Liabilities for Breach of Precontract in China
Precontract is a contract whereby the parties agree to conclude a contract within a certain period of time in the future. Precontract is quite common in practice. However, it is not stipulated in the General Principles of the Civil Law of the PRC and the Contract Law of the PRC. The provision of precontract has been formally included in the Civil Code of the PRC (hereinafter referred to as the Civil Code), which will come into force on 1 January 2021.
According to Article 495 of the Civil Code, if the parties agree to conclude a subscription contract, subscription order, reservation order and so on within a certain period of time in the future, such contracts shall constitute precontracts. Where one party fails to perform the obligation to conclude a precontract as agreed, the other party may request it to bear the breach of contract liability in relation to the precontract.
The Civil Code enumerates several common forms of precontract such as subscription contract, subscription order, reservation order and so on in the above provision. But it shall not be limited to those forms. Whether a letter of intent or a framework agreement that is commonly used in commercial activities constitutes a precontract shall be determined according to the specific contents of the document. It shall not be deemed as a precontract if it is only the expression of the parties’ intention to cooperate and it is not explicitly agreed that a formal contract will be concluded within a certain period of time in the future.
The Civil Code does not stipulate the remedies for breach of precontract. However, if the precontract has explicitly stipulated the remedies and liabilities for breach of contract, the non-breaching party may require the breaching party to bear the liability for breach in accordance with the contract. Therefore, in order to avoid the uncertainty of remedies for breach of contract in the future, you are advised to clearly set forth the remedies for breach of contract, for example, to specify the amount of damages for breach of contract or to define the calculation method of losses, when drafting the precontract.