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3. Standard Terms

Standard terms are generally viewed as the special type of written contract, which may become part of a contract or the contract itself.41 If all terms of the contract are the standard terms, the contract is than called standard contract. In addition, the standard terms may be contained in the contract document itself or in a separate document. Under Article 39 of the Contract Law, the standard terms are defined as the contract provisions which are prepared in advance for general and repeated use by one party, and which are not negotiated with the other party in concluding the contract.42 It is the first time in modern Chinese contract legislation that the standard terms are provided as the contract form.

The statutory recognition of the standard terms results from the fact that in many business transactions where the services or products provided are stable and the number of the users are quite large, it would greatly increase business efficiency to have the standard terms in the contracts for repeated use and to help simplify the contract making process. The standard terms are normally used in the contracts involving insurance, transportation and the use of public utilities. As a growing trend, the standard terms are more and more sued in the contract concluded through the Internet, particularly in service area. Keep in mind that the legal characteristic of the standard terms is not the function of “repeated-use” but the notion of “prepared-in-advance” by one party.

Because the standards terms are provided by one party in the pre-printed form, the fairness of the terms becomes the issue to which a lot of attentions have been drawn. In the sense in which the standard terms are normally not the product of negotiations of the parties, the contract that contains all standard terms is often called the “adhesion contract”, which in most cases is a “take-it or leave-it” deal. Because of the concerns about the fairness, there are certain rules that are generally accepted in China to govern the use of the standard terms. First, the standard terms, regardless of whether they constitute a contract itself or part of a contract, will not take effect unless and until the

41Because of the fact that the standard terms are not made through the negotiations by the parties, rather they are made by one party unilaterally, there are argument about whether the standard terms are the contracts. Some argue that the standard terms are the norms recognized by the law. Others label the standard terms are civil rules or regulations adopted by legal persons. Some contend that the standard terms should be deemed as de facto contract because the standard terms exist before the contract is concluded and they are just accepted by the contracting parties as facts.

42This definition is consistent with UNIDROIT’s Principles of International Commercial Contract (PICC). According to Article 2.19 of PICC, standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.

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other party accepts. In addition, if the standard terms are contained in a separate document, for the terms to be effective, they will normally have to be inferred to expressly by the party intending to use them. Furthermore, no standard terms are to be used without the reasonable knowledge of the other party, or put another way, any of the standard terms should not be taken as a surprise to the other party.

The Contract Law seems to have attempted to incorporate these rules into its provisions that are intended to regulate the standard terms. According to Article 39 of the Contract Law, where standard terms are adopted when entering into a contract, the party who supplies the standard terms shall define the rights and obligations between the parties according to the principle of fairness, shall make the other party noted of the exclusion or limitation of the supplying party’s liabilities in a reasonable way, and shall explain these terms in response to the other party’s request. On its face, Article 39 does not mention the “surprising terms”. It, nevertheless, is understood to have implied from the notice requirement that the other party shall not be surprised with any of the standard terms that would adversely affect its interest.43

Additionally, Article 40 of the Contract Law specifies several situations in which the standard terms are invalid. First, the standard terms shall be null and void if there exists fraud, duress, illegal purpose, harm to the State, collective, individual or social public interests, or violation of compulsory provisions of laws and administrative regulations. Second, the standard terms shall be invalid if they contain exclusion provisions that are prohibited by laws. Third, the standard terms shall not be employed for the purpose of exempting one party’s liability while increasing the other party’s liabilities and excluding the other party’s major rights. Article 40, however, fails to specify what would be the “major rights.” One scholarly interpretation is that the major rights refer to the rights the party normally will have in the kind of contract.

Despite the business efficiency advantage of the standard terms, the impact of the use of standard terms on consumers is obvious. One major concern is the freedom of contract. The question is whether the contract could be made freely and fairly between the parties particularly when the other party is in a

43With regard to the notice, the statutory standard under the Contract Law is “reasonable ways.” According to Professor Wang Liming, the reasonable ways should be judged from the following five aspects: (a) the outfit of the notice document – it should be legible enough to attract the other party’s attention; (b) the method of giving the notice; (c) degree of explicitness of the language used; (d) time to give the notice – the notice must be given before the contract is concluded or in the process of concluding the contract; and (e) degree of the awareness of the other party – the notice must make the other party fully aware. See Wang Liming, supra note 1 at pp. 394–395.

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weaker position. Realizing that the standard terms are often abused by the party having the greater bargaining power in the market, many countries have adopted the laws or rules to help maintain the fair use of the standard terms. Apparently, Article 39 of the Contract Law is designed for that purpose, and it represents the legislative efforts to regulate the use of the standard terms in the business transactions. A similar provision could also be seen in Article 24 of the Law of Protection of Consumer Rights and Interests, where business operators are prohibited from imposing any unfair and unreasonable restrictions through standard contract on consumers or reducing or escaping their civil liability for their infringement of the legitimate rights and interests of consumers.44

Not surprisingly, Article 39 of the Contract is being criticized for want of actual legal effect because the article only states what obligations the party making the standard terms may have, but provides no punishment for the failure to perform the obligations. A practical question is what standard terms would be considered unfair and unreasonable. Disturbed by the spreading practices of unfair standard terms in the markets, the Chinese Association of Consumer Protection (CACP) – the national consumer protection watchdog – made a survey in 2003 in four major business areas such as governmentmonopolized public utilities, insurance, real estate and tourism where the standard terms are most heavily used, and found a quite large number of the standard terms that were “despotic” and clearly violated Article 39 of the Contract Law.45

44The Consumer Protection Law of China was promulgated on October 30, 1993 and took effect January 1, 1994. Under Article 24 of the Consumer Protection Law, no business operator shall, through such means as standard contract, notice, announcement, entrance hall bulletin, impose unfair and unreasonable restrictions on consumers or reduce or escape their civil liabilities for the harm caused to the legitimate rights and interests of consumers.

45These clauses were classified into ten major categories: (a) the clause giving telecommunication company power to set arbitrary expiration date for calling card with the purpose to “take” unused balance; (b) the clause providing that the monthly charge will still apply even if the cell phone service has been cancelled unless certain procedures have been followed;

(c)the clause requiring that customers promise not to make claim against the company if the transmitting signal for the use of cell phone is not strong or interrupted; (d) clause requiring customers to prepay the monthly fees for telephone services and to face the risk of suspending the use of telephone line if the telephone charges in any given month unusually exceed the prepaid amount; (e) clause allowing company to alter the contract terms unilaterally without notice; (f) clause granting company the ultimate right to interpret the contract; (g) clause reducing the statutory period of business record keeping; (g) clause requiring customers at their additional cost to only use provided box or materials for shipping; (h) clause limiting customers’ option for receiving the shipped goods in order to charge more; (i) clause prohibiting customer from making claims within reasonable period of time. See the report from Xinhua News Agency on July 28, 2003, available at http://people.com.cn/GB/jingji/1047/1988742.html.

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According to the CACP, the standard terms are unfair and unreasonable if they are aimed at (a) exempting the party who makes the standard terms from being held liable for any consequences, (b) restricting or excluding the legitimate rights of the other party, (c) providing the party making the standard terms with additional rights in order to reduce its liability, (d) restricting the access of consumers to CACP for assistance; or (e) granting the party making the standard terms the ultimate right of interpretation.46 However, given the very limited authority of the CACP, it remains questionable whether the abuse of the standard terms could be effectively dealt with under the regime of Article 39.

Like other contract terms, the standard terms also confront with the issue of interpretation, especially when the parties have different understanding about the terms. In contrast to the regular terms of the contract, the standard terms have their distinctions. One distinction commonly discussed among contract law scholars is that the “meaning intended by the parties” may not be a proper parameter for the determination of the terms in dispute because the standard terms in many cases are not the corollary of the negotiation of the parties. Another distinction is that the standard terms normally involve a large number of users (consumers) and therefore affect more social and public interests. For this reason, the rules for interpretation of standard terms are necessarily blended with the policy concerns.

In the Contract Law, the interpretation of standard terms is specially addressed. According to Article 41, if a dispute over the understanding of a standard term occurs, the interpretation shall be made under the general understanding. If there are two or more kinds of interpretations, an interpretation unfavorable to the party supplying the standard term shall be preferred. In case of inconsistence between the standard term and non-standard term, the non-standard term shall prevail.47 Hence, as articulated in Article 41, to interpret standard terms, three rules shall be followed, which are “general understanding”, “unfavorable to supplying party” and “non-standard term preferable”. What is important to note is that these three rules may not necessarily take any particular order, when applied to the specific cases.

The application of Article 41 requires some more elaboration. First, Article 41 may not be used to exclude the application of other contract interpretation provisions. This would mean that any of the principles relevant to contract interpretation in the Contract Law might also be applicable to the interpretation of the standard terms in addition to Article 41. Second, from judicial point of view, application of the rules stated in Article 41 is regarded unconditional.

46See id.

47See the Contract Law, art. 41.

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The notion is that as long as the difference between a standard term and a nonstandard term exists, the non-standard term must be upheld. Third, the rule of “general understanding” is premised on the idea that the interpretation of standard terms shall be made both reasonably and objectively because the standard terms are provided unilaterally.

An interesting question concerning the standard terms is the effect of individually negotiated terms. This question becomes relevant when the parties have agreed to add certain terms into the standard contract and the added terms are inconsistent with the standard terms normally used to deal with the same or similar situation. The Contract Law provides no clear answer to this question, but the compelling argument is that the individually negotiated terms shall have the effect overriding that of the standard terms. The underlying rationale rests with the dictum lex specialis derogat lex generalis (special law derogates general law), although when applied to the standard terms vis- à-vis the general terms, the dictum is reversed.

The case below tells how the additional terms agreed by the parties to the standard contract were treated by the people’s courts. The interesting part in this case is that the High People’s Court of He Nan Province treated the additional terms as a special agreement that supersedes the standard contract. According to the Court, the additional terms would control if there was a discrepancy between the special terms and the standard contract, and if the special terms did not violate any provisions of law.

Kai Feng City Hong Tian Electronics Company, Inc.

v.

Mincheng Securities Co. Ltd.

High People’s Court of He Nan Province48

Plaintiff, Kai Feng City Hong Tian Electronics Company, Inc., brought this lawsuit on August 25, 2003 against defendant, Mincheng Securities Co. Ltd, concerning a dispute over a trustee agreement on assets management. Defendant demanded that defendant (a) pay plaintiff RMB 50.45 million Yuan for the entrusted fund and accrued interest, (b) pay stipulated damage of RMB 2.41 million Yuan for breach of contract, and (c) pay fine at the rate of .004% per day for the late payment of the fund from August 13, 2003 to the date of actual payment.

In its complaint, plaintiff claimed that on February 17, 2003, plaintiff entered into the “Agreement of Trustee on the Management of Assets” (Agreement) with defendant (the standard contract provided by defendant), and on the same day, plaintiff and defendant signed the “Additional Terms to the Agreement of Trustee on the Management of Assets” (Additional terms), and both the Agreement and the Additional Terms were concluded on

48See, The Civil Judgment of High People’s Court of He Nan Province, (2003) Yu Fa Min (2) Chu Zhi No. 24.

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the basis on the assent of the parties. Plaintiff alleged that on February 13, 2003 plaintiff remitted RMB 48.20 million Yuan as agreed into the special account of the defendant’s branch located in Jin Shui road, and entrusted defendant to manage the fund. Plaintiff further alleged that after the agreed six-month period of trusteeship ended on August 18, 2003, defendant did not payback to plaintiff the principle of the entrusted fund and interest amounting to RMB 50.45 million Yuan in total.

Defendant did not submit a written answer to the Court. During the court hearings, defendant admitted facts stated in plaintiff’s complaint but argued that the additional terms contained a minimum guarantee clause, which was void because it violated the prohibitive provision of the Securities Law. Defendant also argued that since defendant had prepaid part of the interest to plaintiff in amount of RMB 1.8 million, the actual amount of the fund remitted by plaintiff to defendant designated account was RMB 48.20 million Yuan, and therefore, the principal of the fund shall be the amount defendant actually received.

In response, plaintiff argued that the RMB 1.8 million Yuan was prepaid interest on the basis of RMB 50 million Yuan and therefore the principal of the fund shall remain unchanged. Plaintiff then contended that the Agreement and the Additional Terms are the standard terms provided by defendant, and adopted by the parties by consensus. Plaintiff further asserted that under the Agreement, defendant should provide plaintiff with assets management report and investment manager report, but defendant did not do so nor did defendant make it available to plaintiff any documents evidencing the financial status of the fund under the trusteeship. Plaintiff also proved that according to the Additional Terms, if there is a conflict between the Agreement and the Additional Terms, the Additional Terms control.

Defendant insisted that the Agreement was the standard contract in compliance with the Securities Law, but the Additional Terms were a result of the negotiations by the parties and should be invalid because of the illegal minimum guarantee clause. Defendant argued that it managed plaintiff’s fund to make investment in security market on behalf of plaintiff, and under the Securities Law in such operational investment management the parties shall equally share the profit and loss.

The Court found that the actual remittance plaintiff made to defendant for the fund in trustee was RMB 48.20 million Yuan, and defendant did not actually pay Plaintiff RMB 1.80 million as interest.

It is held that under the provisions of “Securities Management Methods” of China Securities Regulatory Commission and business operation scope stated on defendant’s business license, defendant is legally qualified as a legal person to engage in asserts management. The Agreement between plaintiff and defendant manifests the true intent of the parties and its contents are not in violation of any prohibitive provisions of law, and therefore shall be held valid. The Additional Terms shall be deemed as a special agreement on the distribution of the profit because it not only provides the rate of return for plaintiff at 4.5% but also makes it clear that any amount exceeding 4.5% shall be paid 100% to defendant as performance bonus. Since the Additional Terms truly reflect the parties’ actual intention and because the case involves trusteeship for which there are no prohibitive provisions, defendant’s argument against the Additional Terms lacks legal grounds and shall therefore be denied.

Under Article 8 of the Contract Law of the People’s Republic of China, a contract that is established according to law shall be legally binding on the parties and the parties shall perform their obligations as agreed, and the contract so established shall be protected by law. Applying Article 8 to the present case, the Court holds that defendant’s failure to provide plaintiff with the periodical report on the management and operation of the fund in trust