- Supreme People’s Court
- Zhengzhou Jinshui District Jicheng Town v. Bank of China
LONG-TERM CONTRACTS - LAND USE CONTRACT - BETWEEN A CHINESE BANK AND A CHINESE VILLAGE COMMITTEE - GOVERNED BY CHINESE LAW
"COMMENTS" BY A CHINESE JUDGE ON COURT DECISIONS - NOT LEGALLY BINDING - TERMINATION OF CONTRACT FOR SUBSTANTIAL CHANGE OF CIRCUMSTANCES - REFERENCE TO ARTICLE ON HARDSHIP IN UNIDROIT PRINCIPLES 2004.
Plaintiff, a Chinese bank, concluded with Defendant, a committee on behalf of villagers, an agreement concerning the transfer of the right of using a piece of land. Under the agreement Plaintiff was obligated to pay a lump sum for the the right of using the land plus a compensation to be paid to Defendent over 50 years according to the interest rate of the respective year. When in the following years the interest rate went up sharply, Plaintiff could no longer afford to pay the agreed compensation and sent a notice to Defendant to terminate the agreement. Defendant objected prompting Plaintiff to sue Defendant in order to terminate the agreement for substantial change of circumstances. The first instant court decided that the contract provisions regarding the compensation were null and void. Defendant then appealed and the second instant court held that the provisions in question were as such binding, but under the subsequent changed circumstance it would be against good faith (unfair) to require Plaintiff to fulfill its obligation, and therefore terminated the agreement. Defendant then brought the case to Supreme People’s Court for retrial. The Supreme Court confirmed the decision of the court of second instance.
The decisions were published by the Supreme People’s Court as a “guide” case and they were commented by a judge of the Supreme People’s Court. In the comment it was discussed what the legal basis for Plaintiff’s right to terminate the agreement was.
The Chinese Contract Act does not contain any provision regarding the change of circumstances, nor was the principle so far accepted in practice. The Supreme People’s Court decided in favor of Plaintiff on the ground of the principle of good faith and the principle of fairness. In the comment reference was made to the article on hardship contained in the UNIDORIT Principles (2004) and it was pointed that due to this “guide” decision the principle of change of circumstances should by now be considered as accepted in Chinese contract law. In 2009 the doctrine of change of circumstances was formally adopted in article 26 in Interpretation II of the Supreme People's Court of Several Issues concerning the Application of the Contract Law of the People's Republic of China.