Part Four Security Interests
Chapter XVI General Rules
Article 386
Where a debtor fails to perform his obligations due, or any event upon which an security interest is to be enforced as agreed upon by the parties occurs, the person entitled to the security interest has priority to be paid from the collateral in accordance with law, unless otherwise provided by law.
Article 387
Where a creditor needs to secure his claims in a civil activity such as lending, buying and selling, and the like, he may create a security interest in accordance with the provisions of this Code and other laws.
Where a third person provides security to the creditor for the debtor, the debtor may be requested to provide a counter-security. Counter-security shall be governed by the provisions of this Code and other laws.
Article 388
To create a security interest, a security contract shall be entered into in accordance with the provisions of this Code and other laws. Security contracts include mortgage contracts, pledge contracts, and other contracts with a function of security. A security contract is a contract secondary to the principal contract with the principal claims and obligations. Where the principal contract is void, the security contract is also void, unless otherwise provided by law.
Where a security contract is determined to be void, if the debtor, the security provider, and the creditor are at fault, they shall each bear civil liability in proportion to their fault.
Article 389
Unless otherwise agreed by the parties, the scope covered by a security interest includes the principal claim and its interests based on the principal contract, liquidated damages, compensatory damages, and the expenses arising from safekeeping the collateral and enforcing the security interests.
Article 390
Where a collateral is destructed, damaged, or lost, or is expropriated during the secured period, the person entitled to a security interest has priority to be paid from the insurance payment, compensation, or indemnity received on the collateral. Where the collateral is destructed, damaged, or lost, or is expropriated prior to the due date of performance of the secured claim, the insurance payment, compensation, or indemnity may also be placed in escrow.
Article 391
Where a third person provides security and the creditor allows the debtor to transfer all or part of the secured obligations without the third person’s written consent, the security provider is no longer liable for securing the part of the obligations so transferred.
Article 392
Where a claim is secured by both a collateral and a surety, and the debtor fails to perform his obligations due or any event upon which a security interest is to be enforced as agreed upon by the parties occurs, the creditor shall enforce the claim in accordance with the agreement. Where there is no agreement or the agreement is unclear, if the collateral is provided by the debtor, the creditor shall first enforce the claim against the collateral, and if the collateral is provided by a third person, the creditor may elect to enforce the claim against the collateral or request the surety to assume liability. After the third person who provides security has assumed such liability, he has the right of indemnification against the debtor.
Article 393
A security interest is extinguished under any of the following circumstances:
(1) the claim under the principal contract is extinguished;
(2) the security interest is enforced;
(3) the creditor waives his security interest; or
(4) there exists any other circumstance in which security interest is extinguished as provided by law.
Chapter XVII Mortgage
Section 1 General Mortgage
Article 394
Where a debtor or a third person, in order to secure the performance of an obligation, mortgages his property to the creditor without relinquishing the possession of the property, the creditor has priority to be paid from the collateral if the debtor fails to perform his obligation due or an event upon the occurrence of which the security interest in the collateral is to be enforced as agreed by the parties occurs.
The debtor or the third person as specified in the preceding paragraph is the mortgagor, the creditor is the mortgagee, and the collateral mortgaged to secure the claim is the mortgaged property.
Article 395
The following property, which the debtor or a third person is entitled to dispose of, may be mortgaged:
(1) buildings and other things attached to the land;
(2) the right to use a lot of land for construction purposes;
(3) the right to use the sea areas;
(4) production equipment, raw materials, work in process, and finished products;
(5) buildings, vessels, and aircraft under construction;
(6) vehicles for transport; and
(7) other property not prohibited by laws or administrative regulations from being mortgaged.
A mortgagor may mortgage the property listed in the preceding paragraph concurrently.
Article 396
An enterprise, an individual-run industrial and commercial household, or an agricultural production operator may mortgage their production equipment, raw materials, work in process, and finished products that they currently own or thereafter acquired, and if the debtor fails to perform his obligations due or any event upon which a security interest in the mortgaged property is to be enforced as agreed by the parties occurs, the creditor has priority to be paid from the movable property determined at the time when the mortgaged property is ascertained.
Article 397
Where a building is mortgaged, the right to use the lot of land in the area occupied by the building for construction purposes shall be mortgaged concomitantly.
Where a right to use a lot of land for construction purposes is mortgaged, any building on the lot of land shall be mortgaged concomitantly.
Where a mortgagor fails to concomitantly mortgage the property as provided in the preceding paragraph, the unmortgaged property in question shall be deemed to be concomitantly mortgaged.
Article 398
A right to use a lot of land for construction purposes of a township or village enterprise may not be mortgaged separately. Where a factory premise or any other building of a township or village enterprise is mortgaged, the right to use the lot of land in the area occupied by the building for construction purposes shall be concomitantly mortgaged.
Article 399
The following property may not be mortgaged:
(1) land ownership;
(2) the right to use the land owned by a collective, such as house sites, land and hills retained for household use, unless it may be mortgaged as provided by law;
(3) educational facilities, medical and health facilities, and other public welfare facilities of non-profit legal persons established for public welfare purposes, such as schools, kindergartens, and medical institutions;
(4) property of which the ownership or right to the use is unclear or disputed;
(5) property that has been seized, detained, or placed under custody in accordance with law; and
(6) other property that may not be mortgaged as provided by laws or administrative regulations.
Article 400
To create a mortgage, the parties shall enter into a mortgage contract in writing. A mortgage contract generally contains the following terms:
(1) the type and amount of the secured claim;
(2) the term during which the debtor shall perform obligations;
(3) such particulars as the name and quantity of the mortgaged property; and
(4) the scope of the security interest covered.
Article 401
Where, prior to the due date of performance of an obligation, the mortgagee reaches an agreement with the mortgagor under which the mortgaged property belongs to the creditor in the event that the debtor fails to perform the obligation due, the mortgagee, regardless, may only have priority to be paid from the mortgaged property in accordance with law.
Article 402
To create a mortgage on the property as specified in Subparagraphs
(1) through
(3) of the first paragraph of Article 395, or on the building under construction as specified in Subparagraph
(5) of the first paragraph of this Code, registration shall be made for the mortgage. The mortgage shall be created upon registration.
Article 403
A mortgage on movable property shall be created at the time when the mortgage contract enters into effect; without registration, such a mortgage may not be asserted against a bona fide third person.
Article 404
A mortgage on movable property may not be asserted against a buyer who has paid a reasonable purchase price and acquired the mortgaged property in the ordinary course of business.
Article 405
Where a mortgaged property has been let to and possessed by another person prior to creation of the mortgage, the lease relationship shall not be affected by the mortgage.
Article 406
A mortgagor may transfer the mortgaged property to another person during the term of the mortgage unless otherwise agreed by the parties. The transfer of the mortgaged property shall not affect the mortgage.
A mortgagor who transfers the mortgaged property to another person shall notify the mortgagee in a timely manner. The mortgagee may request the mortgagor to apply the proceeds of the transfer to pay off the obligation before it is due, or place such proceeds in escrow where he may establish that the transfer of the mortgaged property may impair his right to the mortgage. The portion of the proceeds obtained from the transfer in excess of the amount of the obligation owed shall belong to the mortgagor, while any deficiency shall be satisfied by the debtor.
Article 407
A mortgage may not be transferred separately from the underlying claim or be used as security for another claim. Where a claim is transferred, the mortgage securing the claim shall be transferred concomitantly with it, unless otherwise provided by law or agreed by the parties.
Article 408
Where an act of a mortgagor suffices to reduce the value of the mortgaged property, the mortgagee is entitled to request the mortgagor to refrain from performing such an act. Where the value of the mortgaged property is reduced, the mortgagee is entitled to request the mortgagor to restore its value or provide additional security to the extent of the reduced value. Where the mortgagor neither restores the original value of the mortgaged property, nor provides additional security therefor, the mortgagee is entitled to request the debtor to pay off the debt before it is due.
Article 409
A mortgagee may waive his right to the mortgage, or waive his priority order in the line of the mortgagees. A mortgagee and the mortgagor may reach an agreement to change such things as the mortgagee’s priority order in the line of the mortgagees and the amount of the secured claim, provided that any change to the mortgage may not adversely affect the other mortgagees without their written consent.
Where a debtor creates a mortgage on his own property, and the mortgagee waives his right to the mortgage and his priority order in the line of mortgagees, or changes the mortgage, the other security providers shall be exempted from the security liability to the extent of the rights and interests of the mortgagee that are forfeited owing to the waiver of his priority to be paid from the mortgaged property, unless the other security providers are committed to still provide security.
Article 410
Where a debtor fails to perform his obligation due or an event upon which a mortgage is to be enforced as agreed upon by the parties occurs, the mortgagee may, upon agreement with the mortgagor, have the priority right to appraise and accept the mortgaged property, or apply the proceeds obtained from auction or sale of the mortgaged property to satisfy his claim against the mortgagor. Where the agreement is detrimental to the interests of other creditors, the other creditors may request the people’s court to rescind the agreement.
Where a mortgagee and a mortgagor fail to reach an agreement on the methods of enforcing the mortgage, the mortgagee may request the people’s court to have the mortgaged property sold at auction or in a sale.
The appraisal or sale of the mortgaged property shall be based on the market price thereof.
Article 411
Where a mortgage is created in accordance with the provisions of Article 396 of this Code, the mortgaged property shall be ascertained at the time when one of the following circumstances occurs:
(1) the claim is not satisfied upon expiration of the term of performance of the obligation;
(2) the mortgagor is declared bankrupt or dissolved;
(3) an event upon which the mortgage is to be enforced as agreed upon by the parties occurs; or
(4) any other circumstance that seriously affects the enforcement of the claim.
Article 412
Where a debtor fails to perform his obligation due or an event upon the occurrence of which the mortgage is to be enforced as agreed upon by the parties occurs, resulting in the seizure of the mortgaged property by the people’s court in accordance with law, the mortgagee is entitled to collect the natural fruits or legal proceeds accrued from the mortgaged property as of the date of the seizure, unless the mortgagee fails to notify the person who is obligated to pay off the legal proceeds.
The fruits or proceeds as specified in the preceding paragraph shall first be applied to offset the expenses of collecting them.
Article 413
Where the appraised value of a mortgaged property or the proceeds obtained from auction or sale of it is in excess of the amount of the obligation owed, the excessive portion shall belong to the mortgagor, while any deficiency shall be satisfied by the debtor.
Article 414
Where a property is mortgaged to two or more creditors, the proceeds obtained from auction or sale of the mortgaged property shall be applied in accordance with the following provisions:
(1) where the mortgages have all been registered, the order of payment is based on the priority in time of registration;
(2) a registered mortgage has priority over an unregistered mortgage to be paid; and，
(3) where none of the mortgages are registered, payment shall be made on a prorata basis against the claims.
The preceding paragraph shall be applied mutatis mutandis with regard to the priority order of payment for other security interests that are registrable.
Article 415
Where both a mortgage and a pledge are created on the same property, the priority order of payment with the proceeds obtained from auction or sale of the property shall be based on the priority in time of registration and delivery of the property.
Article 416
Where a principal claim secured by a mortgage on movable property is the purchase price of the mortgaged property, and registration for the mortgage is made within 10 days after delivery of the property, the mortgagee has the priority to be paid over the other persons, other than a lienholder, who have security interests thereon in relation to the purchaser of the mortgaged property.
Article 417
Where a right to use a lot of land for construction purposes is mortgaged, any newly added buildings on the lot of land are not part of the mortgaged property. Upon enforcement of the mortgage on the right to use the lot of land for construction purposes, the newly added buildings on such land shall be disposed of concomitantly with the right to use such land for construction purposes, provided that the mortgagee has no priority to be paid from the proceeds obtained from disposition of the newly added buildings.
Article 418
Where a right to use a lot of land owned by a collective is mortgaged in accordance with law, the nature of the ownership and the purpose of use of the land may not be altered without going through statutory procedures after the mortgage is enforced.
Article 419
A mortgagee shall exercise his right to mortgage within the limitation period for claiming against the principal obligation; otherwise no protection may be provided by the people’s court.
Section 2 Maximum Mortgage for Floating Claims
Article 420
Where a debtor or a third person provides a collateral for future claims that will arise consecutively within a certain period of time to secure performance of the obligations, if the debtor fails to perform an obligation due or an event upon which such a mortgage is to be enforced as agreed upon by the parties occurs, the mortgagee has the priority to be paid from the mortgaged property up to the maximum amount of his claim.
A claim that exists prior to the creation of the maximum mortgage for floating claims may, upon consent of the parties, be included in the claims secured by such a mortgage.
Article 421
Before the claims secured by the maximum mortgage for floating claims are ascertained, where part of the claims is transferred, the mortgage may not be transferred unless otherwise agreed by the parties.
Article 422
Before the claims secured by a maximum mortgage for floating claims are ascertained, the mortgagee and the mortgagor may change by agreement the period of time for the ascertainment of the claims, the scope of the claims, and the maximum amount of the claims, provided that such changes may not adversely affect other mortgagees.
Article 423
The claims of the mortgagee are ascertained under one of the following circumstances:
(1) where the agreed period of time for the claims to be ascertained expires;
(2) where there is no agreement on the period of time for the claims to be ascertained or the agreement is unclear , and the mortgagee or the mortgagor requests for ascertainment of the claims after the lapse of two years from the date of the creation of the mortgage;
(3) where it is impossible for a new claim to arise;
(4) where the mortgagee knows or should have known that the mortgaged property has been seized or detained;
(5) where the debtor or the mortgagor is declared bankrupt or dissolved; or
(6) any other circumstance under which the claims are to be ascertained as provided by law.
Article 424
In addition to the provisions of this Section, the relevant provisions of Section 1 of this Chapter shall be applied to the maximum mortgage for floating claims.
Chapter XVIII Pledge
Section 1Pledge in Movable Property
Article 425
Where a debtor or a third person pledges his movable property to the creditor for possession in order to secure the performance of an obligation, if the debtor fails to perform the obligation due or an event upon the occurrence of which the pledge is to be enforced as agreed upon by the parties occurs, the creditor has priority to be paid from the movable property.
The debtor or third person as specified in the preceding paragraph is the pledgor, the creditor is the pledgee, and the movable property delivered is the pledged property .
Article 426 Movable property may not be pledged where its transfer is prohibited by laws or administrative regulations.
Article 427
To create a pledge, the parties shall enter into a pledge contract in writing. A pledge contract generally contains the following clauses:
(1) the type and amount of the secured claim;
(2) the term for the debtor to perform the obligation;
(3) such particulars as the name and quantity of the pledged property;
(4) the scope of the security covered; and
(5) the time for and the mode of the delivery of the pledged property.
Article 428
Where, prior to the due date of performance of an obligation, the pledgee reaches an agreement with the pledgor under which the pledged property belongs to the creditor in the event that the debtor fails to perform the obligation due, the pledgee, regardless, may only have priority to be paid from the pledged property in accordance with law.
Article 429
A pledge is created upon delivery of the pledged property by the pledgor.
Article 430
A pledgee has the right to collect the fruits and proceeds accrued from the pledged property unless otherwise agreed in the contract.The fruits and proceeds as specified in the preceding paragraph shall first be applied to offset the expenses of collection of them.
Article 431
A pledgee who, during the effective period of the pledge, uses or disposes of the pledged property without the consent of the pledgor and thus causes damage to the latter shall be liable for compensation.
Article 432
A pledgee is obligated to well keep the pledged property, and shall be liable for compensation where the pledged property is destructed, damaged, or lost due to his improper custody.
Where the pledgee’s act is likely to cause the pledged property to be destructed, damaged, or lost, the pledgor may request the pledgee to place the pledged property in escrow, or request the pledgee to discharge the obligation before it is due and return the pledged property.
Article 433
Where, due to a cause the pledgee is not responsible for, the pledged property is likely to be damaged or significantly diminished in value which suffices to jeopardize the pledgee’s rights, the pledgee has the right to request the pledgor to provide additional security; where the pledgor fails to do so, the pledgee may have the pledged property sold at auction or in a sale and may, by agreement with the pledgor, apply the proceeds obtained from the auction or sale to discharge the obligation before it is due or place such proceeds in escrow.
Article 434
A pledgee shall be liable for compensation where he, during the effective period of the pledge, repledges the pledged property without the consent of the pledgor to a third person and thus causes destruction, damage, or loss to the pledged property.
Article 435
A pledgee may waive his right to the pledge. Where a debtor creates a pledge on his own property and the pledgee waives his right to the pledge, the other security providers shall be exempted from the security liability to the extent of the rights and interests of the pledgee that are forfeited owing to the waiver of his priority to be paid from the collateral, unless the other security providers are committed to still provide security.
Article 436
A pledgee shall return the pledged property after the debtor has performed his obligation or the pledgor has paid the secured claim before it is due.
Where a debtor fails to perform an obligation due or an event upon the occurrence of which the pledge is to be enforced as agreed upon by the parties occurs, the pledgee may, by agreement with the pledgor, appraise and accept the pledged property as satisfaction of his claim, or have priority to be paid from the proceeds obtained from auction or sale of the pledged property.
The appraisal or sale of the pledged property shall be based on the market price.
Article 437
A pledgor may request the pledgee to enforce the pledge in a timely manner after expiration of the period for the performance of the obligation; where the pledgee fails to do so, the pledgor may request the people’s court to have the pledged property sold at auction or in a sale.
Where a pledgor requests the pledgee to enforce the pledge in a timely manner, and damage is caused to the pledgor owing to the pledgee’s indolence in doing so, the pledgee shall be liable for compensation.
Article 438
After a pledged property is appraised and accepted by the pledgee as full or partial satisfaction of his claim, or is sold at auction or in a sale, where the value of the pledged property as appraised or the proceeds obtained from auction or sale is in excess of the amount of the obligation owed, the excessive portion shall belong to the pledgor, while any deficiency shall be satisfied by the debtor.
Article 439
A pledgor and a pledgee may create a maximum pledge for floating claims upon agreement.In addition to the relevant provisions of this Section, the relevant provisions of Section 2 of Chapter 17 of this Book shall be applied mutatis mutandis to the maximum pledge for floating claims.
Section 2 Pledge on a Right
Article 440
The following rights, which a debtor or a third person is entitled to dispose of, may be pledged:
(1) bills of exchange, promissory notes, and checks;
(2) bonds and certificates of deposits;
(3) warehouse receipts and bills of lading;
(4) transferable fund shares and equity;
(5) transferable proprietary rights consisted in intellectual property such as the right to the exclusive use of registered trademarks, patent rights, and copyrights;
(6) existing and after-acquired accounts receivables; and
(7) other proprietary rights that may be pledged in accordance with the provisions of laws and administrative regulations.
Article 441
Unless otherwise provided by law, a pledge on a bill of exchange, promissory note, check, bond, certificate of deposits, warehouse receipt, or bill of lading is created at the time when the certificate of such a right is delivered to the pledgee, or, in the absence of such a certificate, at the time when the pledge is registered.
Article 442
Where the maturity date for the payment or the delivery of goods against a pledged bill of exchange, promissory note, check, bond, certificate of deposits, warehouse receipt, or bill of lading precedes the due date of the principal claim, the pledgee may cash the certificate or take delivery of the goods, and, upon agreement with the pledgor, apply the purchase price or the goods accepted to discharge the obligation before it is due or place it in escrow.
Article 443
A pledge on fund shares or equity is created upon registration of the pledge.
The fund shares or equity, after being pledged, may not be transferred unless otherwise agreed by the pledgor and the pledgee through consultation. The proceeds obtained by the pledgor from the transfer of the pledged fund shares or equity shall be applied to pay to the pledgee to discharge the obligation before it is due or be placed in escrow.
Article 444
A pledge on a proprietary right in intellectual property, such as the right to the exclusive use of a registered trademark, a patent right, or copyright, is created upon registration.
A proprietary right in intellectual property, after being pledged, may not be transferred or licensed by the pledgor to another person, unless otherwise agreed by the pledgor and the pledgee through consultation. The proceeds obtained by the pledgor from the transfer or licensing of the proprietary right in the pledged intellectual property shall be applied to pay to the pledgee to discharge the obligation before it is due or be placed in escrow.
Article 445
A pledge on an account receivable is created upon registration.
An account receivable, after being pledged, may not be transferred unless otherwise agreed by the pledgor and the pledgee through consultation. The proceeds obtained by the pledgor from the transfer of the account receivable shall be applied to pay to the pledgee to discharge the obligation before it is due or be placed in escrow.
Article 446
In addition to the provisions of this Section, the relevant provisions of Section 1 of this Chapter shall be applied to the pledge on rights.
Chapter XIX Lien
Article 447
Where a debtor fails to perform his obligation due, the creditor may retain the debtor’s movable property which is already in the lawful possession of the creditor and has priority to be paid from the movable property.
The creditor as specified in the preceding paragraph is the lienholder, the movable property in his possession for this purpose is the property under lien.
Article 448
The movable property retained under a lien by the creditor shall be in the same legal relationship as the underlying claim, unless the lienholder and the debtor are both enterprises.
Article 449
The movable property that may not be retained under a lien as provided by law or agreed by the parties may not be so retained.
Article 450
Where the property retained under a lien is a divisible thing, the value of the retained property shall be equivalent to the amount of the obligation.
Article 451
A lienholder is obligated to well keep the retained property and shall be liable for compensation where the retained property is destructed, damaged, or lost due to improper custody.
Article 452
A lienholder has the right to collect the fruits and proceeds accrued from the property retained under a lien.
The fruits and proceeds as specified in the preceding paragraph shall first be applied to offset the expenses for collecting them.
Article 453
A lienholder and the debtor shall reach an agreement on the term of performance of the obligation after the property is retained under the lien; where there is no agreement or the agreement is unclear, the lienholder shall give the debtor a period of 60 or more days as the term of performance, unless the retained movable property is fresh, living, or perishable so that it is hard to keep it for long. Where a debtor defaults upon expiration of the term of performance, the lienholder may, upon agreement with the debtor, appraise and accept the retained property to fully or partially satisfy the obligation, or be paid with priority from the proceeds obtained from auction or sale of the retained property.
The appraisal or sale of the retained property shall be based on the market price.
Article 454
A debtor may request the lienholder to enforce the lien after expiration of the term of performance of the obligation; where the lienholder fails to do so, the debtor may request the people’s court to have the retained property sold at auction or in a sale.
Article 455
After the property retained under a lien is appraised and accepted by the lienholder as full or partial satisfaction of his claim, or is sold at auction or in a sale, where the value of the retained property or the proceeds obtained from auction or sale of the retained property is in excess of the amount of the obligation owed, the excessive portion shall belong to the debtor, while any deficiency shall be satisfied by the debtor.
Article 456
Where a lien is created on a movable property on which a mortgage or pledge has already been created, the lienholder has priority to be paid.
Article 457
A lien is extinguished where the lienholder loses possession of the retained property or accepts another form of security provided by the debtor.
Part Five Possession
Chapter XX. Possession
Article 458
In the case of possession of immovable or movable property based on a contractual relationship, matters such as the use of the immovable or movable property, the benefits therefrom, and the default liability shall be subject to the agreement in the contract; where there is no agreement thereon in the contract or the agreement is unclear, the relevant provisions of laws shall be applied.
Article 459
Where damage is caused to the immovable or movable property by its possessor as a result of use of the property, a mala fide possessor shall be liable for compensation.
Article 460
Where an immovable or movable property is in the possession of another person, a person holding a right in the property may request the possessor to return the original property and its fruits and proceeds, provided that the necessary expenses incurred by a bona fide possessor for the maintenance of the immovable or movable property shall be paid.
Article 461
Where the immovable or movable property in another person’s possession is destructed, damaged, or lost, and a person holding a right in the property requests for compensation, the possessor shall return to the right holder the amount of insurance payment, compensation or indemnity he has received for the property destructed, damaged, or lost; where the right holder has not been fully compensated, a possessor mala fide shall also compensate for the loss.
Article 462
Where an immovable or movable property is trespassed or converted, its possessor is entitled to request restitution. Where there is a nuisance against the possession, the possessor has the right to request the removal of the nuisance or the elimination of the danger. Where damage is caused as a result of the trespass, conversion, or nuisance, the possessor has the right to request compensatory damages in accordance with law.
The possessor’s right to request for restitution is extinguished if such a right has not been exercised within one year from the date the trespass or conversion occurs.
Book Three Contracts
Part One General Provisions
Chapter I General Rules
Article 463
This Book regulates the civil-law relations arising from contracts.
Article 464
A contract is an agreement on the establishment, modification, or termination of a civil juristic relationship between persons of the civil law.
An agreement on establishing a marriage, adoption, guardianship, or the like personal relationships shall be governed by the provisions of laws providing for such personal relationships; in the absence of such provisions, the provisions of this Book may be appliedmutatis mutandisaccording to the nature of such agreements.
Article 465
A contract formed in accordance with law is protected by law.
A contract formed in accordance with law is legally binding only on the parties thereto, unless otherwise provided by law.
Article 466
Where the parties have a dispute on the understanding of a contract clause, the meaning of the disputed clause shall be determined according to the provisions in the first paragraph of Article 142 of this Code.
Where a contract is made in two or more languages which are agreed to be equally authentic, the words and sentences used in each text shall be presumed to have the same meaning. Where the words and sentences used in each text are inconsistent, interpretation thereof shall be made in accordance with the related clauses, nature, and purpose of the contract, and the principle of good faith, and the like.
Article 467
For a contract not explicitly provided in this Code or other laws, the General Provisions of this Book shall be applied, and the provisions provided in this Book and other laws on a contract which is most similar to the said contact may be appliedmutatis mutandis.
The laws of the People's Republic of China shall apply to the contracts of Sino-foreign equity joint venture, contracts of Sino-foreign contractual joint venture, or contracts of Sino-foreign cooperation in the exploration and exploitation of natural resources that to be performed within the territory of the People's Republic of China.
Article 468
For a creditor-debtor relation not arising from a contract, the provisions of laws relating to such relations shall be applied; in the absence of such provisions, the relevant provisions of the General Provisions of this Book shall be applied, unless they shall not be applied based on the nature of the creditor-debtor relation
Chapter II Conclusion of Contracts
Article 469
The parties may conclude a contract in writing, orally, or in other forms.
A writing refers to any form that renders the content contained therein capable of being represented in a tangible form, such as a written agreement, letter, telegram, telex, or facsimile.
A data message in any form, such as electronic data interchange and e-mails, that renders the content contained therein capable of being represented in a tangible form and accessible for reference and use at any time shall be deemed as a writing.
Article 470
The content of a contract shall be agreed by the parties and generally includes the following clauses:
(1) name or designation and domicile of each party;
(2) objects;
(3) quantity;
(4) quality;
(5) price or remuneration;
(6) time period, place, and manner of performance;
(7) default liability; and
(8) dispute resolution.
The parties may conclude a contract with reference to the various types of model contracts.
Article 471
The parties may conclude a contract by making an offer and acceptance or other means.
Article 472
An offer is an expression of intent to conclude a contract with another person, and the expression of intent shall conform to the following conditions:
(1) the content shall be specific and definite; and
(2) it is indicated therein that the offeror is to be bound by his expression of intent upon acceptance thereof by an offeree.
Article 473
An invitation to offer is a manifestation that a person expects another person to make an offer to him. Auction announcements, bidding announcements, stock prospectuses, bond prospectuses, fund prospectuses, commercial advertisements and promotions, and mailed price catalogs, and the like, are invitations to offer.
A commercial advertisement and promotion shall constitute an offer if its content conforms to the conditions for an offer.
Article 474
The time when an offer becomes effective shall be governed by the provisions of Article 137 of this Code.
Article 475
An offer may be withdrawn. The withdrawal of an offer shall be governed by the provisions of Article 141 of this Code.
Article 476
An offer may be revoked, unless under any of the following circumstances:
(1) the offeror has explicitly indicated that the offer is irrevocable by specifying a time limit for acceptance or in any other manner; or
(2) the offeree has reasons to believe that the offer is irrevocable and the offeree has made reasonable preparations to perform the contract.
Article 477
Where an expression of intent to revoke an offer is made in a real-time communication, the content of such expression of intent shall be known to the offeree before the offeree makes an acceptance; where an expression of intent to revoke an offer is not made in a real-time communication, it shall reach the offeree before the offeree makes an acceptance.
Article 478
An offer becomes invalid under any of the following circumstances:
(1) the offer is rejected;
(2) the offer is revoked in accordance with law;
(3) the offeree makes no acceptance prior to expiration of the time limit for acceptance; or
(4) the offeree materially alters the content of the offer.
Article 479
An acceptance is an expression of intent of the offeree to accept an offer.
Article 480
An acceptance shall be made by means of notice, except that an acceptance may be made by performing an act according to the parties’ course of dealing or as indicated in the offer.
Article 481
An acceptance shall reach the offeror within the time limit specified in the offer.
Where no time limit for acceptance is specified in the offer, an acceptance shall reach the offeror in accordance with the following provisions:
(1) where an offer is made in a real-time communication, acceptance shall be made promptly; or
(2) where an offer is not made in a real-time communication, the acceptance notice shall reach the offeror within a reasonable period of time.
Article 482
Where an offer is made through a letter or a telegram, the time limit for acceptance shall be counted from the date shown on the letter or the date the telegram is handed in for dispatch or, if no such a date is shown on the letter, from the mailing date shown by the postmark of the letter. Where an offer is made by means of instantaneous communications such as telephone calls, facsimiles, or e-mails, the time limit for acceptance shall be counted from the moment the offer reaches the offeree.
Article 483
A contract is formed at the time when an acceptance becomes effective, unless otherwise provided by law or agreed by the parties.
Article 484
Where an acceptance is made by means of notice, the time when the acceptance becomes effective shall be governed by the provisions of Article 137 of this Code.
Where an acceptance notice is not required, the acceptance becomes effective when an act of acceptance is performed according to the parties’ course of dealing or as indicated by the offer.
Article 485
An acceptance may be withdrawn. The provisions of Article 141 of this Code shall apply to the withdrawal of an acceptance.
Article 486
Where an offeree makes an acceptance beyond the time limit for acceptance, or where the acceptance is made within the time limit for acceptance but it cannot reach the offeror in time under normal circumstances, such an acceptance constitutes a new offer unless the offeror timely notifies the offeree that the acceptance is effective.
Article 487
Where an offeree makes an acceptance notice within the time limit for acceptance, if the notice would have reached the offeror in time under normal circumstances but reaches the offeror beyond the time limit for other reasons, the acceptance shall be effective unless the offeror timely notifies the offeree that the acceptance is not accepted as it exceeds the time limit for acceptance.
Article 488
The content of an acceptance shall be consistent with the content of the offer. Where the offeree proposes in the acceptance any material alteration to the content of the offer, it shall constitute a new offer. An alteration concerning the object of the contract, the quantity, quality, price or remuneration, time period of performance, place and manner of performance, default liability, the methods of dispute resolution, or the like is a material alteration to the content of an offer.
Article 489
Where an acceptance makes a non-material alteration to the offer, the acceptance shall be effective and the content of the contract shall be as altered by the acceptance, unless the offeror objects in time, or the offer indicates that an acceptance may not make any alteration to the content of the offer.
Article 490
Where the parties conclude a contract in the form of a written agreement, the contract is formed at the time when the parties all sign, stamp, or put their fingerprints on the memorandum. Prior to signing, stamping, or putting their fingerprints thereon, where one of the parties has already performed the principal obligation and the other party has accepted the performance, the contract is formed at the time of such acceptance.
Where a contract is required to be concluded in writing in accordance with laws or administrative regulations or agreed by the parties and the parties fail to make the contract in writing, if one of the parties has already performed the principal obligation and the other party has accepted the performance, the contract is formed at the time of such acceptance.
Article 491
Where the parties conclude a contract in the form of a letter, data message, or the like, and a confirmation letter is required to be signed, the contract is formed when the confirmation letter is signed.
Where the information about goods or services published by a party via information network, such as internet, conforms to the conditions for an offer, unless otherwise agreed by the parties, a contract is formed at the time when the other party chooses such product or service and successfully submits the order.
Article 492
The place where an acceptance becomes effective is the place where the contract is formed.
Where a contract is concluded in the form of data message, unless otherwise agreed by the parties, the recipient’s principal place of business is the place where the contract is formed; in the absence of a principal place of business, the recipient’s domicile is the place where the contract is formed.
Article 493
Where the parties conclude a contract in the form of a memorandum of contract, unless otherwise agreed by them, the place where the contract is finally signed, stemped, or fingerprinted is the place where the contract is formed.
Article 494
Where the State issues a State purchase order or a mandatory assignment in accordance with the needs such as emergency and disaster relief, pandemic prevention and control, or the like, the persons of the civil law concerned shall conclude a contract in accordance with the rights and obligations provided by the relevant laws and administrative regulations.
The party that has an obligation to make an offer in accordance with the provisions of laws and administrative regulations shall make a reasonable offer in a timely manner.
The party that has an obligation to make an acceptance in accordance with the provisions of laws and administrative regulations shall not reject the reasonable request of the other party to conclude a contract.
Article 495
A letter of subscription, letter of order, and letter of reservation, and the like, in which the parties agree to conclude a contract within a certain period of time in the future, constitutes a preliminary contract.
Where one of the parties fails to perform the obligation to conclude a contract agreed in the preliminary contract, the other party may request such party to bear the liability for breach of the preliminary contract.
Article 496
A standard clause refers to a clause formulated in advance by a party for the purpose of repeated use which has not been negotiated with the other party when concluding the contract.
Upon concluding a contract, where a standard clause is used, the party providing the standard clause shall determine the parties’ rights and obligations in accordance with the principle of fairness, and shall, in a reasonable manner, call the other party's attention to the clause concerning the other party’s major interests and concerns, such as a clause that exempts or alleviates the liability of the party providing the standard clause, and give explanations of such clause upon request of the other party. Where the party providing the standard clause fails to perform the aforementioned obligation of calling attention or giving explanations, thus resulting in the other party’s failure to pay attention to or understand the clause concerning his major interests and concerns, the other party may claim that such clause does not become part of the contract.
Article 497
A standard clause is void under any of the following circumstances:
(1) existence of a circumstance under which the clause is void as provided in Section 3 of Chapter VI of Book One and Article 506 of this Code;
(2) the party providing the standard clause unreasonably exempts or alleviates himself from the liability, imposes heavier liability on the other party, or restricts the main rights of the other party; or
(3) the party providing the standard clause deprives the other party of his main rights.
Article 498
Where a dispute arises over the understanding of a standard clause, the clause shall be interpreted in accordance with its common understanding. Where there are two or more interpretations of a standard clause, the clause shall be interpreted in a manner unfavorable to the party providing the standard clause. Where a standard clause is inconsistent with a non-standard clause, the non-standard clause shall prevail.
Article 499
Where a rewarder through making a public announcement promises to pay a reward to anyone who has completed a particular act, the person who has completed the act may request the rewarder to pay.
Article 500
During the course of concluding a contract, the party that falls under any of the following circumstances and causes loss to the other party shall bear the liability for compensation:
(1) under the guise of concluding a contract, engaging in consultation with malicious intention;
(2) intentionally concealing material facts or providing false information concerning the conclusion of the contract; or
(3) conducting any other acts contrary to the principle of good faith.
Article 501
The parties shall not disclose or improperly use the trade secrets or other confidential information that are obtained in the course of concluding a contract, regardless of whether the contract is formed or not. The party that discloses or improperly uses such trade secrets or information and thus causes losses to the other party shall bear the liability for compensation.
Chapter III Effect of Contracts
Article 502
A contract formed in accordance with law becomes effective upon its formation, unless otherwise provided by law or agreed by the parties.
Where there are laws or administrative regulations providing that a contract shall be subject to the approval and other procedures, such provisions shall be followed. Where failure to complete the approval or other procedures is to affect the validity of the contract, the validity of the clauses concerning the performance of an obligation of filing for approval, and the like, and the other relevant clauses in the contract shall not be affected. Where the party obligated to complete application for approval or other procedures fails to do so, the other party may request the former party to bear the liability for breach of such obligation.
Where there are laws or administrative regulations providing that modification, assignment, or rescission of a contract shall be subject to approval or other procedures, such provisions shall be followed.
Article 503
Where a person without authority concludes a contract in the name of a principal, and if the principal has already started performing the contractual obligations or accepted the performance of the other party, the contract is deemed ratified.
Article 504
Where the legal representative of a legal person or the responsible person of an unincorporated organization concludes a contractultra vires, such an act is effective and the contract is binding on the legal person or the unincorporated organization unless the other party knows or should have known that the legal representative or the responsible person actsultra vires,.
Article 505
Where the parties conclude a contract beyond their scope of business, the validity of the contract shall be determined according to the provisions in Section 3 of Chapter VI of Book One of this Code and this Book, and the contract shall not be determined as invalid solely on the ground that it is beyond their scope of business.
Article 506
An exculpatory clause in a contract exempting the liability on the following acts are void:
(1) causing physical injury to the other party; or
(2) causing losses to the other party’s property intentionally or due to gross negligence.
Article 507
Where a contract does not take effect, or is void, revoked, or terminated, the validity of a clause concerning dispute resolution shall not be affected.
Article 508
The validity of a contract which is not covered by the provisions in this Book shall be governed by the relevant provisions in Chapter VI of Book One of this Code.
Chapter IV Performance of Contracts
Article 509
The parties shall fully perform their respective obligations as contracted.
The parties shall comply with the principle of good faith, and perform such obligations as sending notices, rendering assistances, and keeping confidentiality in accordance with the nature and purpose of the contract and the course of dealing .
The parties shall avoid wasting the resources, polluting the environment, or damaging the ecology in the course of performance of the contract.
Article 510
Where the parties have not agreed on such content as the quality, price or remuneration, or the place of performance, and the like, or the agreement is unclear, after the contract becomes effective, the parties may make a supplementary agreement; where the parties fail to reach a supplementary agreement, such content shall be determined according to the relevant clauses of the contract or the course of dealing.
Article 511
Where an agreement between the parties concerning the content of their contract is unclear and such content cannot be determined according to the provisions of the preceding Article, the following provisions shall be applied:
(1) where the quality requirements are not clearly stipulated, the contract shall be performed in accordance with a mandatory national standard, or a recommendatory national standard in the absence of a mandatory national standard, or the standard of the industry in the absence of a recommendatory national standard. In the absence of any national or industrial standards, the contract shall be performed in accordance with the general standard or a specific standard conforming to the purpose of the contract.
(2) where the price or remuneration is not clearly stipulated, the contract shall be performed in accordance with the market price in the place of performance at the time the contract is concluded. Where the government-set or government-guided price shall be applied as required by law, the contract shall be performed on such a price.
(3) where the place of performance is not clearly stipulated, the contract shall be performed at the place of the party receiving money where payment of money is involved, or, where real estate is to be delivered, at the place where the real estate is located. For other subject matters, the contract shall be performed at the place where the party performing the obligation is located.
(4) where the period of performance is not clearly stipulated, the debtor may perform his obligations at any time, and the creditor may request the debtor to perform at any time, provided that he shall give the debtor necessary time for preparation;
(5) where the mode of performance is not clearly stipulated, the contract shall be performed in a manner conducive to realizing the purpose of the contract; and
(6) where the allocation of expenses for performance is not clearly stipulated, the expenses shall be borne by the party performing the obligation; where the expenses for performance are increased owing to the creditor’s reason, the creditor shall bear the increased part of the expenses.
Article 512
Where the object of an electronic contract concluded through internet or other information network is the delivery of goods and the goods are to be delivered by express delivery services, the time of delivery is the time of acknowledging receipt of the goods by the recipient. Where the object of the said electronic contract is the provision of services, the time for provision of the service is the time stated in the automatic generated electronic certificate or physical certificate. Where there is no time stated in such a certificate or the time stated therein is inconsistent with the actual time for provision of the service, the actual time for provision of the service shall prevail.
Where the subject matter of the said electronic contract is delivered by online transmission, the time of delivery is the time when the subject matter of the contract enters the specific system designated by the other party and can be searched and identified.
Where the parties to the said electronic contract agree otherwise on the mode and time of delivery of goods or provision of services, such agreement shall be complied with.
Article 513
Where a government-set or government-guided price is adopted in a contract, if the said price is adjusted within the delivery period stipulated in the contract, the contract price shall be the price as adjusted at the time of delivery. Where an overdue delivery of the subject matter occurs, the contract price shall be the original price if the price rises at the time of delivery, or the price as adjusted if the price falls at the time of delivery. Where a delayed delivery of the subject matter or an overdue payment occurs, the contract price shall be the price as adjusted if the price rises, or the original price if the price falls.
Article 514
Where an obligation is payment of money, unless otherwise provided by law or agreed by the parties, the creditor may request the debtor to perform the obligation by the lawful currency of the place of actual performance.
Article 515
Where a contract has multiple objects and the debtor is required to perform only one of them, the debtor has the right of choice to choose the object to perform, unless otherwise provided by law or agreed by the parties, or otherwise determined by the course of dealing.
Article 516
A party shall promptly notify the other party when exercising the right of choice, and the object of the contract to be performed shall be ascertained at the time when such notice reaches the other party. The ascertained object shall not be changed, unless otherwise consented to by the other party.
Where one of the objects available for choice becomes impossible to perform, the party with the right of choice shall not choose such object to perform, unless the impossibility to perform is caused by the other party.
Article 517
Where there are two or more creditors, if the object is divisible and each creditor is entitled to the claim in proportion to his own share, then the claim is a claim by share; where there are two or more debtors, if the object is divisible and each debtor assumes the obligation in proportion to his own share, then the obligation is an obligation by share.
Where it is difficult to determine the share among the creditors with a claim by share or the debtors with an obligation by share, each is deemed to have or assume an equal share.
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