A “Standard Clause” is a clause drafted by a business in advance and intended for repeated use in its contracts. It’s also called boilerplate language. We have all encountered contracts with Standard Clauses in our daily life, while dealing with insurance, E-commerce, financial services, etc. However, while efficient, Standard Clauses are sometimes criticized, as they may contain some unfair terms. This article highlights some of the developments lawmakers recently introduced via the Civil Code on companies’ use of Standard Clauses.
Expanded Obligations for Notice and Explanation
Ordinary consumers signing contracts with Standard Clauses usually do not have enough bargaining power to request modifications. Frankly, most would not even notice the existence of a Standard Clause.
Prior to the Civil Code, the PRC Contract Law only required businesses to call the signer’s attention to Standard Clauses that exempt or restrict the liability of the business, and required them to offer an explanation upon a specific request by the signer.
The PRC Civil Code, though, greatly expanded the scope of these obligations by introducing the following general concept: according to Article 496, the provider of a Standard Clause shall not only perform the obligation of calling attention to and explaining clauses that exempt or alleviate its liability, but also other “clauses with major interest and concern.”
So, what is a “major interest and concern?”
The Civil Code does not clarify this further. However based on our experience and further research, we believe this would include the following clauses as examples：
1. Clauses regarding right of termination
2. Clauses related to liquidated damages
3. Dispute resolution clauses
4. Clauses capping damages
5. Expiration or time limit on services
6. Unilateral right to change performance of the contract
In general, we think that Standard Clauses written to exempt or limit the provider’s liability, increase the signer’s liability, or otherwise alter the primary rights of the signer likely fall under this category.
Of additional note is that according to the judicial interpretation by China’s Supreme People’s Court, the expanded obligation for calling attention to and explaining such clauses also applies to contracts concluded before the Civil Code came into effect.
How to Perform the Obligations
“Calling attention to” means that the provider shall take proper actions to draw the signer’s attention to the relevant Standard Clauses. Usually, use of special indicators to highlight the clauses, such as words, symbols, fonts, etc. are deemed acceptable.
However, Courts also tend to impose higher standards on parties like E-commerce platforms who provide Standard Clauses online. According to some recent decisions, practices such as bolding, underlining, and/or italicizing the font might not be sufficient since:
1. Online contracts are usually complicated and contain a lot of content already laid out with various special indicators, making it difficult for the signer to actually notice the relevant Standard Clauses.
2. Signers often do not actually notice the online contracts when they deal with or via the platform.
The obligation to explain is still usually triggered by a request from the signer, unless laws provide otherwise (for example, the PRC Insurance Law). Once the request is made, the provider must provide an explanation allowing the signer to adequately understand the clause.
Failing to Perform the Obligations
The Civil Code has made a change to the legal effect of a Standard Clause where the provider fails to call attention or give explanation. Instead of requesting to revoke the clause, the signer may argue that the clause is not actually concluded and therefore has no binding effect.
The difference between revocation and not being concluded is important. Before the Civil Code took effect, such a clause remained binding unless and until it was revoked according to Contract Law. Under the Civil Code, such a clause was never effective in the first place.
Restrictions on Standard Clauses have developed in practice quite a bit since the Civil Code. DaWo Law Firm has unique expertise on this, and helps both business and consumers on issues with Standard Clauses. If you have any question, do not hesitate to contact us.