By Matthew Kowalak.
There are, unfortunately, times when contracts, for whatever reason, need to be voided. The problem is, when can contracts legally be voided in China? There are specific circumstances when this indeed can be done. But to make it work, you have to meet specific legal criteria.
The key to understanding these types of contracts is to note when they are actually voidable. There are three situations in which you have the option of voiding a contract in China.
- A contract made by a “significant misconception” – This one is tough, because there are not really enough cases on the books in China to even attempt to take a guess at what “significant” implies. Tentatively, if you are able to prove that in some aspect of the contract, one of the parties made significantly misleading promises that are not in sync with industry standards, you may meet this standard.
- Contracts that are “significantly unfair” – This has more to do with contracts in which
some aspect of the agreement has changed significantly from the time the contract began to be effective to the time of performance by one of the parties.
- A contract signed “under duress” – While this seems like a straight forward idea, no one can somehow force you to sign a contract and force you to perform it, in reality duress can be difficult to prove.
Basically, proving legal voidability in China will come down to three things, how well you know your industry, what the specific standards are and how influential your lawyer can be in arguing that you were mislead, tricked or coerced into signing a contract.
The tricky part about these types of contracts is that while they are indeed voidable, they are still valid until or unless the party that is getting the short end of the stick exercises their right to have the contract voided. These contracts are not inherently unenforceable. Chinese courts have treated many cases in which a contract has been created by fraud as a voidable contract. This means that unless you catch the other party to your contract cheating and blow the whistle on them, the contract is still perfectly legal.
While this may seem to tilt the field of play in favour of those who will steal cookies all day long and just take their losses when the one time they get caught with their hand in the jar, the Chinese courts have actually rationalized this position by pointing out that it may be in the interest of the party being misled to continue to enforce the contract.
While there may be some hypothetical situations in which the party being wronged would benefit if the contract were to be enforced, it seems to me that more often than not, these “significant misconceptions” will not be understood by the party being wronged. The other point of view from the Chinese courts is the recognition of the intent of the parties when they signed the original contract, they decided, by free will, to do business with each other in the first place and it should be up to them whether or not they continue to uphold the contract.
The most important point to take from this discussion is that, if you find yourself being deceived in a contract, it is up to you to go to the court and have the contract declared void.
A similar issue is the right to the rescission of a contract. This right deals with rescission as well as the modification of a contract. In Chinese courts, modification is almost universally preferred to rescission. While modification of the contract is preferred, it is usually too difficult to try to decide what the true intent of both parties was had they been honest when putting together the original contract.
The statue of limitations for rescinding a contract is one year from the point one of the parties ought to have known they had cause to rescind the contract. Also, your right to rescind a contract may be waived through an explicit declaration or through your actions, if you continue to perform a contract after the evidence that you had cause to rescind was uncovered.
There are also many possible legal consequences to voiding a contract. If a contract is declared void, (meaning it does not meet the minimum requirements of a contract) the contract will not have the intended outcome. If part of a contract is void (this is known as severance) you can basically cut that part out of the contract without damaging other parts of the contract that are still valid. Also, the dispute resolution clauses of a contract may still be valid as well, determining arbitration, mediation or conciliation and even the choice of applicable law. Just because the terms of the contract are void, does not mean that the contract disappears, there may still be very real responsibilities that can be costly.
Matthew Kowalak has worked in manufacturing related positions in Shenzhen for the last 5 years. He studied Chinese at Shenzhen University and is currently an LLM student at The Chinese University of Hong Kong. For further business questions or consulting you can reach Matt at email@example.com.