On the Application of the Civil Code of the People's Republic of China Interpretation of Several Issues Concerning the General Provisions of the Contract Code   

To properly adjudicate contract dispute cases as well as disputes over creditor-debtor relationships not arising from contracts, and to safeguard the legitimate rights and interests of the parties in accordance with the law, this Interpretation is formulated based on relevant legal provisions such as the Civil Code of the People’s Republic of China and the Civil Procedure Law of the People’s Republic of China, and in conjunction with judicial practice.

I. General Provisions

Article 1: When interpreting contract terms, the People’s Courts shall, in accordance with the provisions of Article 142, paragraph 1, and Article 466, paragraph 1, of the Civil Code, base their interpretation on the ordinary meaning of the words and phrases, and, in conjunction with relevant provisions, the nature and purpose of the contract, established practices, and the principle of good faith, determine the meaning of the disputed terms by taking into account such factors as the background of the contract formation, the negotiation process, and the conduct of performance.

If there is evidence demonstrating that the parties had a common understanding of the contract terms that differs from the ordinary meaning of the wording, the people’s court will not support the claim by one party that the contract terms should be interpreted according to their ordinary meaning.

If there are two or more interpretations of the contract terms that could affect the validity of those terms, the people’s court shall adopt the interpretation that favors the validity of the terms. In the case of a gratuitous contract, the court shall adopt the interpretation that imposes a lighter burden on the debtor.

Article 2: In the following circumstances, where the practices do not violate the mandatory provisions of laws and administrative regulations and do not contravene public order and good morals, the people’s courts may recognize them as “trade customs” as referred to in the Civil Code:

(1) The customary practices between the parties in their transactional activities;

(2) Practices that are commonly adopted in the locality where the transaction takes place or in a particular field or industry, and that the counterparty would have known or should have known when entering into the contract.

With regard to trading practices, the party asserting such practices bears the burden of proof.

II. Conclusion of the Contract

Article 3: If the parties dispute whether a contract has been established, and the people’s court can ascertain the names or titles of the parties, the subject matter, and the quantity, the court shall generally recognize the contract as having been established. However, this does not apply if otherwise provided by law or agreed upon by the parties.

Where the contract can be determined to have been established pursuant to the preceding provision, the people’s court shall, in accordance with Article 510 and Article 511 of the Civil Code, determine the contents lacking in the contract.

If a party claims that the contract is invalid or requests its revocation or termination, and the people’s court finds that the contract was not established in the first place, it shall, in accordance with Article 53 of the “Several Provisions of the Supreme People’s Court on Evidence in Civil Litigation,” treat whether the contract was established as a central issue for trial and may, depending on the specific circumstances of the case, re-designate the deadline for submitting evidence.

Article 4: If a party requests that a contract concluded through tendering be deemed to have come into effect upon the arrival of the notice of award to the successful bidder, the people’s court shall uphold such request. After the contract has been established, if a party refuses to sign a written contract, the people’s court shall determine the content of the contract based on documents such as the tender documents, bid documents, and the notice of award.

If a contract is concluded through open bidding methods such as on-site auctions or online auctions, and a party requests that the contract be deemed to have come into effect from the moment the auctioneer’s gavel falls or the electronic trading system confirms the transaction, the people’s court shall support such request. After the contract is established, if a party refuses to sign the transaction confirmation document, the people’s court shall determine the content of the contract based on the auction announcement, the bids submitted by bidders, and other relevant evidence.

Where institutions such as property rights exchanges preside over auctions and listed transactions, and the auction announcements and trading rules they publish explicitly set forth the conditions that must be met for a contract to be deemed established, if a party requests confirmation that the contract becomes effective upon fulfillment of these conditions, the people’s court shall uphold such request.

Article 5: If a third party engages in fraudulent or coercive conduct, causing a party to enter into a contract against its true intention and thereby suffering losses, the people’s court shall, in accordance with the law, support the injured party’s claim for compensation against the third party. However, if either party has also acted in violation of the principle of good faith, the people’s court shall determine the respective liabilities based on the degree of fault of each party. Nevertheless, where the law or judicial interpretations provide otherwise regarding the civil liabilities of the parties and the third party, such provisions shall prevail.

Article 6: If the parties have agreed, in the form of a subscription agreement, order form, reservation agreement, or the like, to enter into a contract within a specified future period, or if they have paid a deposit as security for entering into such a contract within a specified future period, and the essential elements of the future contract—such as the parties involved and the subject matter—can be clearly identified, the people’s court shall recognize that a preliminary contract has been established.

If the parties, through methods such as signing a letter of intent or a memorandum, merely express their intention to enter into a transaction without agreeing to conclude a contract within a specified future period, or although such an agreement exists, it is difficult to determine the specific parties and subject matter of the future contract, the people’s court will not support a claim by one party that a preliminary contract has been established.

If the subscription agreements, purchase orders, reservation agreements, and the like entered into by the parties have reached consensus on key terms such as the subject matter of the contract, quantity, price, or remuneration, and meet the conditions for the establishment of a contract stipulated in Paragraph 1 of Article 3 of this Interpretation, and no explicit agreement has been made to enter into a separate contract within a specified future period— or although such an agreement exists, one party has already performed its obligations and the other party has accepted such performance— the people’s court shall recognize that the preliminary contract has been established.

Article 7: After the reservation contract takes effect, if one party refuses to enter into the formal contract or, during negotiations aimed at concluding the formal contract, violates the principle of good faith and thereby prevents the conclusion of the formal contract, the people’s court shall determine that such party has failed to perform the obligations stipulated in the reservation contract.

When determining whether a party has violated the principle of good faith in the course of negotiating and concluding this contract, the people’s court shall comprehensively consider factors such as whether the terms proposed by that party during negotiations significantly deviated from the provisions agreed upon in the preliminary contract, and whether that party had made reasonable efforts to engage in negotiations.

Article 8: After the reservation contract takes effect, if one party fails to perform its obligation to enter into the formal contract, and the other party requests compensation for the losses thereby incurred, the people’s court shall, in accordance with the law, support such a claim.

With regard to the loss compensation stipulated in the preceding paragraph, if the parties have made an agreement, the compensation shall be determined according to the agreement; if no agreement has been reached, the people’s court shall, taking into account factors such as the completeness of the preliminary contract’s content and the extent to which the conditions for concluding the formal contract have been fulfilled, make a discretionary determination.

Article 9: If the contract terms fall under the circumstances specified in Article 496, Paragraph 1 of the Civil Code, and a party claims that the terms are not standard terms solely on the grounds that the contract was drafted based on a model contract text or that the parties have explicitly agreed that the contract terms are not standard terms, the people’s court shall not support such claim.

If a party engaged in business activities claims that contract terms pre-drafted and not negotiated with the other party are not standard terms solely on the ground that they have not actually been repeatedly used, the people’s court will not support such a claim. However, this does not apply if there is evidence proving that the terms were not pre-drafted for the purpose of repeated use.

Article 10: If the party providing standardized terms uses conspicuous markings—such as words, symbols, or fonts—that are typically sufficient to attract the other party’s attention at the time of contract formation, thereby drawing the other party’s attention to unusual clauses that significantly affect their interests—such as clauses exempting or reducing its own liability, or excluding or restricting the other party’s rights—then the people’s court may determine that such party has fulfilled its obligation to provide notice as stipulated in Article 496, paragraph 2, of the Civil Code.

If the party providing the standard terms, upon the other party’s request, provides a clear and understandable explanation—either in writing or orally—of the concept, content, and legal consequences of any unusual clauses that significantly affect the other party’s interests, the people’s court may determine that such party has fulfilled its obligation to provide explanations as stipulated in Article 496, paragraph 2, of the Civil Code.

The party providing the standard terms bears the burden of proof regarding its fulfillment of the obligation to provide notice or explanation. With regard to electronic contracts concluded via information networks such as the internet, if the party providing the standard terms merely relies on having adopted measures such as check-boxes or pop-up windows to claim that it has fulfilled its obligation to provide notice or explanation, the people’s court will not uphold such a claim—unless the evidence presented by that party complies with the provisions set forth in the preceding two paragraphs.

3. Effectiveness of the Contract

Article 11: If one of the parties is a natural person, and based on that party’s age, intelligence, knowledge, experience, and taking into account the complexity of the transaction, it can be determined that the party lacks the requisite cognitive capacity to understand the nature of the contract, the legal consequences of entering into the contract, or specific risks inherent in the transaction, the People’s Court may recognize such a situation as constituting “lack of judgment capacity” as stipulated in Article 151 of the Civil Code.

Article 12: After a contract is legally established, if the party obligated to submit the contract for approval fails to perform such obligation, or if its performance of the approval obligation does not conform to the contractual agreement or to the provisions of applicable laws and administrative regulations, the people’s court shall support the other party’s request that the defaulting party continue to perform the approval obligation. If the other party claims to rescind the contract and requests the defaulting party to assume liability for damages resulting from the breach of the approval obligation, the people’s court shall also support such claim.

If, after the people’s court has ruled that one party to the contract must fulfill its obligation to obtain approval, that party still fails to do so, and the other party claims termination of the contract and seeks compensation from the defaulting party in accordance with the liability for breach of contract, the people’s court shall uphold such claim.

Before the contract is approved, if one party files a lawsuit requesting the other party to perform the main obligations stipulated in the contract and, after being advised, refuses to amend the claim, the people’s court shall dismiss the claim. However, this decision does not preclude the party from filing a separate lawsuit at a later time.

If a party obligated to obtain approval has already completed the application and approval procedures or has fulfilled the approval obligation as determined by an effective judgment, yet the approving authority decides not to grant approval, the people’s court will not support the other party’s request for compensation. However, if the contract fails to be approved due to reasons attributable to the party—such as delayed fulfillment of the approval obligation—resulting in losses suffered by the other party, the people’s court shall handle such claims in accordance with Article 157 of the Civil Code.

Article 13: If a contract is found to be invalid or voidable, the people’s court shall not uphold the claim by a party that the contract has been filed with the relevant administrative authority, approved by the approving authority, or that property rights changes or transfer registrations have been duly carried out pursuant to the contract.

Article 14: If the parties to a transaction have entered into multiple contracts for the same transaction, the people’s court shall deem invalid any contract concluded through a false expression of intent. If the parties, in order to circumvent mandatory provisions of laws and administrative regulations, conceal their true intention behind a false expression of intent, the people’s court shall determine the validity of the concealed contract in accordance with Article 153, paragraph 1 of the Civil Code. If the parties, in order to evade legal or administrative regulatory requirements that contracts must undergo approval procedures or the like, conceal their true intention behind a false expression of intent, the people’s court shall determine the validity of the concealed contract in accordance with Article 502, paragraph 2 of the Civil Code.

If, pursuant to the preceding paragraph, a concealed contract is determined to be invalid or deemed not to have legal effect, the people’s court shall, taking the concealed contract as the factual basis, determine the civil liabilities of the parties in accordance with Article 157 of the Civil Code. However, this does not apply where otherwise provided by law.

If multiple contracts entered into by the parties for the same transaction all reflect their true intentions and no other circumstances exist that would affect the validity of the contracts, the people’s court shall, after ascertaining the chronological order in which the contracts were concluded and the actual performance status of each contract, determine whether the content of the contracts has been altered. If laws or administrative regulations prohibit altering the content of a contract, the people’s court shall deem any corresponding alteration to the contract invalid.

Article 15: In determining the rights and obligations between the parties, the People’s Court shall not be bound by the names used in the contract, but rather shall base its determination on the contents agreed upon in the contract. If the rights and obligations claimed by the parties are inconsistent with those determined based on the contract’s content, the People’s Court shall, taking into account such factors as the context of the contract’s formation, the purpose of the transaction, the structure of the transaction, the conduct of performance, and whether the parties have fabricated the subject matter of the transaction, ascertain the actual civil legal relationship between the parties.

Article 16: If a contract violates the mandatory provisions of laws and administrative regulations, and one of the following circumstances applies, the People’s Court may, in accordance with Article 153, paragraph 1 of the Civil Code—“except where such mandatory provision does not render the civil legal act invalid”—determine that the contract is not invalid merely because it violates the mandatory provisions, provided that imposing administrative or criminal liability on the actor can achieve the legislative purpose of the mandatory provision:

(1) Although mandatory provisions are intended to safeguard public order, the actual performance of the contract has only a negligibly minor impact on public order. To deem the contract invalid would result in an unfair and unjust outcome in the handling of the case.

(2) Mandatory provisions are designed to safeguard national interests such as government tax revenues and land transfer fees, as well as the legitimate interests of other civil entities—not the civil rights and interests of the contracting parties themselves. Therefore, holding a contract valid will not undermine the achievement of the purpose underlying these regulations.

(3) Mandatory provisions are intended to require one party to strengthen risk control, internal management, and the like. The other party is neither capable nor obligated to review whether the contract violates these mandatory provisions; if the contract were deemed invalid, the other party would bear adverse consequences.

(4) Although one party to the contract violated a mandatory provision at the time of contracting, after the contract was concluded, that party already met the conditions for rectifying the violation of the mandatory provision but nonetheless failed to do so in breach of the principle of good faith.

(5) Other circumstances prescribed by laws and judicial interpretations.

The mandatory provisions of laws and administrative regulations are intended to govern the performance of contracts after their conclusion. If a party requests that a contract be declared invalid on the ground that it violates such mandatory provisions, the people’s court will not support such a request. However, this does not apply if the performance of the contract would inevitably lead to a violation of the mandatory provisions or if the law or judicial interpretations provide otherwise.

If the contract is determined to be valid pursuant to the preceding two paragraphs, but the illegal acts of the parties remain unresolved, the people’s court shall submit judicial recommendations to the relevant administrative authorities. If the parties’ conduct is suspected of constituting a crime, the case clues shall be forwarded to the criminal investigation authorities; if the case falls under the category of a private criminal prosecution, the parties shall be informed that they may file a separate lawsuit with the people’s court having jurisdiction.

Article 17: Although a contract does not violate the mandatory provisions of laws or administrative regulations, if any of the following circumstances exist, the people’s court shall, in accordance with Article 153, paragraph 2 of the Civil Code, deem the contract invalid:

(1) Contracts that affect national security, including political security, economic security, and military security;

(2) Contracts that undermine social public order by affecting social stability, disrupting fair competition, or harming the public interest;

(3) Contracts that violate social morality, family ethics, or undermine personal dignity—thus contravening generally accepted moral norms.

When determining whether a contract violates public order and good morals, the People’s Court shall be guided by the core socialist values and comprehensively consider factors such as the subjective motives and transaction purposes of the parties involved, the intensity of regulatory oversight by government authorities, the frequency with which the parties have engaged in similar transactions over a certain period, and the social consequences of their conduct. The Court shall also provide thorough reasoning in its judgment. If the parties have entered into the transaction out of genuine necessity for daily life, the transaction has not significantly disrupted public order, does not compromise national security, and does not run counter to prevailing moral norms, the People’s Court should not deem the contract invalid.

Article 18: Although provisions of laws and administrative regulations may use expressions such as “shall,” “must,” or “may not,” if these provisions are intended to restrict or confer civil rights, and a party’s violation of such provisions results in acts such as unauthorized disposal, unauthorized agency, or exceeding the scope of authorized representation—thereby granting the counterparty to the contract or a third party the right to rescind or terminate the contract—then the people’s court shall determine the validity of the contract based on the civil legal consequences prescribed by laws and administrative regulations for violations of those provisions.

Article 19: With regard to contracts concluded with the purpose of transferring or establishing property rights, if a party or the true right holder claims that the contract is invalid solely on the ground that the assignor did not have ownership or disposal rights over the subject matter at the time of concluding the contract, the people’s court shall not uphold such claim. However, if the contract cannot be performed due to the failure to obtain the subsequent consent of the true right holder or because the assignor subsequently failed to acquire the right of disposal, and the transferee seeks to rescind the contract and requests the assignor to assume liability for breach of contract, the people’s court shall support such claim in accordance with the law.

If the contract stipulated in the preceding paragraph is determined to be valid and the transferor has already delivered the property or completed the registration of transfer to the transferee, the people’s court shall support the request of the true rights holder to have the property rights confirmed as unchanged or to have the property returned. However, this does not apply if the transferee has acquired the property rights in good faith pursuant to Article 311 and other relevant provisions of the Civil Code.

Article 20: Where laws and administrative regulations restrict the authority of a legal person’s legal representative or the person in charge of a non-legal person organization, stipulating that matters covered by a contract must be resolved by the competent authority or decision-making body of the legal person or non-legal person organization, or must be decided by the executing body of the legal person or non-legal person organization, and the legal representative or person in charge enters into a contract in the name of the legal person or non-legal person organization without obtaining authorization, and the counterparty, having failed to exercise due diligence in conducting a reasonable review, claims that the contract is effective against the legal person or non-legal person organization and that the latter should bear liability for breach of contract, the people’s court shall not support such claim. However, if the legal person or non-legal person organization is at fault, the court may, in accordance with Article 157 of the Civil Code, order it to bear corresponding compensation liability. If the counterparty has fulfilled its duty of reasonable review and the situation constitutes apparent representation, the people’s court shall handle the matter in accordance with Article 504 of the Civil Code.

If the matters covered by the contract do not exceed the scope of authority delegated to the legal representative or person in charge as stipulated by laws and administrative regulations, but do exceed any restrictions on representation powers imposed by the articles of association or the competent authority of the legal person or non-legal person organization, and the counterparty claims that the contract is effective against the legal person or non-legal person organization and that the latter should bear liability for breach of contract, the people’s court shall uphold such claim in accordance with the law. However, this does not apply if the legal person or non-legal person organization provides evidence proving that the counterparty knew or ought to have known about such restrictions.

After a legal person or an unincorporated organization has assumed civil liability, the people’s court shall, in accordance with law, support its claim for reimbursement from the legally authorized representative or person in charge who was at fault for losses incurred due to acts of representation exceeding their authority. If laws or judicial interpretations provide otherwise regarding the civil liability of the legally authorized representative or person in charge, such provisions shall prevail.

Article 21: If staff members of a legal person or an unincorporated organization enter into a contract in the name of the legal person or unincorporated organization on matters that exceed their authorized scope of authority, and the other party claims that the contract is effective against the legal person or unincorporated organization and that the latter should bear liability for breach of contract, the people’s court shall not support such claim. However, if the legal person or unincorporated organization is at fault, the people’s court may, by reference to the provisions of Article 157 of the Civil Code, order it to assume corresponding compensation liability. In the circumstances described above, if the situation constitutes apparent agency, the people’s court shall handle it in accordance with the provisions of Article 172 of the Civil Code.

If any of the following circumstances apply to the matters covered by the contract, the people’s court shall determine that the staff members of a legal person or an unincorporated organization exceeded their authority when concluding the contract:

(1) Matters that, according to law, must be resolved by the authority or decision-making body of a legal person or an unincorporated organization;

(2) Matters that, according to law, shall be decided by the executive body of a legal person or an unincorporated organization;

(3) Matters that, according to law, shall be carried out by the legal representative or person in charge on behalf of the legal entity or non-legal entity organization;

(4) Matters that do not fall under those typically handled by virtue of official authority.

If the matters covered by the contract do not exceed the scope of authority determined under the preceding paragraph, but do exceed the limitations on the authority of staff members imposed by the legal person or non-legal person organization, and the counterparty claims that the contract is effective against the legal person or non-legal person organization and that the latter should bear liability for breach of contract, the people’s court shall support such claim. However, this does not apply if the legal person or non-legal person organization provides evidence proving that the counterparty knew or ought to have known about such limitations.

After a legal person or an unincorporated organization bears civil liability, the people’s court shall, in accordance with the law, support its right to seek reimbursement from staff members who acted intentionally or with gross negligence.

Article 22: If a legal representative, person in charge, or staff member enters into a contract in the name of a legal person or an unincorporated organization without exceeding their authority, and the legal person or unincorporated organization claims that the contract is invalid solely on the ground that the seal affixed to the contract is not the registered seal or is a forged seal, the people’s court shall not support such claim.

The contract is entered into in the name of a legal person or an unincorporated organization, but it bears only the signature or fingerprint of the legal representative, person in charge, or staff member, without being affixed with the official seal of the legal person or unincorporated organization. If the counterparty can prove that the legal representative, person in charge, or staff member did not exceed their authority when entering into the contract, the people’s court shall recognize that the contract is binding on the legal person or unincorporated organization. However, this does not apply if the parties have agreed that the affixing of the official seal constitutes a condition for the contract’s establishment.

If a contract bears only the official seal of a legal person or non-legal organization without the signature or fingerprint of any individual, yet the counterparty can prove that the contract was entered into by the legal representative, person in charge, or staff member within the scope of their authority, the people’s court shall recognize that the contract is binding on the legal person or non-legal organization.

In the first three scenarios specified above, if the legal representative, person in charge, or staff member, although exceeding their authority as a representative or agent when entering into a contract, nonetheless constitutes apparent representation pursuant to Article 504 of the Civil Code, or apparent agency pursuant to Article 172 of the Civil Code, the people’s court shall recognize that the contract is effective against the legal person or non-legal person organization.

Article 23: If the legal representative, person in charge, or agent colludes maliciously with the other party and enters into a contract in the name of a legal person or an unincorporated organization, thereby harming the legitimate rights and interests of such legal person or unincorporated organization, and the legal person or unincorporated organization claims that it should not bear civil liability, the people’s court shall support such claim.

If a legal person or an unincorporated organization requests that the legal representative, person in charge, or agent bear joint and several liability for damages suffered as a result, the people’s court shall support such a request.

Based on the evidence submitted by legal persons and non-legal organizations, and taking into account factors such as the trading practices between the parties, whether the contract was manifestly unfair at the time of its conclusion, whether relevant personnel obtained undue benefits, and the performance status of the contract, if the People’s Court finds that there is a high probability that the legal representative, person in charge, or agent colluded maliciously with the counterparty, it may require the aforementioned individuals to make statements or provide corresponding evidence regarding relevant facts pertaining to the conclusion and performance of the contract. If they refuse to make such statements without justifiable reasons, or if their statements are unreasonable and they fail to provide supporting evidence, the People’s Court may determine that the fact of malicious collusion has been established.

Article 24: If a contract is not established, is invalid, is rescinded, or is determined to be ineffective, and the parties request the return of property, the people’s court shall, upon examination and confirmation that the property can be returned, apply—either separately or jointly—such methods as returning the object in possession or correcting the records in the registration books, depending on the specific circumstances of the case. If, upon examination, the property cannot be returned or there is no need to return it, the people’s court shall, using the market value of the property on the date the contract was determined to be not established, invalid, rescinded, or ineffective, or using the value calculated by other reasonable means, render a judgment awarding compensation at a reduced price.

Except in the circumstances specified in the preceding paragraph, if a party also requests compensation for losses, the people’s court shall, taking into account the return of property or its monetary equivalent, comprehensively consider such factors as gains from property appreciation and losses from depreciation, as well as expenditures on transaction costs. The court shall, based on the degree of fault and causal contribution of each party, and in accordance with the principles of good faith and fairness, reasonably determine the amount of loss compensation.

If a contract is not established, is invalid, is rescinded, or is determined to be ineffective, and the parties’ conduct is suspected of violating the law but remains unaddressed, potentially enabling one or both parties to obtain undue benefits through illegal means, the people’s court shall submit judicial recommendations to the relevant administrative authorities. If the parties’ conduct is suspected of constituting a crime, the case clues shall be forwarded to the criminal investigation authorities; if the case falls under the category of a private criminal prosecution, the parties shall be informed that they may file a separate lawsuit with the people’s court having jurisdiction.

Article 25: If a contract is not established, is invalid, is rescinded, or is determined to be ineffective, and a party entitled to request the return of the price or remuneration also requests the other party to pay a fee for the use of funds, the people’s court shall, within the scope requested by the party, calculate such fee based on the one-year Loan Prime Rate (LPR) published by the National Interbank Funding Center authorized by the People's Bank of China. However, if the party using the funds is not at fault for the contract’s failure to be established, its invalidity, its rescission, or its determination to be ineffective, the fee shall be calculated based on the benchmark deposit rate for similar deposits of the same term as published by the People's Bank of China.

Both parties have a mutual obligation to return the subject matter. If a party claims that performance should be simultaneous, the people’s court shall support such claim. If the party in possession of the subject matter is using it or is legally entitled to use it, and the other party requests that the funds occupied by the former be offset against the usage fees owed by the latter, the people’s court shall support such request, unless otherwise provided by law.

4. Performance of the Contract

Article 26: If one party fails to perform non-essential obligations such as issuing invoices or providing supporting documents as required by law or the contract, and the other party requests that the defaulting party continue to perform such obligations and compensate for losses caused by its failure to do so, the people’s court shall uphold such request in accordance with the law. If the other party requests termination of the contract, the people’s court shall not support such request, unless the failure to perform the obligation prevents the achievement of the contract’s purpose or the parties have otherwise agreed.

Article 27: If the debtor or a third party enters into an agreement with the creditor to settle the debt by delivering property after the maturity of the debt performance period, and provided that no circumstances exist that would affect the validity of the contract, the people’s court shall hold that the agreement becomes effective from the moment the parties’ expressions of intent are consistent.

After the debtor or a third party performs the debt-for-asset agreement, the people’s court shall recognize that the corresponding original debt is simultaneously extinguished. If the debtor or a third party fails to perform the debt-for-asset agreement as agreed and, after being urged to do so, still fails to perform within a reasonable period, the creditor’s choice to request performance of the original debt or enforcement of the debt-for-asset agreement shall be supported by the people’s court, unless otherwise provided by law or otherwise agreed upon by the parties.

If the debt-for-asset agreement stipulated in the preceding paragraph has been confirmed by the people’s court, or if the people’s court has prepared a mediation statement based on the debt-for-asset agreement reached by the parties, the people’s court shall not support the creditor’s claim that the property rights take effect or become enforceable against bona fide third parties from the time the confirmation document or mediation statement becomes effective.

If a debtor or a third party enters into a debt-settlement agreement using property rights over which they do not have ownership or disposal rights, such agreement shall be handled in accordance with Article 19 of this Interpretation.

Article 28: If the debtor or a third party enters into an agreement with the creditor to settle the debt by delivering property before the maturity of the debt performance period, the people’s court shall determine the validity of such agreement based on its review of the underlying creditor-debtor relationship.

If the parties agree that, upon the debtor’s failure to repay the debt at maturity, the creditor may auction, sell, or discount the property used as collateral to satisfy the creditor’s claim, the people’s court shall recognize such agreement as valid. If the parties agree that, upon the debtor’s failure to repay the debt at maturity, the property used as collateral shall become the sole property of the creditor, the people’s court shall deem such agreement invalid, though this shall not affect the validity of other provisions thereof. Should the creditor request that the property used as collateral be auctioned, sold, or discounted to satisfy the creditor’s claim, the people’s court shall support such request.

After the parties enter into a debt-for-asset agreement as provided in the preceding paragraph, if the debtor or a third party has failed to transfer the property rights to the creditor’s name, the people’s court will not support the creditor’s claim for priority repayment. If the debtor or a third party has already transferred the property rights to the creditor’s name, the matter shall be handled in accordance with Article 68 of the “Interpretation by the Supreme People’s Court on the Application of the Security System under the Civil Code of the People’s Republic of China.”

Article 29: If a third party, as stipulated in the second paragraph of Article 522 of the Civil Code, requests the debtor to perform the debt obligation toward itself, the people’s court shall uphold such request. However, if the third party seeks to exercise civil rights such as the right to rescind or the right to terminate the contract, the people’s court shall not uphold such request, unless otherwise provided by law.

If a contract is legally revoked or terminated, and the debtor requests the creditor to return the property, the people’s court shall support such request.

If the debtor performs the obligation to a third party as agreed, but the third party refuses to accept it, and the creditor requests the debtor to perform the obligation directly to itself, the people’s court shall support such request, unless the debtor has already discharged the debt through methods such as depositing the performance. If the third party refuses to accept the performance or delays in accepting it, and the debtor requests the creditor to compensate for any losses incurred as a result, the people’s court shall grant such compensation in accordance with the law.

Article 30: The following civil entities may be recognized by the People’s Court as third parties with a legitimate interest in performing the debt as stipulated in Article 524, Paragraph 1 of the Civil Code:

(1) The guarantor or a third party providing security in the form of property;

(2) The transferee of the secured property, the holder of usufructuary rights, and the lawful possessor;

(3) Subsequent-ranking security interest holders on the secured property;

(4) A third party who has a legitimate right in the debtor’s property and whose right would be lost if the property were subject to compulsory enforcement;

(5) If the debtor is a legal person or an unincorporated organization, its investor or founder;

(6) If the debtor is a natural person, their close relatives;

(7) Other third parties who have a legitimate interest in the performance of the debt.

A third party acquires the creditor’s rights against the debtor to the extent that it has already performed on behalf of the debtor, but such acquisition shall not prejudice the interests of the creditor.

If a guarantor, after assuming the debt and acquiring the corresponding creditor’s rights, asserts its guarantee rights against other guarantors, such claims shall be handled in accordance with Article 13, Article 14, and Paragraph 2 of Article 18 of the “Interpretation by the Supreme People’s Court on the Application of the Guarantee System under the Civil Code of the People’s Republic of China.”

Article 31: If the parties owe each other debts, and one party refuses to perform its own principal obligation on the ground that the other party has failed to perform a non-principal obligation, the people’s court shall not support such refusal. However, this does not apply if the other party’s failure to perform the non-principal obligation renders it impossible to achieve the purpose of the contract, or if the parties have otherwise agreed.

If one party sues, requesting the other party to perform its debt obligation, and the defendant raises a defense based on Article 525 of the Civil Code, asserting that both parties should perform their obligations simultaneously—and this defense is upheld—then, unless the defendant has filed a counterclaim, the people’s court shall rule that the defendant must perform its own debt obligation at the same time as the plaintiff performs its debt obligation. The judgment shall explicitly state that if the plaintiff applies for compulsory enforcement, the people’s court shall take enforcement measures against the defendant only after the plaintiff has fulfilled its own debt obligation. If the defendant files a counterclaim, the people’s court shall rule that both parties must perform their respective debt obligations simultaneously, and the judgment shall clearly stipulate that, should either party apply for compulsory enforcement, the people’s court shall take enforcement measures against the other party only after that party has fulfilled its own debt obligation.

If one party to the dispute files a lawsuit requesting the other party to perform its debt obligation, and the defendant raises a defense—based on Article 526 of the Civil Code—that the plaintiff should first perform its own obligations, and this defense is established, the people’s court shall dismiss the plaintiff’s claim. However, this dismissal does not preclude the plaintiff from filing a separate lawsuit after fulfilling its own debt obligations.

Article 32: After a contract is concluded, if, due to policy adjustments or abnormal fluctuations in market supply and demand, the price experiences increases or decreases that were unforeseeable at the time of contracting and do not constitute commercial risks, and continued performance of the contract would clearly be unfair to one of the parties, the people’s court shall recognize that the fundamental conditions of the contract have undergone a “material change” as stipulated in Article 533, Paragraph 1 of the Civil Code. However, this provision does not apply to contracts involving commodities with highly active market characteristics and long-term significant price volatility, as well as risk-invested financial products such as stocks and futures.

If the fundamental conditions of the contract have undergone a significant change as stipulated in Article 533, Paragraph 1 of the Civil Code, and a party requests a modification of the contract, the people’s court shall not terminate the contract. If one party requests a modification of the contract while the other party requests termination, or if one party requests termination while the other party requests a modification, the people’s court shall, taking into account the specific circumstances of the case and guided by the principle of fairness, rule either to modify or terminate the contract.

If a people’s court rules to modify or terminate a contract pursuant to Article 533 of the Civil Code, it shall comprehensively consider factors such as the timing of the material change in the underlying conditions of the contract, the circumstances under which the parties have renegotiated, and the losses suffered by the parties as a result of the modification or termination of the contract, and shall clearly specify in the judgment the date on which the contract was modified or terminated.

If the parties have previously agreed to exclude the application of Article 533 of the Civil Code, the people’s court shall deem such agreement invalid.

V. Preservation of the Contract

Article 33: If a debtor fails to perform its due debts to the creditor and does not assert its claims or any accessory rights related to such claims against the counterparty through litigation or arbitration, thereby causing the creditor’s due claims to remain unfulfilled, the people’s court may determine that this constitutes the “debtor’s failure to exercise its claims or any accessory rights related to such claims, thereby impairing the realization of the creditor’s due claims” as stipulated in Article 535 of the Civil Code.

Article 34: The following rights may be recognized by the People’s Court as rights exclusively belonging to the debtor themselves as stipulated in Article 535, paragraph 1 of the Civil Code:

(1) Right to claim child support, alimony, or maintenance payments;

(2) Right to claim compensation for personal injury;

(3) The right to claim remuneration for labor, except for any portion exceeding the living expenses necessary for the debtor and the dependents he or she supports;

(4) Request the right to receive basic living security benefits, such as basic old-age insurance pensions, unemployment insurance benefits, and minimum living allowances, which are essential for ensuring the parties’ basic livelihoods;

(5) Other rights that belong exclusively to the debtor themselves.

Article 35: If a creditor brings a subrogation lawsuit against the debtor’s counterparty pursuant to Article 535 of the Civil Code, the People’s Court at the defendant’s domicile shall have jurisdiction, unless exclusive jurisdiction provisions prescribed by law apply.

If the debtor or the counterparty raises an objection on the ground that the parties have entered into a jurisdiction agreement regarding their creditor-debtor relationship, the people’s court shall not support such objection.

Article 36: After a creditor files a subrogation lawsuit, if the debtor or the counterparty raises an objection to the court’s jurisdiction on the ground that the creditor-debtor relationship between the two parties is governed by an arbitration agreement, the people’s court shall not uphold such objection. However, if the debtor or the counterparty applies for arbitration regarding the creditor-debtor relationship between the debtor and the counterparty before the first hearing, the people’s court may, in accordance with the law, suspend the subrogation lawsuit.

Article 37: If a creditor brings a subrogation lawsuit against the debtor’s counterparty in the People’s Court, without including the debtor as a third party, the People’s Court shall add the debtor as a third party.

If two or more creditors bring a subrogation lawsuit against the same counterparty of the debtor, the people’s court may consolidate the cases for joint trial. If the debtor’s claim against the counterparty is insufficient to satisfy the debts owed to two or more creditors, the people’s court shall determine the counterparty’s share of performance according to the proportion of claims held by each creditor, unless otherwise provided by law.

Article 38: If a creditor, after filing a lawsuit against the debtor in the People's Court, subsequently brings a subrogation action against the debtor’s counterparty before the same People's Court, and such action falls within the jurisdiction of that People's Court, the two actions may be jointly tried. If the subrogation action does not fall within the jurisdiction of that People's Court, the creditor shall be informed to file a separate lawsuit with the People's Court having jurisdiction. The subrogation action shall be suspended until the conclusion of the lawsuit against the debtor.

Article 39: In a subrogation lawsuit, if the debtor sues the counterparty for the portion of the claim that exceeds the amount claimed by the creditor through subrogation, and such case falls under the jurisdiction of the same people's court, the cases may be jointly tried. If the case does not fall under the jurisdiction of the same people's court, the debtor shall be informed to file a separate lawsuit with the people's court having jurisdiction. Before the conclusion of the subrogation lawsuit, any lawsuit filed by the debtor against the counterparty shall be suspended.

Article 40: In a subrogation lawsuit, if the people’s court, after trial, finds that the creditor’s claim does not meet the conditions for exercising subrogation rights, it shall dismiss the claim. However, this decision shall not preclude the creditor from filing a new lawsuit based on newly discovered facts.

If the counterparty of the debtor argues, solely on the ground that the creditor-debtor relationship between the creditor and the debtor has not been confirmed by an effective legal document when the creditor brings a subrogation lawsuit, that the creditor’s lawsuit does not meet the conditions for exercising subrogation rights, the people’s court shall not support such argument.

Article 41: After a creditor files a subrogation lawsuit, if the debtor, without justifiable reason, reduces or waives the debt owed to the counterparty or extends the performance deadline for the counterparty, and the counterparty raises this as a defense against the creditor, the people’s court shall not support such defense.

Article 42: With regard to the “obviously unreasonable” low or high prices stipulated in Article 539 of the Civil Code, the People’s Court shall determine such prices based on the judgment of a typical operator in the place of transaction, and with reference to either the prevailing market transaction price at the time of the transaction or the guided price set by the price administration authorities.

If the transfer price falls below 70 percent of the market transaction price or the guiding price prevailing at the time of the transaction, it can generally be deemed a “clearly unreasonable low price.” Conversely, if the acquisition price exceeds 30 percent of the market transaction price or the guiding price prevailing at the time of the transaction, it can generally be deemed a “clearly unreasonable high price.”

If the debtor and the counterparty have a familial or affiliated relationship, they shall not be subject to the 70% and 30% restrictions stipulated in the preceding paragraph.

Article 43: If a debtor engages in transactions such as barter of property, repayment of debt by delivering property, leasing or renting property, or licensing the use of intellectual property rights at prices that are clearly unreasonable, thereby impairing the realization of the creditor’s claims, and the debtor’s counterparty knows or should have known about such circumstances, the people’s court shall, upon the creditor’s request to rescind the debtor’s actions, uphold the creditor’s claim in accordance with the provisions of Article 539 of the Civil Code.

Article 44: If a creditor brings an action for revocation pursuant to Articles 538 and 539 of the Civil Code, the debtor and the counterparty of the debtor shall be jointly named as defendants. The People's Court at the domicile of either the debtor or the counterparty shall have jurisdiction, unless exclusive jurisdiction provisions prescribed by law apply.

If two or more creditors bring a lawsuit for the right of revocation against the debtor’s same act, the people’s court may consolidate the cases for joint trial.

Article 45: In a lawsuit for the creditor’s right of revocation, if the object of the revoked act is divisible, and the party claims that the debtor’s act should be revoked only within the scope of the affected claim, the people’s court shall uphold such claim. If the object of the revoked act is indivisible, and the creditor claims that the debtor’s entire act should be revoked, the people’s court shall also uphold such claim.

The reasonable attorney fees, travel expenses, and other costs incurred by the creditor in exercising the right of revocation may be recognized as “necessary expenses” as stipulated in Article 540 of the Civil Code.

Article 46: If, in a lawsuit for revocation rights, the creditor simultaneously requests the debtor’s counterparty to bear legal consequences such as returning property, compensating for the value at a reduced price, or performing the due debt obligations, the people’s court shall support such request in accordance with the law.

If a creditor requests the people’s court that has accepted the lawsuit for revocation rights to also hear, in the same proceeding, the creditor-debtor relationship between the creditor and the debtor—and such relationship falls within the jurisdiction of that people’s court—it may be jointly tried. If the relationship does not fall within the jurisdiction of that people’s court, the creditor shall be informed to file a separate lawsuit with the people’s court that does have jurisdiction.

If a creditor applies for compulsory enforcement based on an effective legal document arising from a lawsuit or a revocation action against the debtor, the people’s court may take compulsory enforcement measures against the rights that the debtor holds against the counterparty to satisfy the creditor’s claim. If, in a revocation action, the creditor applies for provisional measures to preserve the counterparty’s property, the people’s court shall grant such application in accordance with the law.

6. Amendment and Assignment of the Contract

Article 47: After the assignment of a claim, if the debtor asserts against the assignee any defenses it had against the assignor, the people’s court may add the assignor as a third party.

After the debt is transferred, if the new debtor asserts defenses against the creditor that were originally raised by the original debtor, the people’s court may add the original debtor as a third party.

If, after one party to the contract has assigned both its rights and obligations under the contract to another party, the other party raises a defense against the assignee regarding the rights and obligations under the contract, or if the assignee raises a defense against the other party regarding the rights and obligations under the contract, the people’s court may add the assignor as a third party.

Article 48: If the debtor has already performed the obligation to the assignor before receiving notice of the assignment of claim, the people’s court shall not support the assignee’s request that the debtor perform the obligation. However, if the debtor continues to perform the obligation to the assignor after receiving notice of the assignment of claim, the people’s court shall support the assignee’s request that the debtor perform the obligation.

If the assignor fails to notify the debtor, and the assignee directly sues the debtor requesting performance of the debt, and the people’s court, after trial, confirms the fact of the assignment of the claim, it shall be deemed that the assignment of the claim takes effect against the debtor from the time the copy of the complaint is served on the debtor. If the debtor claims that expenses increased or losses incurred due to the failure to provide notice should be deducted from the amount of the claim as determined, the people’s court shall uphold such claim in accordance with the law.

Article 49: After the debtor receives notice of the assignment of credit, if the assignor requests the debtor to perform the obligation on the ground that the credit assignment contract is invalid, ineffective, rescinded, or determined not to take effect, the people’s court shall not support such a request. However, this does not apply in cases where the notice of credit assignment has been legally rescinded.

If, after the assignee has acquired the claim based on the debtor’s confirmation of the claim’s actual existence, the debtor subsequently refuses to perform its obligations to the assignee on the ground that the claim does not exist, the people’s court will not support such refusal. However, this does not apply if the assignee knew or should have known that the claim did not exist.

Article 50: If the assignor assigns the same credit right to two or more assignees, and the debtor claims that it is no longer obligated to perform its debt on the ground that it has already performed its obligation to the assignee who was first notified, the people’s court shall uphold such claim. If the debtor knowingly accepts performance from an assignee who is not the first notified assignee, and the first notified assignee requests the debtor to continue performing the debt or seeks from the assignor liability for breach of contract pursuant to the credit assignment agreement, the people’s court shall uphold such request. However, if the first notified assignee requests the assignee who accepted performance to return the property it has received, the people’s court shall not uphold such request—unless the assignee who accepted performance knew prior to its acquisition that the credit right had already been assigned to another assignee.

The assignee first notified as referred to in the preceding paragraph means the assignee specified in the notice of assignment that first reaches the debtor. If the parties dispute the time when the notice was received, the people’s court shall make a comprehensive determination based on factors such as the method of notification, rather than relying solely on the time acknowledged by the debtor or the time recorded in the notice itself. Where the parties send notifications by mail or through electronic communication systems, the people’s court shall take the postmark date or the time recorded by the electronic communication system as the basis for determining the time when the notice was received.

Article 51: If a third party joins the debt and agrees with the debtor on a right of recovery, and after performing the debt, the third party seeks recovery from the debtor, the people’s court shall uphold such claim. If no right of recovery has been agreed upon, and the third party, pursuant to the provisions of the Civil Code concerning unjust enrichment and the like, requests the debtor to fulfill its obligation within the scope of the debt already paid to the creditor, the people’s court shall also uphold such request—unless the third party knew or should have known that joining the debt would harm the debtor’s interests.

If a debtor asserts against a third party who has joined the debt the defenses that the debtor holds against the creditor, the people’s court shall uphold such claims.

7. Termination of Rights and Obligations under the Contract

Article 52: If the parties have reached a mutual agreement to terminate the contract but have failed to address issues such as liability for breach of contract, settlement, and liquidation following termination, the people’s court shall uphold the claim that the contract has been terminated, unless the parties have otherwise agreed.

If any of the following circumstances exist, unless one party to the contract expresses a different intention, the people’s court may deem the contract terminated:

(1) If one party claims to exercise the right of termination provided by law or stipulated in the contract, but upon trial it is determined that the conditions for exercising such right are not met, yet the other party agrees to terminate the contract;

(2) Both parties do not meet the conditions for exercising the right to terminate the contract, yet both claim to terminate the contract.

With regard to issues such as liability for breach of contract, settlement, and liquidation under the first two scenarios, the People’s Courts shall handle them in accordance with Article 566 and Article 567 of the Civil Code, as well as relevant provisions on liability for breach of contract.

Article 53: If one party to the contract terminates the contract by means of notice and claims that the contract has been terminated on the ground that the other party failed to raise an objection within the agreed objection period or within another reasonable period, the people’s court shall examine whether the party in question possesses the right to terminate the contract as stipulated by law or as agreed upon in the contract. Upon examination, if the party does have such a right, the contract shall be terminated from the moment the notice reaches the other party; if the party does not have such a right, the termination of the contract shall not take effect.

Article 54: If one party to the contract, without notifying the other party, directly asserts termination of the contract by filing a lawsuit and then, after withdrawing the lawsuit, files another lawsuit seeking termination of the contract, and the people’s court, upon trial, supports such claim, the contract shall be terminated from the time the copy of the complaint in the second lawsuit is served on the other party. However, this does not apply if, after withdrawing the initial lawsuit, the party that filed it subsequently notifies the other party of the termination of the contract and such notice has already been received by the other party.

Article 55: If one party to the dispute asserts set-off pursuant to Article 568 of the Civil Code, and the People’s Court, after trial, finds that the right of set-off is established, it shall hold that, upon the notice reaching the other party, the principal debts, interest, liquidated damages, or damages compensation owed by both parties to each other shall be extinguished to the extent of equal amounts.

Article 56: If the party exercising the right of set-off is burdened with several debts of the same type, but the claims it holds are insufficient to offset all of those debts, and the parties dispute the order in which the set-off should be carried out, the people’s court may handle the matter by referring to the provisions of Article 560 of the Civil Code.

If the creditor exercising the right of set-off does not have sufficient claims to offset all of its debts—including the principal debt, interest, and expenses incurred in realizing the claim—when the parties dispute the order of set-off, the people’s court may handle the matter by referring to the provisions of Article 561 of the Civil Code.

Article 57: If a tortfeasor claims set-off against a debt for damages arising from infringement upon the personal rights of natural persons or from intentional or grossly negligent infringement upon the property rights of others, the people’s court shall not support such claim.

Article 58: If the parties owe each other debts, and one party notifies the other of its claim that has reached the statute of limitations period, asserting set-off, and the other party raises a defense based on the statute of limitations, the people’s court shall uphold such defense. If the statute of limitations period for one party’s claim has already expired, and the other party asserts set-off, the people’s court shall also uphold such assertion.

8. Liability for Breach of Contract

Article 59: If one party to the contract requests termination of the contractual rights and obligations pursuant to Paragraph 2 of Article 580 of the Civil Code, the people’s court shall generally take the date on which a copy of the complaint is served on the other party as the time when the contractual rights and obligations are terminated. However, in light of the specific circumstances of the case, if another date would better conform to the principles of fairness and good faith, the people’s court may adopt that alternative date as the time when the contractual rights and obligations are terminated, provided that it fully explains its reasoning in the judgment.

Article 60: When the People’s Court determines the benefits that could have been obtained upon performance of the contract pursuant to Article 584 of the Civil Code, it may, after deducting reasonable costs such as expenses incurred by the non-breaching party in entering into and performing the contract, calculate such benefits based on the production profits, operating profits, or resale profits that the non-breaching party could have obtained.

If the non-breaching party lawfully exercises its right to terminate the contract and undertakes a substitute transaction, and claims that the benefit obtainable upon performance of the contract should be determined based on the difference between the substitute transaction price and the contract price, the people’s court shall uphold such claim in accordance with the law. If the substitute transaction price significantly deviates from the local market price prevailing at the time the substitute transaction took place, and the breaching party claims that the benefit obtainable upon performance of the contract should be determined based on the difference between the market price and the contract price, the people’s court shall also uphold such claim.

If the non-breaching party exercises its right to terminate the contract in accordance with the law but fails to enter into a substitute transaction, and claims that the benefit it could have obtained after performance of the contract should be determined by the difference between the market price at the place of contract performance during a reasonable period following the occurrence of the breach and the contract price, the people’s court shall uphold such claim.

Article 61: In a periodic contract involving obligations to be performed continuously, if one party fails to perform its monetary obligations such as payment of the purchase price or rent, and the other party requests termination of the contract, the people’s court, after trial, may, if it finds that the contract should be terminated according to law, determine a reasonable period within which the non-breaching party may seek alternative transactions, taking into account factors such as the parties to the contract, the type of transaction, changes in market prices, and the remaining term of performance. The benefits that the non-breaching party could have obtained upon proper performance of the contract shall then be determined by deducting from the corresponding price or rent the relevant performance costs that the non-breaching party would have been required to pay during that reasonable period.

If the non-breaching party claims that the benefits obtainable after contract performance should be determined by deducting the performance costs from the price, rent, and other amounts corresponding to the remaining term of performance following termination of the contract, the people’s court will not support such a claim. However, this does not apply if the remaining term of performance is shorter than a reasonable period for finding an alternative transaction.

Article 62: If the benefits that the non-breaching party could have obtained after performance of the contract cannot be determined in accordance with the provisions of Article 60 and Article 61 of this Interpretation, the people’s court may, taking into account comprehensively such factors as the benefits gained by the breaching party due to the breach, the degree of fault of the breaching party, and other circumstances of the breach, determine the amount in accordance with the principles of fairness and good faith.

Article 63: In determining the “losses that the breaching party could have foreseen or should have foreseen at the time of concluding the contract” as stipulated in Article 584 of the Civil Code, the people’s court shall, based on the purpose for which the parties entered into the contract and taking into account comprehensively such factors as the identity of the contracting parties, the content of the contract, the type of transaction, trading practices, and the negotiation process, ascertain the losses that a civil entity in a similar or comparable situation to the breaching party could have foreseen or should have foreseen at the time of concluding the contract.

In addition to the benefits that the non-breaching party may obtain upon performance of the contract, if the non-breaching party claims other losses caused by the breach—such as additional expenses incurred in bearing breach liability to a third party—the people’s court shall support such claims if, upon review, it finds that these losses were foreseeable or should have been foreseeable by the breaching party at the time the contract was entered into.

When determining the amount of damages for breach of contract, if the breaching party claims that the non-breaching party’s failure to take appropriate measures resulted in increased losses, that the non-breaching party also bore some fault contributing to the losses, or that the non-breaching party gained additional benefits or reduced necessary expenses due to the breach, the people’s court shall, in accordance with the law, uphold such claims.

Article 64: If one party to the dispute requests an adjustment of the liquidated damages through a counterclaim or defense, the people’s court shall support such request in accordance with the law.

If the breaching party claims that the agreed-upon liquidated damages are excessively higher than the losses caused by the breach and requests a reasonable reduction, it shall bear the burden of proof. If the non-breaching party asserts that the agreed-upon liquidated damages are reasonable, it too shall provide corresponding evidence.

If a party claims that the liquidated damages should not be adjusted solely on the ground that the contract stipulates that such adjustments are prohibited, the people’s court will not support such a claim.

Article 65: If a party claims that the agreed-upon liquidated damages are excessively higher than the losses caused by the breach and requests a reasonable reduction, the people’s court shall, based on the losses stipulated in Article 584 of the Civil Code, take into account factors such as the parties to the contract, the type of transaction, the performance status of the contract, the degree of fault of the parties, and the context of contract performance. The court shall make its judgment in accordance with the principles of fairness and good faith.

If the agreed-upon liquidated damages exceed 30 percent of the actual loss incurred, the people’s court will generally deem them to be excessively higher than the actual loss.

If a party who has maliciously breached the contract requests a reduction in the liquidated damages, the people’s court will generally not support such a request.

Article 66: If one party to the contract requests the other party to pay liquidated damages, and the other party raises a defense claiming that the contract was not established, is invalid, has been rescinded, has been determined not to be effective, does not constitute a breach of contract, or that the non-breaching party has suffered no loss, but fails to request an adjustment of the excessively high liquidated damages, the people’s court shall clarify, in the first instance, whether the party intends to request an adjustment of the liquidated damages if the court does not uphold the defense. If the people’s court in the first instance finds the defense well-founded but fails to provide such clarification, and the people’s court in the second instance determines that the defendant should be ordered to pay liquidated damages, it may directly provide such clarification and, upon request of the parties, after the parties have fully presented evidence, cross-examined, and debated on whether the liquidated damages should be adjusted, render a judgment in accordance with the law reducing the liquidated damages appropriately.

If the defendant, for objective reasons, failed to appear in court during the first-instance proceedings but did appear in the second-instance proceedings and requested a reduction in the liquidated damages, the people’s court of the second instance may, after the parties have fully presented evidence, cross-examined each other, and engaged in debate on whether the liquidated damages should be adjusted, render a judgment according to law reducing the liquidated damages appropriately.

Article 67: If a party delivers a deposit, security deposit, guarantee deposit, earnest money, bail, or reservation deposit without specifying the nature of such payment as earnest money, the people’s court shall not support the claim by one party that the penalty provisions for earnest money set forth in Article 587 of the Civil Code should apply. However, if the parties have agreed on the nature of the payment as earnest money but have failed to specify the type of earnest money or the agreement is unclear, and one party claims that the payment constitutes a penalty for breach of contract, the people’s court shall support such claim.

If the parties agree to use the delivery of a deposit as security for the conclusion of a contract, and one party refuses to enter into the contract or fails to act in good faith during negotiations aimed at concluding the contract, thereby preventing the contract from being concluded, the people’s court shall support the other party’s claim that the penalty provisions for deposits stipulated in Article 587 of the Civil Code should apply.

If the parties have agreed that the delivery of a deposit shall serve as a condition for the establishment or effectiveness of the contract, and the party obligated to deliver the deposit fails to do so, yet the main obligations under the contract have already been fully performed and accepted by the other party, the people’s court shall hold that the contract has been established or become effective upon the other party’s acceptance of such performance.

If the parties have agreed that the earnest money serves as a penalty for breach of contract, and the party who paid the earnest money claims to terminate the contract in exchange for forfeiture of the earnest money, or the party who received the earnest money claims to terminate the contract in exchange for double repayment of the earnest money, the people’s court shall uphold such claims.

Article 68: If both parties have committed breaches of contract that render it impossible to achieve the purpose of the contract, and one party requests the application of the penalty clause for earnest money, the people’s court shall not support such a request. If one party has only committed a minor breach of contract, while the other party has committed a breach that renders it impossible to achieve the purpose of the contract, and the party who committed the minor breach claims that the penalty clause for earnest money should be applied, but the other party argues that the minor breaching party itself has also committed a breach, the people’s court shall not uphold such defense.

If one party has already partially performed the contract, and the other party accepts this performance and claims that the penalty for the earnest money should be applied proportionally to the unperformed portion, the people’s court shall uphold such claim. If the other party claims that the penalty for the earnest money should be applied to the contract as a whole, the people’s court shall not support such claim, unless the partial non-performance has made it impossible to achieve the purpose of the contract.

If a contract cannot be performed due to force majeure, the people’s court will not support the non-breaching party’s claim that the penalty clause for earnest money should apply.

9. Supplementary Provisions

Article 69: This Interpretation shall take effect as of December 5, 2023.

With regard to civil cases arising from legal facts occurring after the Civil Code takes effect, this Interpretation shall apply to cases that have not yet undergone final adjudication as of the date of its entry into force. However, this Interpretation shall not apply to cases that had already undergone final adjudication before the date of its entry into force, provided that the parties have filed an application for retrial or that a retrial has been ordered pursuant to the trial supervision procedure.