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Key Points of the Civil Code Revision: An Expert Guide for Your Business

2020.06.16 QIN, Yu (Bill)、BAI, Lin、WANG, Shuning

On May 28, 2020, the Third Session of the Thirteenth National People’s Congress (“NPC”) adopted by vote the Civil Code of the People’s Republic of China, which is to take effect on 1 January 2021. The Civil Code is the first law to carry the title “code” in our country, and it is known as a declaration and guarantee for the protection of citizens’ civil rights. The Civil Code consists of 1,260 articles in seven parts, including General Part, Part on Rights in Rem, Part on Contracts, Part on Personality Rights, Part on Marriage and Family, Part on Inheritance, Part on Tort Liability, and supplementary provisions. It involves the inheritance and integration of the current laws and judicial interpretations such as General Provisions of the Civil Law, Property Law and Contract Law, and also embodies the reflection and reconstruction of some defects or legislative gaps in the current legal system by the legislator. In this article, we will focus on the major provisions under some parts of contracts, rights in Rem, personality rights and tort liability that have a relatively large impact on the general business activities of enterprises, by comparing the old and the new laws, and to introduce the new added provisions as well as the amendments to the existing legal provisions under the Civil Code that companies should pay attention to in their commercial activities.


I.Part on Contracts


A.Defining the Validity of Preliminary Agreements


  • Comparison of Provision


Art. 495, Civil Code

Art. 2, Judicial Interpretations on Sales Contracts

A purchase offer, purchase order, subscription book, or the like that the parties agree to contract within a certain time limit shall constitute a preliminary agreement. If one party fails to perform the obligation to contract as agreed in the preliminary agreement, the other party may request it to be liable for breach of the preliminary agreement.

Where both parties have signed preliminary agreements such as purchase offers, purchase orders, subscription books, letters of intent, and memorandums, and have agreed that a sales contract is to be concluded within a certain period of time, if one party does not perform the obligation of concluding a sales contract and the other party requests that it assumes liability for the breach of the preliminary agreements or demands the rescission of the preliminary agreements and claims compensation for damages, the people's court shall support such claims.


  • Key Takeaways


The preliminary agreement was previously mainly stipulated in the Interpretation of the Supreme People’s Court on Issues Concerning the Application of Law for the Trial of Cases of Disputes over Sales Contracts (Fa Shi [2012] No. 8) (“Judicial Interpretations on Sales Contracts”). The preliminary agreement was included in the Civil Code as a new provision this time, confirming the validity of the preliminary agreement, expanding the scope of the application of the preliminary agreement, and helping to clarify the legal relationship between the parties.


  • Practical Focus


In commercial activities such as equipment procurement, business cooperation, investment, and mergers and acquisitions, companies often participate in arrangements such as signing letters of intent, framework agreements, and so on. Before signing the corresponding documents, a company should first clarify whether it is to sign a non-binding consultation document or a valid preliminary agreement, and then proceed with the drafting of the specific clauses. After the signing of the preliminary agreement, considering that the breach of obligations under the preliminary agreement should bear the corresponding liability for breach of contract, a company should strengthen its awareness of fulfilling such an agreement. The question of whether the observing party has the right to require the violating party to continue to perform the preliminary agreement and then sign a subsequent formal contract after the violating party violates the preliminary agreement is not specified in the Civil Code. Therefore, whether the preliminary agreement can be required to continue to perform needs to be analyzed in practice in conjunction with the specific case situation.


B.Emphasizing the Description Obligation Under the Format Contract


  • Comparison of Provision


Art. 496, Civil Code

Art. 39, Contract Law

Standard terms are terms drawn up by one party in advance for repeated use and not negotiated with the other party at the time of contracting. Where standard terms are adopted for contracting, the party furnishing the standard terms shall define the rights and obligations between the parties abiding by the principle of fairness, so inform in a reasonable manner as to enable the other party to note the terms excluding or limiting its liability or otherwise related to the material interest of the other party, and explain the terms upon request of the other party. If the party furnishing the standard terms fails to perform the informing or explanation obligation, resulting in the other party failing to note or understand the terms in which it has a material interest, the other party may argue that the terms are not a part of the contract.

Where standard terms are adopted in concluding a contract, the party supplying the standard terms shall define the rights and obligations between the parties, abiding by the principle of fairness, and shall inform the other party to note the exclusion or restriction of its liabilities in a reasonable way, and shall explain the standard terms upon request by the other party. Standard terms are clauses that are prepared in advance for general and repeated use by one party, and which are not negotiated with the other party when the contract is concluded.


  • Key Takeaways


The Civil Code has absorbed the spirit of the Consumer Rights and Interests Protection Law (see Article 26 of the Consumer Rights and Interests Protection Law) in drafting the terms for the format contract, which further emphasizes the description obligations of the party providing the standard terms, and strengthens the protection of the party accepting the standard terms. Firstly, the article expands the scope of the description obligation. The scope of the description obligation of the party providing the standard terms stipulated in the Contract Law includes clauses that exempts or limits its liability, and Article 496, paragraph 2 of the Civil Code adds the “provision that has a material interest to the party that accepts the standard terms” on the basis of the Contract Law. Secondly, the legal consequences of failure to fulfill the description obligations are more favorable for the party accepting the standard terms. The Contract Law does not stipulate the legal consequences of failure to perform the description obligations. According to Article 9 of Interpretation II of the Supreme People’s Court of Several Issues concerning the Application of the Contract Law of the People’s Republic of China (Fa Shi [2009] No. 5) (“Judicial Interpretations II on Contract Law”), where the party providing the standard terms violates the obligation to provide prompting and explanation and causes the other party’s failure to notice the relevant clauses, the other party may claim to revoke such standard terms. Article 496, paragraph 2 of the Civil Code further stipulates that in this case, the party that accepts the standard terms may claim that such standard terms shall not be the content of the agreement. In addition, the Civil Code specifies the circumstances in which the standard terms shall be deemed invalid. According to Article 40 of the Contract Law, when standard terms are under the circumstances stipulated in Articles 52 and 53 of the Contract Law, or the party which supplies the standard terms exempts itself from its liabilities, increases the liabilities of the other party, and deprives the material rights of the other party, the terms shall be invalid. The Civil Code has enumerated three types of situations where the standard terms shall be deemed invalid under Article 497. According to the second situation, when the party furnishing the standard terms unreasonably excludes or limits its liability, aggravates the liability of the other party, or restricts the main rights of the other party, such terms shall be invalid. Compared with the provisions under the Contract Law, the Civil Code has added a situation where the party providing the standard terms reduces its liability and restricts the other party’s main rights, and “unreasonable” shall be a condition for determining such situations.


  • Practical Focus


In order to improve efficiency and ensure standardized operations, production and service companies often draw up various types of format contracts, and generally makes the counterparty pay attention to the price, performance period, risk warnings, after-sales obligations, civil liability and other terms that may have a significant interest to the counterparty by bolding the font and underlining the text in the format contract. In the context of the Civil Code clearly strengthening the protection of the party that accepts the standard terms, companies should pay more attention to the description obligations for the recipient to avoid possible disputes arising from the validity of the relevant standard terms.


C.Presumption of Ordinary Guarantee in Guarantee Agreement


  • Comparison of Provision


Art. 686 & 687, Civil Code

Art. 16 & 19, Guarantee Law

- Article 686: Suretyship shall be divided into ordinary suretyship and joint and several suretyship according to different methods. If the parties fail to agree on the method of suretyship in the contract of suretyship, or the agreement is not clear, the suretyship shall be treated as ordinary suretyship.

- Paragraph 1 of Article 687: Ordinary suretyship takes place where the parties agree in the contract of suretyship that the surety assumes suretyship liability when the debtor fails to perform the obligation.

- Article 16: There are two modalities of guarantee: (1) Ordinary guarantee; (2) Joint responsibility guarantee.

- Article 19: When there is no arrangement or there is an unclear arrangement on the modality of the guarantee, the debtor and the guarantor shall assume joint guarantee responsibility.


  • Key Takeaways


The Civil Code has changed the presumption rules for joint and several guarantee responsibilities stipulated in the Guarantee Law, and if the parties under the guarantee contract do not clearly stipulate the guarantee method, the presumed responsibility of the guarantor is changed from joint and several guarantee responsibility to ordinary guarantee responsibility. This amendment will, to a certain extent, reduce the burden of the guarantor. In addition, the Civil Code has made certain adjustments to the guarantor’s right to recover, the guarantor’s right to exclude the prelitigation demur right and the time limit for the commencement of litigation, etc., which requires special attention.


  • Practical Focus


According to Article 687 and 688 of the Civil Code, “ordinary suretyship” takes place where the parties agree in the contract of suretyship that the surety assumes suretyship liability when the debtor fails to perform the obligation, and “joint and several suretyship” takes place where the parties agree in the contract of suretyship that the surety and the debtor are jointly and severally liable for the obligation. The main difference between the above two kinds of responsibilities is whether the guarantor has the prelitigation demur right, that is, whether the guarantor has the “right to refuse to bear the guarantee responsibility to the creditor” before the disputes in the main contract have been solved by trial or arbitration procedures, and the debtor’s property is still unable to perform relevant debt after being enforced. In addition, the ordinary guarantee and the joint guarantee are different in the rules such as the start time of the guarantor’s performance of the guarantee obligations, the status of the lawsuit, and the start time of the limitation of action. It is recommended that when signing a guarantee contract (especially as a creditor), the company should focus on the guarantee method to avoid possible unfavorable situations if there is no agreement or if the agreement is unclear.


D.Adjusting the Definition of the Principle of Change of Circumstances


  • Comparison of Provision


Art. 533, Civil Code

Art. 26, Judicial Interpretations II on Contract Law

Where the basic conditions of a contract undergoes a material change unforeseeable by the parties at the time of contracting which is not a commercial risk after the formation of the contract, rendering the continuation of the performance of the contract unconscionable for either party, the adversely affected party may renegotiate with the other party; and if the renegotiation fails within a reasonable time limit, the party may request the people’s court or an arbitration institution to modify or terminate the contract. The people’s court or arbitration institution shall change or terminate the contract based on the actual circumstances of the case, in accordance with the principle of fairness.

Where any major change which is unforeseeable, is not a business risk and is not caused by a force majeure occurs after the formation of a contract, and if the continuous performance of the contract is obviously unfair to the other party or cannot realize the purposes of the contract and a party files a request for the modification or rescission of the contract with the people's court, the people's court shall decide whether to modify or rescind the contract under the principle of fairness and in light of the actualities of the case.


  • Key Takeaways


The principle of change of circumstances was previously stipulated in the Judicial Interpretations II on Contract Law. Relevant content of the judicial interpretation is clearly stated in the Civil Code this time, which makes the principle of change of circumstances formally established at the legal level. Different from the definition under the Judicial Interpretations II on Contract Law, the Civil Code deletes the prerequisite elements of “not caused by a force majeure”, and confirms that the principle of change of circumstances can be applied to force majeure events. In addition, an arbitration institution has been added to the Civil Code as one of the authorities authorized to confirm whether the principle of change of circumstances can be applied.


  • Practical Focus


In the context of the outbreak of the 2019 Novel Coronavirus Pneumonia Epidemic (“COVID-19”) at the beginning of this year, whether the principle of change of circumstances can be applied to force majeure events has been one of the hot topics in the industry in recent months. According to the original definition under the Judicial Interpretations II on Contract Law, the major changes that occurred after the signing of the contract shall not be caused by force majeure. This has led to the fact that some parties to the contract that would apparently be unfair due to the impact of COVID-19 cannot apply the principle of force majeure for exemption, nor can they apply the principle of change of circumstances to request change or rescind the contract to the court. This revision of the Civil Code is intended to resolve the aforementioned contradictions, which has practical significance, and the revision also provides a clearer basis for enterprises to resolve disputes caused by COVID-19.


E.Confirming the Validity of Contracts Involving Approval Obligations


  • Comparison of Provision


Art. 502 Para. 2, Civil Code

Art. 1, Judicial Interpretations I on Foreign Enterprises

With regard to contracts that are subject to approval as stipulated by relevant laws or administrative regulations, the provisions thereof shall be followed. If the approval and other procedures fail to be performed, precluding the contract from becoming effective, the validity of the terms of the obligation to apply for approval and related terms of the contract is not affected. If the party obligated to apply for approval and other procedures fails to perform the obligation, the other party may request it to be liable for breach of the obligation.

Where a contract concluded during the formation, modification, etc. of a foreign-funded enterprise does not take effect until it is approved by the foreign-funded enterprise examination and approval organ in accordance with the laws and administrative regulations, it shall become effective upon the date of approval. If the contract is not approved, the people's court shall determine the contract as ineffective. If any party concerned requests the court to determine the contract as invalid, it shall not be upheld by the people's court. If a contract as mentioned in the preceding paragraph is determined as ineffective because it is not approved, it does not affect the effectiveness of the clause on the parties' fulfillment of the obligation of obtaining approval and that of the relevant clauses set for such obligation in the contract.


  • Key Takeaways


Regarding determination of the validity of contracts with pre-approval requirements, Article 502 of the Civil Code inherits the position in Article 1, paragraph 2 of the Provisions of the Supreme People’s Court on Several Issues concerning the Trial of Disputes Involving Foreign-Funded Enterprises (I) (Fa Shi [2010] No. 9) (“Judicial Interpretations I on Foreign Enterprises”) that affirms the independence of the provisions of the approval obligation and related provisions, and clarifies that if the approval and other procedures fail to be performed, precluding the contract from becoming effective, the validity of the terms of the obligation to apply for approval and related terms of the contract shall not be affected. In addition, Article 81 of the Judicial Interpretations II on Contract Law defines the legal consequences of breach of the obligation to apply for approval as a liability for contracting fault, and the parties can therefore only claim compensation for the corresponding losses. However, the Civil Code stipulates that “if the party obligated to apply for approval and other procedures fails to perform the obligation, the other party may request it to be liable for breach of the obligation”. This essentially establishes the legal remedy for breach of the obligation of approval on the basis of liability for breach of contract, which will further protect the legitimate rights and interests of the parties.


  • Practical Focus


The business contract or investment contract signed by enterprises in commercial activities may require pre-approval by the government before such contract becomes effective. The recognition of the validity of the approval obligation and relevant terms in the Civil Code can effectively avoid the disputes that may be caused by the failure of the obligor to perform approval application related obligations in practice due to the validity of the contract.


F.Improving the Rules for Fulfillment to Third Parties; Welcoming New Rules for Third-party Liquidation and Debt Participation


  • Comparison of Provision


Art. 522 to Art. 524, Art. 552, Civil Code

Contract Law

- Article 522: Where the parties agree that the debtor shall perform the obligation to a third party, and the debtor fails to perform its obligations to such third party or the performance of the obligations is not in conformity with the agreement, the debtor shall be liable to the creditor for breach of contract. When the law requires or the parties agree that a third party may directly request the debtor to perform the obligation to it, if the third party fails to expressly refuse within a reasonable time limit, and the debtor fails to perform the obligation to the third party, or the performance of the obligation is not in conformity with the agreement, the third party may request the debtor to be liable for breach of contract; and the debtor may raise against the third party defenses against the creditor.

- Article 523: Where the parties agree that a third party performs the obligation to the creditor, and the third party fails to perform the obligation, or the performance is not in conformity with the agreement, the debtor shall be liable to the creditor for breach of contract.

- Article 524: Where a debtor fails to perform the debt, and a third party has a lawful interest in performing the debt, the third party shall have the right to perform the obligation to the creditor on its behalf, unless the nature of the debt, the parties, or the law requires that only the debtor may perform. After the creditor has accepted the performance from the third party, the obligation owed by the debtor to it shall be assigned to the third party, unless otherwise agreed by the debtor and the third party.

- Article 552: Where a third party and the debtor agree on its joining the debtor in the obligation and notify the creditor, or the third party notifies the creditor of its willingness to join the debtor in the obligation, and the creditor fails to explicitly refuse within a reasonable time limit, the creditor may request the third party, to the extent of the obligation that it is willing to assume, and the debtor to assume the obligation jointly and severally.

- Article 64: Where the parties agree that the obligor shall perform the obligations to a third party, and the obligor fails to perform its obligations to such third party or its performance of the obligations is not in conformity with the agreement, the obligor shall be liable to the obligee for breach of contract.

- There are no clear provisions under the Contract Law regarding debt participation and liquidation for third party beneficiary.


  • Key Takeaways


The provisions of the Civil Code on contracts involving third parties are, to a certain extent, breaking the “relativity” principle of contracts under Article 64 of the Contract Law, and clarifies that in a contract performed with a third party, the third party has the right to directly request the debtor to assume responsibility for breach of contract, which protects the interests of the third party. In addition, the Civil Code adds the third-party liquidation system under Article 524, which stipulates that where a debtor fails to perform the debt, and a third party has a lawful interest in performing the debt, the third party shall have the right to perform the obligation to the creditor on its behalf. The Civil Code also adds a third-party debt participation rule under Article 552, which provides a substantive legal basis for a third party to voluntarily join the legal relationship of the contract, become a party to the contract, and assume joint and several liability with the debtor to the creditor.


  • Practical Focus


Since the Civil Code clearly stipulates the legal relationship between the parties involved in third-party contracts, companies involved in the three situations in the aforementioned provisions in commercial activities, especially for the debt participation situations, should pay close attention, as the legal consequences of debt participation will be that the enterprise and the debtor will jointly assume the liability for repayment.


G.Welcoming the New Rules for Factoring Contracts


  • Comparison of Provision


Art. 761, Civil Code

Contract Law

A factoring contract is a contract by which an accounts receivable creditor assigns existing or future accounts receivable to a factor, who provides financial facilities, management or collection of accounts receivable, assurance of payment from accounts receivable debtors, and other services.

There is no specific provision for factoring contracts in the Contract Law.


  • Key Takeaways


Before the promulgation of the Civil Code, the provisions on factoring business were scattered in the general principles of international factoring, judicial interpretations, departmental regulations and other documents, and considering that the factoring contract is an unnamed contract, the court will generally analyze the issues in factoring contract disputes in accordance with the relevant provisions of the transfer of claims in the Contract Law. This caused a certain degree of difficulty for parties to determine the legal relationships, rights and obligations. The Civil Code stipulates the rules of factoring contracts in detail in Chapter 16 through nine clauses, including the definition of the factoring contract, the content and form of the factoring contract, the legal consequences of fictitious receivables, the obligation of the factor to indicate its identity, the effect of changing or terminating the basic transaction contract without justifiable reasons for the factor, factoring with recourse, factoring without recourse, the order of settlement of multiple factoring and the application of the transfer of creditor’s rights. Accordingly, the factoring contract has officially become a new type of typical contract in our country from an unnamed contract, which provides a legal basis for the development of factoring business and helps promote the healthy development of the industry.


  • Practical Focus


Factoring business is an important driving force for corporate receivables financing, which can promote corporate capital turnover and alleviate the difficulty of corporate financing. On the one hand, the Civil Code has established a system foundation for enterprises to standardize the factoring business from the legislative level; on the other hand, it has strengthened the role of using legal means to protect the rights and interests of enterprises.


II.Part on Rights in Rem


A.Providing Right of Recourse for Mortgage


  • Comparison of Provision


Art. 406, Civil Code

Art. 191, Property Law

The mortgagor may transfer the mortgaged property during the mortgage term. If it is otherwise agreed upon by the parties, their agreement shall prevail. A Mortgage is not affected if the mortgaged property is transferred. The mortgagor that transfers the mortgaged property shall notify the mortgagee in a timely manner. If the mortgagee is able to prove that the mortgage may be damaged due to the transfer of the mortgaged property, the mortgagee may request the mortgagor to pay off the debt with the proceeds obtained from such transfer to the mortgagee in advance or set aside the proceeds. The part of the proceeds obtained from the transfer exceeding the amount of claim shall belong to the mortgagor, and if the proceeds are insufficient to pay the debt, the shortfall shall be paid off by the debtor.

In case a mortgagor transfers a property under mortgage during the mortgage term upon consent of the mortgagee, the mortgagor shall pay off its debts to the mortgagee with the money incurred from the transfer in advance or submit the said money to a competent authority for keeping. The value exceeding the obligee’s rights shall belong to the mortgagor, and the gap shall be paid off by the obligor. A mortgagor shall not transfer a property under mortgage during the mortgage term without the mortgagee’s consent, unless the transferee pays off the debts on its behalf so as to eliminate the right to mortgage.


  • Key Takeaways


Allowing the transfer of collateral and granting the right of recourse for the mortgagee under Article 406 of the Civil Code is an important change to the existing Article 191 of the Property Law. According to the Civil Code, the transfer of collateral no longer requires the prior consent of the mortgagee, and the mortgagee’s mortgage right is not affected by the transfer of the collateral. This has changed the long-lasting rules in our country to protect the mortgagee by restricting the transfer of collateral and is more in line with the legal principles of the security rights. In addition, if the mortgagee is able to prove that a mortgage may be damaged due to the transfer of the mortgaged property, according to the Civil Code, the mortgagee may request the mortgagor to pay off the debt with the proceeds obtained from such transfer to the mortgagee in advance or set aside the proceeds. The part of the proceeds obtained from transfer exceeding the amount of claim shall belong to the mortgagor, and if the proceeds are insufficient to pay the debt, the shortfall shall be paid off by the debtor. This provision provides better protection for the interests of the mortgagee.


  • Practical Focus


Companies often encounter real estate mortgages and transfers in their financing, acquisitions and asset transactions. Keeping abreast of relevant mortgage laws and regulations helps companies better protect their rights and interests.


B.Including Future Property in the Scope of Guarantee


  • Comparison of Provision


Art. 396 & 440, Civil Code

Art. 181 & 223, Property Law

- Article 396: An enterprise, industrial and   commercial household, or agricultural producer or trader may mortgage its   existing and anticipated production equipment, raw materials, semi-finished   products, and products, and if the debtor fails to pay the due debt or falls   under any circumstance where mortgage shall be exercised as agreed upon by   the parties, the creditor shall have the priority of compensation made with   the movable determined as the mortgaged property.

- Article 440: The following rights that the   debtor or a third party is entitled to dispose of may be pledged: … (6)   Existing and anticipated accounts receivable.

- Article 181: Upon the written agreement between the parties concerned, an enterprise, individual industrial and commercial household or agricultural production operator may mortgage the manufacturing facilities, raw materials, semi-manufactured goods and products it has already owned or is going to own, and when the obligor fails to pay their due debts or any circumstance for realizing the right to mortgage as stipulated by the parties concerned occurs, the obligee shall be entitled to seek preferred payments from the movable properties that exist when the parties concerned stipulate to realize the right to mortgage.

- Article 223: The following rights which an obligor or third party has the right to dispose of may be pledged: … (6) Accounts receivable.


  • Key Takeaways


The adjustment of the provisions of the secured property in the Civil Code is worthy of attention. Firstly, Articles 400 and 427 of the Civil Code allow a general description of the name and quantity of the secured property in the security contract, without having to enumerate the basic information in details such as the name, the quantity, the quality and the condition of the secured property as required under the Property Law. Secondly, Article 440 of the Civil Code echoes the provisions of Article 2, paragraph 12 of the Measures for the Registration of the Pledge of Accounts Receivable that the right to request payment of accounts receivable should include existing and future monetary claims, and expands the range of pledgeable accounts receivable to “existing and anticipated” accounts receivable. According to this, the Civil Code  clearly reflects in two places that future property can be included in the scope of guarantees, that is, to allow “anticipated accounts receivable” to be pledged, and allow “existing and anticipated production equipment, raw materials, semi-finished products, and products” to be mortgaged.


  • Practical Focus


The state and local governments in recent years have been vigorously promoting enterprises to raise funds through pledged accounts receivable to enhance their liquidity. Since the outbreak of COVID-19 this year, in order to reduce the financing burden of enterprises and help enterprises to resume work and production, the state has also provided enterprises with preferential policies on the pledge of accounts receivable (for example, according to the Notice of the National Development and Reform Commission on Periodic Reduction and Exemption of Certain Credit Information Service Charges (Fa Gai Jia Ge [2020] No. 291), from March 1 to June 30, 2020, enterprises can be exempted from the charge of registration, change of registration and objection registration of accounts receivable). The timely tracking of the relevant provisions of the pledge registration of accounts receivable by companies will help companies better carry out their relevant financing business.


C.Welcome New Rules for the Priority Right of the Chattel Mortgagee over the Purchase Price of Goods


  • Comparison of Provision


Art. 416, Civil Code

Property Law

Where the principal claim secured by mortgage on a movable is the price of the mortgaged property, and mortgage registration is undergone within 10 days after the delivery of the subject matter, the mortgagee has the priority of compensation over other security interest holders of the buyer of the mortgaged property, except the lienor.

There are no relevant provisions under the Property Law.


  • Key Takeaways


The Civil Code, for the first time, stipulates the priority of mortgage on the purchase price of movable property in Article 416, which fills the gap in the provisions of the Property Law and protects the legitimate rights and interests of the seller of goods.


  • Practical Focus


The production process of a production enterprise usually involves a large amount of goods. When the enterprise is the seller and has signed the contract for the sale of goods with a buyer, after the buyer mortgages the movable property to the seller as a guarantee for the price, and then sets up another guarantee for another creditor and performs the relevant publicity procedures for the movable property, the seller, as the guarantor to be announced later, is obviously at a disadvantage. The provisions of the Civil Code as mentioned above have solved this contradiction to a certain extent. In addition, the provisions under this article are of some help to the establishment of floating mortgages on the equipment, production materials and other movable assets of enterprises.


III.Part on Personality Rights


A.Clarifying the Scope of Personal Information and the Protection of Personal Information


  • Comparison of Provision


Art. 1034 & 1035, Civil Code

General Provisions of the Civil Law & Cybersecurity Law

- Article 1034: The personal information of natural persons is protected by law. Personal information is various information recorded electronically or in other forms that can identify a specific natural person separately or in combination with other information, including a natural person's name, date of birth, identity card number, biological recognition information, address, telephone number, e-mail address, health information, and whereabouts information, among others. Private information in personal information shall be governed by the provisions on privacy rights; where there are no provisions, the provisions on the protection of personal information shall apply.

- Article 1035: The personal information of a natural person shall be handled under the principles of lawfulness, justification and necessity, shall not be excessively handled, and shall meet the following conditions: (1) With the consent of the natural person or their guardian, unless as otherwise prescribed by laws and administrative regulations. (2) The rules for publicly handling information. (3) Expressly indicating the purpose, method and scope of handling information. (4) Not violating the provisions of the laws or administrative regulations or the agreement between both parties. The handling of personal information includes the collection, storage, use, handling, transmission, provision, and disclosure, among others, of personal information.

- Art. 111, General Provisions of the Civil Law: The personal information of a natural person shall be protected by law. Any organization or individual needing to obtain the personal information of other persons shall legally obtain and ensure the security of such information, and shall not illegally collect, use, process, or transmit the personal information of other persons, nor illegally buy, sell, provide, or publish the personal information of other persons.

- Art. 76 Para. 5, Cybersecurity Law: “Personal information” means all kinds of information recorded in electronic or other forms, which can be used, independently or in combination with other information, to identify a natural person's personal identity, including but not limited to the natural person's name, date of birth, identity certificate number, biology-identified personal information, address and telephone number.



  • Key Takeaways


The Civil Code separates the personality rights into a single part and specifically stipulates the right to privacy and protection of personal information through Chapter 6, reflecting the legislator’s emphasis on citizens’ privacy and personal information. The definition of personal information in Article 1034 of the Civil Code combines the principles of the General Provisions of the Civil Law and the Cybersecurity Law, and clarifies that personal information refers to “various information recorded electronically or in other forms that can identify a specific natural person separately or in combination with other information”. The e-mail address, health information and whereabouts information are included in the scope of protection of personal information. Articles 1035 and 1036 clarify the principles and conditions to be followed when processing personal information, and the exemption grounds for processing personal information. According to the work report of the NPC Standing Committee this year3, the “Personal Information Protection Law” and “Data Security Law” have been incorporated into the legislative plan and the progress of the introduction of special laws on personal information and data protection is expected to accelerate. In the context of the rapid development of big data, cloud computing, AI and other technologies, this will be of great significance for establishing a comprehensive personal information protection and compliance system as soon as possible and strengthening the protection of personal information rights.


  • Practical Focus


According to the Civil Code, if an enterprise needs to collect the personal information of its employees in its business activities, even if the relevant information does not constitute the employee’s private information, it should also comply with the principles of lawfulness, justification and necessity under Article 1035 of the Civil Code, and such collection should be agreed to by the employees. In addition, an enterprise shall have the obligation to ensure the safety of an employee’s personal information. When processing the collected employee information, the enterprise shall not disclose or tamper with any personal information collected or stored, or illegally provide such information to any other person (except the information through which the specific individual cannot be identified after processing and which cannot be restored). This will put forward higher requirements for the enterprise to properly preserve employee personal information in business activities, improve employee information management rules, and pay attention to information desensitization when using employee information.


B.Clarifying the Company’s Obligation to Prevent and Stop Sexual Harassment


  • Comparison of Provision


Art. 1010, Civil Code

Art. 11, Special Rules on the Labor Protection of Female Employees

n the event of sexual harassment against another person by words, character, images, or physical acts, the victim has the right to request the mitigator to assume civil liability according to the law. Bodies, enterprises, schools and other entities shall take reasonable measures for the prevention, acceptance of complaints, investigation and handling, so as to prevent and stop sexual harassment conducted by violators by making use of their powers and affiliation relationships.

Employers shall prevent and prohibit the sexual harassment of female employees in their workplace.


  • Key Takeaways


The provisions on sexual harassment in our country were previously distributed in the Criminal Law, the Law on the Protection of Women’s Rights and Interests, and the Special Rules on the Labor Protection of Female Employees, which mainly emphasized the prohibition of sexual harassment against women. The Civil Code replaces the expression “women” with “another person” and expands the scope of sexual harassment objects between the same sex and the opposite sex. In addition, the Civil Code stipulates that bodies, enterprises, schools and other entities have the obligation to prevent and cease sexual harassment and shall take reasonable measures of prevention, the acceptance of complaints, investigation and handling, which strengthens the responsibilities of bodies, enterprises and schools.


  • Practical Focus


It is recommended that enterprises should improve the rules and regulations related to sexual harassment, internal compliance systems, employee manuals, etc., as well as the handling mechanisms for sexual harassment in accordance with the requirements of the Civil Code, to effectively protect the interests of employees. Otherwise, if the enterprise does not take reasonable measures of prevention, the acceptance of complaints, investigation etc., it may need to bear corresponding responsibilities.


IV.Part on Tort Liability


A.Welcoming New Rules for Punishment Compensation for Ecological Environment Infringement, Environmental Restoration Responsibility and Compensation Systems


  • Comparison of Provision


Art. 1232 to Art. 1235, Civil Code

Tort Law

- Article 1232: Where a tortfeasor violates the provisions issued by the state and causes environmental pollution or ecological damage, resulting in serious consequences, the victim shall have the right to claim corresponding punitive compensation.

- Article 1234: Where a violation of the provisions issued by the state causes harm to the ecology and environment, and the ecology and environment are capable of remediation, the authority specified by the state or the organization specified by law shall have the right to require the tortfeasor to assume the liability for remediation within a reasonable time limit. If the tortfeasor fails to do so, the authority specified by the state or the organization specified by law may conduct remediation by itself or by entrusting others at the expense of the tortfeasor.

- Article 1235: Where a violation of the provisions issued by the state causes harm to the ecology and environment, the authority specified by the state or the organization specified by law shall have the right to require the tortfeasor to make compensation for the following: (1) The loss resulting from the privation of service functions from the time when damage is caused to the ecology and environment to the completion of remediation. (2) The loss resulting from permanent damage to the ecological and environmental functions. (3) Expenses of investigation, authentication, and assessment of ecological and environmental damage. (4) Expenses of pollution removal and ecological and environmental remediation. (5) Reasonable expenses incurred to prevent the occurrence and aggravation of damage.


- The Tort Law does not clearly stipulate that punitive damages can be applied for ecological environment infringement.

- The current law does not clearly stipulate the system of environmental restoration responsibility and environmental compensation.


  • Key Takeaways


The Civil Code, for the first time, stipulates that punitive damages will be applied to infringements that intentionally pollute the environment and damage the ecology, which is a breakthrough in the existing law. However, the specific scope of the amount of punitive damages has not been mentioned in the Civil Code and still needs to be further clarified by the laws. The content of the environmental restoration obligation and environmental compensation liability of the infringer was previously mainly stipulated in some judicial interpretations (for example, Article 114 and Article 125 of Several Provisions of the Supreme People’s Court on the Trial of Cases on Compensation for Damage to the Ecological Environment; Article 196 of Interpretation of the Supreme People’s Court on Several Issues concerning the Application of Law in the Conduct of Environmental Civil Public Interest Litigations). The Civil Code clearly gives the authority specified by the state or the organization specified by law the right to claim compensation and the legal right to request the infringer to repair the ecological environment, providing a substantive legal basis for environmental public interest relief.


  • Practical Focus


With the continual strengthening of environmental governance in our country, and after the effect of the Civil Code, infringers who deliberately damage the environment will be held accountable with the strictest punitive damages. This will also provide a powerful legal guarantee for authorities with regulatory responsibilities when they supervise enterprises and file corresponding environmental compensation or public interest litigation. Enterprises should pay more attention to environmental compliance in the production and construction process to avoid unnecessary civil, administrative and even criminal liability.


B.Applying Punitive Damage Rules to Violations of Intellectual Property Rights


  • Comparison of Provision


Art. 1185, Civil Code

Art. 63 Para. 1, Trademark Law

Where any harm caused intentionally by a tort to the intellectual property rights of another person has serious circumstances, the victim of the tort shall have the right to request corresponding punitive damages.

The amount of damages for infringement upon the right to exclusively use a registered trademark shall be determined according to the actual losses suffered by the rights holder from the infringement; where it is difficult to determine the amount of actual losses, the amount of damages may be determined according to the benefits acquired by the infringer from the infringement; where it is difficult to determine the rights holder's losses or the benefits acquired by the infringer, the amount of damages may be a reasonable multiple of the royalties. If the infringement is committed in bad faith with serious circumstances, the amount of damages shall be the amount, but not more than five times the amount, determined in the aforesaid method. The amount of damages shall include reasonable expenses of the rights holder for stopping the infringement.


  • Key Takeaways


On November 24, 2019, the General Office of the CPC Central Committee and the General Office of the State Council issued the Opinions on Strengthening the Protection of Intellectual Property Rights, which pointed out that “the establishment of a punitive damage system for infringement of patents and copyrights shall be quickened. The upper limit of statutory compensation for infringement shall be raised significantly, and the compensation for damages shall be increased”. Under such a policy orientation, the Civil Code has formally established unified general legal rules for punitive damages infringing intellectual property rights in Article 1185, which has raised the legislative level of intellectual property protection. The country has only introduced a punitive compensation mechanism in Article 63 of the Trademark Law for malicious infringement of trademark exclusive rights and incorporated punitive damages into the disciplinary measures for malicious violations of trade secrets in Article 17, paragraph 37 of the Anti-Unfair Competition Law. At present, the revised drafts of the Patent Law and the Copyright Law have not been formally released, but judging from the published draft amendments, punitive damages will also apply to acts of intentional infringement of patent rights and copyrights.


  • Practical Focus


Ways to avoid the risk whereby an enterprise may infringe the intellectual property rights of others in the course of business operations and how to prevent the risk that the enterprise’s own intellectual property rights are infringed by others due to loopholes in its own management system are important components of the establishing of an enterprise’s intellectual property compliance system. After the establishment of general rules on punitive damages to intellectual property rights, the cost of an infringement of intellectual property rights by infringers will be greatly increased, and the consequences of infringement will be more serious. This requires the management of the company to increase its emphasis on the ability to effectively protect intellectual property rights and to prevent risks.


C.Bearing Necessary Expenses of  Infringed Persons When Recalling  Defective Products


  • Comparison of Provision


Art. 1206, Civil Code

Art. 46, Tort Law

Where any defect of a product is found after the product is put into circulation, the manufacturer or seller shall take such remedial measures as ceasing sale, warning and recall in a timely manner; and the manufacturer or seller who fails to take remedial measures in a timely manner or take sufficient and effective measures and has caused the aggravation of any harm, shall also assume the tort liability for the aggravation. Where recall measures are taken in accordance with the preceding paragraph, the manufacturer or seller shall bear the necessary expenses incurred by the victim.

Where any defect of a product is found after the product is put into circulation, the manufacturer or seller shall take such remedial measures as warning and recall in a timely manner. The manufacturer or seller who fails to take remedial measures in a timely manner or take sufficient and effective measures and has caused any harm, shall assume the tort liability.


  • Key Takeaways


On the basis of the existing Tort Law, the Civil Code adds a remedy of “ceasing sale” for defective products, and adds a rule that the necessary costs incurred by the infringer in the recall of defective products shall be borne by the producer and seller. This amendment improves the recall system for defective products and strengthens the protection of consumer rights.


  • Practical Focus


In the context of the increasingly effective system for recalling defective products in regulations such as the Civil Code and the Interim Provisions on the Administration of Recall of Consumer Goods issued by the State Administration for Market Regulation on November 21, 2019 and effective on January 1, 2020, production enterprises should strengthen their control of product quality to avoid adversely affecting their operations due to product problems.


V.Conclusion


After the implementation of the Civil Code next year, the country’s civil rights protection will officially enter the era of “code”. The important amendments of the Civil Code and its improvement of the existing laws and regulations are not limited to the foregoing. We hereby only share several key points that we believe will have a great impact on an enterprise. We will, according to specific needs, carry out in-depth research to provide targeted services for an enterprise.


1.Article 8: After the formation of a contract which does not become effective until it is approved or registered under a relevant law or administrative regulation, if the party which has the obligation to apply for going through the approval or registration formalities fails to apply for approval or registration under the relevant law or contractual provisions, such a failure shall fall within the scope of “any other act in violation of the principle of good faith”, and the people’s court may, as the case may be and upon the request of the opposite party, rule that the opposite party shall go through the relevant formalities by itself; however, the other party shall be liable for compensating the opposite party for the expenses incurred thereof and the losses actually caused to the opposite party.

2.Article 2: For the purposes of these Measures, “accounts receivable” means the rights obtained by the rights holder to require the obligor to make payment for certain goods, services or facilities provided and other legal claims for payment, including existing and future pecuniary claims, but excluding claims for payment arising from commercial papers or other negotiable securities and claims for payment prohibited from assignment by any law or administrative regulation.

3.See the Beijing News dated May 25, 2020 (https://baijiahao.baidu.com/s?id=1667648951079014119&wfr=spider&for=pc).

4.Article 11: Where the defendant pollutes the environment and destroys the ecology in violation of any law or regulation, the people's court shall, according to the plaintiff's claim and specific case circumstances, reasonably render a judgment on the defendant’s civil liability for restoring the ecological environment, compensating for the loss, ceasing the infringement, removing the obstruction, eliminating the danger, and extending a formal apology, among others.

5.Article 12: Where the damaged ecological environment can be restored, the people’s court shall, in accordance with the law, render a judgment that the defendant shall assume the restoration liability, and at the same time, determine the ecological environment restoration expenses that the defendant shall bear when it fails to perform the restoration obligation. The ecological environment restoration expenses include the expenses of making and implementing the restoration plan, the expenses of monitoring and supervision during the restoration period, the acceptance check expenses after the completion of restoration, and the expenses for the post-assessment of restoration effects, among others. Where the plaintiff requests the defendant's compensation for damage to the service function from the period when the ecological environment is damaged to the completion of restoration, the people's court shall render a judgment according to the specific case circumstances.

6.Article 19: Where, for the purpose of preventing the occurrence and enlargement of damage to the ecological environment, the plaintiff requests the defendant to cease the tortious act, remove the obstruction, and eliminate the danger, the people’s court may support such a request in accordance with the law. Where the plaintiff requests the defendant to assume the expenses incurred for taking reasonable prevention and disposal measures so as to cease the tortious act, remove the obstruction and eliminate the danger, the people's court may support such a request in accordance with the law.

7.Article 17, paragraph 3: The amount of compensation for the damage caused to a business by any act of unfair competition shall be determined as per the actual loss of the business incurred for the infringement or if it is difficult to calculate the actual loss, as per the benefits acquired by the tortfeasor from the infringement. If a business infringes upon a trade secret in bad faith with serious circumstances, the amount of compensation may be determined to be more than one time but not more than five times the amount determined by the aforesaid method. The amount of compensation shall also include reasonable disbursements made by the business to prevent the infringement.

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