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According to the Supreme People’s Court, no one may, in the name of the person without or with limited capacity for civil conduct, claim voidness of the conduct of such person to receive reward, donation and remuneration on the ground of no capacity or limited capacity for civil conduct.14

The concept of “appropriate to age, intelligence or mental health conditions” refers to the conduct of which a minor or mentally ill person fully understands the nature under the given age, intelligence and mental healthy condition. For a minor, a civil conduct appropriate to his or her age is normally understood to include the activities that do not involve special knowledge, sophisticated understanding or valuables. The activities as such include for example taking bus or purchasing stationary for study. As far as a person with mental infirmity is concerned, a conduct is deemed appropriate if performed under the situation where the mental health of such person permits and he or she understands the nature and consequences of the conduct. A standard that is commonly used in the people’s courts is to look at the ability of making a judgment and self-protection of a person in question in order to determine the mental health condition of the person.

The Contract Law does not state the effect of a contract made by a person with no capacity for civil conducts. As we have addressed, Article 12 of the Civil Code regards a minor under the age of 10 as the person without capacity for civil conduct, and requires that the minor be represented by his or her agent ad litem in all civil activities of any nature. Since under Article 12 of the Civil Code, a civil conduct of a minor under the age of 10 would have no any legal effect, it could then be reasonably inferred that a contract of which a person without capacity for civil conduct is a party would be void.

2.2. Contract by Agent without Authorization

A contract may be concluded by an agent on behalf of the principal, and if effective the contract so concluded will bind the principal. But for a contract as such to be effective, the agent must have a due authorization from the principal. As a practical matter, the authorization may be made in advance or be acquired afterwards through the ratification of the principal. Without such authorization, the agent will be considered unauthorized agent and thus will have no power of agency. As a general pattern, the “no power” of an agency would be found when (a) there is no authorization, (b) the scope of the authorization is exceeded, or (c) the authorization expires.

In accordance with Article 48 of the Contract Law, if a contract concluded on behalf of principal by a person who is not authorized, who excesses the

14 See Supreme People’s Court, Opinions, supra note 9, art. 6.

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authorization, or whose authorization has been terminated, the contract would have no binding effect upon the principal without the ratification of the principal, and the person who lacks the due authorization shall be held liable.15 Thus, before the principal’s action on ratification, the effect of the contract that is concluded by the unauthorized agent would be pending, and the contract then falls into the category of the effect-to-be-determined.

However, under Article 49, if the other party has reason to believe that the agent has a due authorization, the act of agency shall be effective.16 Obviously, Article 49 states a situation of apparent authority of the agent, which constitutes an exception to Article 48. As a result, in the context of the Contract Law, the agent authority in making a contract in the name of the principal could be either actual or apparent, and under the apparent authority the agent’s activity in the name of principal that would otherwise be invalid may become valid.

Apparent authority is the authority that the agent is deemed to have in the mind of the other party regardless of the actual status of the said authority, except that the other party knows and should know that the agent is not authorized. In Chinese people’s courts, there are three circumstances under which an apparent authority might be found. First, although no authorization is made, certain conduct of the principal would create an impression on the other party that there has been an authorization. For example, the principal does not authorize an agent to sign a contract but allows the agent to use the principal’s official seal or use a blank contract form bearing the principal’s seal. An apparent authority may also stand when the principal knows about the agent’s doing something on behalf of the principal without authorization, but takes no action to repudiate it.17

Second, an apparent authority might exist if there is a change of authorization that results in narrowing down the scope of the authority granted to the agent but the principal fails to make the change known to the other. Therefore, in the other party’s belief, the agent still has the authority as he used to have. In this situation, the principal may still be held liable for the agent’s conduct on the principal’s behalf with regard to the other party’s interests that are involved. The logical reason is that the principal’s laches in making the other party aware of the change of the agent’s authority shall not overcome the other party’s reasonable belief that the agent still has the authority.

15See the Contract Law, art. 48.

16See id., art. 49.

17This is the situation where the principal’s consent will be assumed. Article 66 of the 1986 Civil Code provides that if a principal is aware that a civil act is being executed in his name but fails to repudiate it, his consent shall be deemed to have been given.

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Third, an apparent authority might also occur where an authorization granted to an agent has been terminated but the principal takes no action to publicly effectuate the termination to make it a known fact that the authorization in question does not exist any more. To illustrate, when an agent’s authorization is terminated, the principal shall make a timely public notice in this regard and in the meantime shall make effort to invalidate the document certificating the authorization through the mean of recall or cancellation. Failure to do so may make the principal still liable for the agent’s conduct affecting the other party if the other party reasonably believes that the agent remains authorized by the principal, e.g. based on the certificate of agency issued or signed by the principal.

The following case serves as a good example demonstrating how the apparent authority is determined in practical settings.

Guang Zhou Swan Sports Goods Trading Company Inc.

v.

Beijing Photoelectricity Hardware Building Materials Store

Beijing No. 2 Intermediate People’s Court18

In October 2000, Wu Sufeng, the owner of the two-floor building known as No. 29 of Zhang Jia Cun, Feng Tai District, Beijing, singed a lease agreement with defendant, under which defendant would rent the building at RMB 60,000 Yuan per year for a term of 6 years. After that, Wu Sufeng orally agreed that defendant might sublet the building. In December 2000, Li Qian, in the name of plaintiff, entered into a lease contract with defendant. Under the contract, defendant agreed to rent to plaintiff a 210-square-meter space of the building of No. 29, Zhang Jia Cun. The term of the lease was three yeas from December 25, 2000 to December 25, 2003 at an annual rent of RMB 120,000 Yuan paid in two installments.

According to the contract, during the term of the lease, for whatever reason plaintiff caused damages to defendant, plaintiff should be responsible without condition. In addition, plaintiff should pay defendant all electricity and water bills that actually incurred within the term of the lease. Moreover, any non performance or incomplete performance of the contract should be deemed as a breach of contract and the party in breach should be responsible for actual damages caused to the other plus stipulated damages in the amount of 10% of the annual rent in that given year.

After conclusion of the contract, on December 15, 2000, on behalf of plaintiff, Li Qian paid RMB 5,000 Yuan as deposit to defendant. On December 25, plaintiff wired RMB 55,000 yuan via the commerce bank of Guang Zhou to defendant as the payment for the rent. In that month, defendant delivered the building to Li Qian for him to use. The part of the rented building was used as a store to sell sport wares. On February 4, 2001, at about 10:35 pm, Li Qian called police reporting that the windows of the store were smashed. On March 20, 2001, Li Qian wrote to Li Guo Jun, the legal representative of defendant,

18See No. 1 Civil Trial Division, Beijing High People’s Court, A Precise Analysis of Beijing Civil Cases, 170 (Law Press, 2003).

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requesting to terminate the lease because the door and windows of the building were repeatedly broken by someone and there was no result of settling the matter though several efforts were attempted. In the letter, Li Qian also asked for a refund of the balance of the rent (from March 25, 2001 to June 25, 2001). Thereafter, Li Qian made no further attempt to negotiate with defendant on whether the lease ought to be terminated.

In April 2001, Li Qian moved out of the building. In the end of May 2001, defendant took back the building and at that time both the door and windows of the building remained damaged. Defendant then had all damaged doors and windows fixed at its own cost. In June 2001, plaintiff brought the lawsuit against defendant at Fengtai District People’s Court, alleging that plaintiff had orally agreed with defendant to rent defendant’s two-floor building, and plaintiff had wired to defendant the half-year rent in the amount of RMB 55,000 Yuan, but as of the lawsuit, defendant never made the building available for plaintiff to use. Plaintiff then sought to recover from defendant the rent payment of RMB 55,000 Yuan.

Defendant argued that defendant signed the lease contract with Li Qian who represented plaintiff, and delivered the building to Li Qian after receiving RMB 5,000 Yuan deposit from Li Qian and RMB 55,000 Yuan rent payment from plaintiff, and therefore, there was no breach of contract on defendant side. Defendant then filed a counterclaim against plaintiff, asserting that plaintiff terminated the contract during the term of the contract without defendant’s consent, and then the termination constituted a breach of contract. In addition, defendant argued that during plaintiff’s use of the building, the door and windows of the building were all damaged, which cost defendant RMB 9,795.48 Yuan to repair, and therefore, defendant was entitled to the damage of RMB 36,000 Yuan plus RMB 9795.48 of repairing expenses.

To rebut defendant’s counterclaim, plaintiff asserted that plaintiff did not actually use the building, and Li Qian was not an employee of plaintiff nor did Li Qian have any agreement with plaintiff concerning the lease of the building. The RMB 55,000 Yuan rent was wired per the request of plaintiff’s local representative who had an oral agreement with defendant for leasing the said building for six months at RMB 110,000 Yuan per annum.

In the trial court, it was found that the lease agreement at issue was entered between Li Qian in the name of plaintiff and defendant, and then Li Qian paid deposit to defendant on behalf of plaintiff. Following the hearing, the trial court further found that after conclusion of the contract and payment of the deposit, plaintiff paid defendant part of the rent according to the lease contract, and Li Qian started using the building in the name of plaintiff. Based on the above finding, the trial court held that the conduct of both Li Qian and plaintiff in dealing with defendant was sufficient enough to make defendant to believe that Li Qian was authorized to represent defendant, and therefore, plaintiff should be responsible for the legal consequences of Li Qian’s conduct in the name of plaintiff.

The trial court also held that the lease agreement between Li Qian and defendant was legally concluded and valid with binding effect on the parties, and that during the performance of the contract, Li Qian asked for an early termination of the contract, but since Li Qian did not reach a consent with defendant in this regard, the contract should not be deemed as having been rescinded per Li Qian’s request for the termination. With regard to defendant, the trial court concluded that pursuant to the lease agreement, defendant was obligated to keep the building in good condition and was responsible for repairing the broken door and windows in a timely manner, and defendant’s failure to do so amounted to a breach of contract for which defendant should be held liable.

In its judgment, the trial court, pursuant to Articles 49, 107, 114 and 102 of the Contract Law of China, ordered plaintiff to pay defendant the damage of RMB 3,000 for breach of

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the contract, and dismissed plaintiff’s claims as well as other claims made by defendant. Plaintiff appealed to No. 2 Beijing Intermediate People’s Court alleging that the trial court erred in finding of the facts.

On appeal, the appellate court agrees with the trial court in the finding of Li Qian’s authority to represent plaintiff. The appellate court reasons that the facts of the case had a clear indication that Li Qian, though he might not actually be authorized, had an apparent authority to act on behalf of plaintiff. The apparent authority can be evidenced from the conducts of plaintiff: (a) Plaintiff wired to defendant RMB 55,000 Yuan as rent payment and the amount plus the deposit of RMB 5,000 Yuan Li Qian made to defendant matched the half rent of RMB 60,000 Yuan; (b) the building in question was used as plaintiff’s local store as well as a distribution center for plaintiff’s goods, and when Li Qian called local police reporting the damage of the windows of the building, he explicitly specified that the building was plaintiff’s store; and (c) Li Qian wrote to the legal representative of defendant to seek to terminate the contract and the letter was sent in the name of plaintiff. Those conducts constituted a legitimate ground on which defendant would believe that Li Qian was duly authorized by plaintiff.

Therefore, the appeal is denied and the judgment of trial court is affirmed.

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As of now, there is no separate law of agency in China, and the provisions that govern agency and agent-principal relationship are stipulated in the 1986 Civil Code. In the Civil Code, however, the apparent authority is not addressed. The determination of apparent authority is therefore basically an exercise of judicial discretion. The Swan Sports case exemplarily illustrated judicial acceptance of the concept of the apparent authority.

With respect to a legal person (a corporation or enterprise), its legal representative or person-in-charge is generally regarded as an agent fully authorized by and for the legal person unless a limited authorization is imposed by the charter of the legal person. A limited authorization would restrict the agent’s power to act on behalf of the legal person to the extent of the limitation.19 Of course, a common assertion is that the authority of the legal representative or person in charge as such for a legal person may only be exercised within the business scope of the legal person.20

If, however, the legal representative has exercised the representation beyond his or her authority, an issue that must be dealt with then will be whether such representation has any legal effect. In the past, the people’s courts normally regarded such representation invalid unless ratified by the

19The legal representative is defined in Article 38 of the 1986 Civil Code as the person who acts on behalf of the legal person in exercising its functions and powers in accordance with the law and articles of the association of the legal person.

20Under Article 43 of the 1986 Civil Code, an enterprise as legal person shall bear civil liability for the operational activities of its legal representatives and other personnel.