful, they may, in accordance with the arbitration clause provided in the contract or a written arbitration agreement reached by the parties afterwards, submit the dispute to a Chinese arbitration body or any other arbitration body for arbitration.

Article 38 If no arbitration clause is provided in the contract, and a written arbitration agreement is not reached afterwards, the parties may bring suit in a peoples court.

Chapter VII Supplementary Provisions

Article 39 The time limit for filing suit or applying for arbitration in a dispute over a contract for the purchase and sale of goods shall be four years, counting from the day when the party was aware or ought to have been aware of its rights being infringed upon. The time limit for filing suit or applying for arbitration in a dispute over any other contract shall be stipulated separately by law.

Article 40 If new legal provisions are formulated while contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures, or Chinese-foreign cooperative exploration and development of natural resources, which have been concluded with the approval of the state, are being performed within the territory of the Peoples Republic of China, the performance may still be based on the terms of the contracts.

Article 41 This Law may apply to contracts concluded before it goes into effect if this is agreed to by the parties through consultation.

Article 42 The State Council shall, in accordance with this Law, formulate rules for its implementation.

Article 43 This Law shall go into effect on July 1, 1985.