Asia IP

On April 24, China’s Supreme People’s Court issued a set of interpretations which could affect the way contract disputes involving intellectual property, and other business contracts, are resolved in China.

The Interpretations on Several Issues Concerning Application of the Contract Law of the People’s Republic of China (II), which took effect on May 13, apply to disputes in relation to contracts entered into after the Contract Law took effect and in respect of which no final appeal has been concluded as of the Effective Date, and permit courts to consider whether there has been a “significant change of circumstances” since the contract was signed.

Lawyers at Pinsent Masons in Beijing and Shanghai, writing in a June client newsletter, note that this principle was removed from China’s 1999 Contract Law from the superseded Economic Contract Law, with a view to limiting the discretionary power of the judges in determining contract disputes. “However, the removal of this principle had presented difficulty for courts in trying contract cases when a party’s failure to perform the contract was caused by a significant change of circumstances,” they wrote. “The current economic downturn has raised an additional challenge to the courts in determining contract disputes when there have been significant changes of circumstances which were not contemplated by the party at the signing of the contract.”

Effectively, the Pinsent Masons lawyers say, Article 26 gives the court power to intervene with the parties’ contractual arrangements and re-write into the contract rights and obligations not originally existing under the contract. For example, if a construction contract provides for a lump-sum fixed price, the Interpretations could potentially provide at least an arguable additional or alternative ground for the contractor to apply to the court to change the price on the basis that the circumstances leading to the fixed price have significantly changed.