Judicial Regulation of Standard Form Contracts in China

The standard form contracts that sellers use in modern transactions often bewilder the average consumer. They can take the form of jargon camouflaged in fine print, or a click box that hides a contract; both constitute means to ‘steal’ contractual rights from the consumer or to operate against their expectations. The dominant theories of standard form contract regulation have changed from the ‘informational regulation’ mechanism (suggesting ex ante informational disclosure requirements) to the ‘substantive regulation’ mechanism (suggesting ex ante administrative regulations on the content of contract terms). China adopted a combination of the two mandatory approaches in the 1999 Contract Law and 2021 Civil Code but deviated from the original theories in that it authorized the courts—instead of any administration—to conduct the mandatory regulation ex post.

In a recent paper, I provide a comprehensive study on China’s legislative regime and judicial practice of standard form contract regulation. China’s legislative framework is that the two restrictions work independently and equally as two required steps for a standard form term to go into effect. This causes two problems for the court: first, if the court adheres strictly to the rules, too many terms are going to be struck down, causing widespread transaction uncertainty; second, the results may turn out to be irrational, such that a ‘good’ term may be struck down because of informational regulation.

By examining a series of Judicial Interpretations and eighteen de-facto binding cases issued or selected by the Supreme People’s Court (‘SPC’), I reveal that the SPC has broken the independence of these two thresholds and changed the original legislative regime into a substantive-centred system. Despite regarding informational regulation as the prevailing justification for evaluating the validity of terms in the Interpretations, the SPC held the substantive regulation decisive to both positive and negative conclusions in the selected cases. Despite the raised bar of disclosure required by the SPC in the Interpretations, inconsistencies in disclosure standards occurred among the selected cases. I offer a potential explanation for the contradiction between the two sets of materials: the SPC only used informational regulation in disguise to reach its decision based on substantive rules. For judges, informational regulation is more attractive than substantive regulation, because the contextual application of informational regulation expands the courts’ discretion, and disengages the courts from dealing with the administrative standards set by industrial regulators for substantive issues.

These eighteen parallel and non-industry-specific ‘precedents’ provide the lower courts with a helpful direction: discretion. In the empirical part of the paper, I locate 918 standard form adjudications from 2017 to 2019 across categories decided by Chinese lower courts. I find that among the various types of contracts, insurance products constitute most disputes (36.3%), with a validity ratio (22.6% for personal insurance and 21.1% for property insurance) far below the average (41%). In contrast, financial products which are loaded with jargon get a higher validity ratio (74.2%), especially for financial loan contracts (77.8%).

I look into the courts’ detailed reasoning approaches for insurance contracts and financial loan contracts. It shows that courts have ‘manipulated’ and tailored the regulatory approaches so that they may intervene in insurance contracts but take a hands-off policy for financial contracts. I provide a potential explanation for this judicial attitude: although both industries are supervised by the same supervision authority (the China Banking and Insurance Regulatory Commission or ‘CBIRC’), the banking industry operates under strict mandatory regulation with detailed substantive rules granting banks accurate ranges for their financial product design, such as commercial loan rates, fixed or floating rates, and liability for overdue payments. But insurance companies are generally self-regulated with few compulsory provisions on substantive issues. For industries with lower supervision, courts feel confident implementing their own standards of fairness. When comparing the insured with the giant insurance companies, courts tend to balance their risk based on their economic conditions and make the companies bear the loss. This preference occurs especially in those cases involving ‘people’s livelihood’ (min sheng), such as third-party liability insurance and sales of homes.

The instructions of courts have caused undesired consequences.

First are misleading requirements. By using informational regulation as a disguise to reach the courts’ prejudgment based on substantive regulation, courts send the message that they take the notification and explanation seriously. Companies have reacted to it by disclosing ‘more than you wanted to know.’ This has engendered another ‘lemon problem’ in the market of standard form contracts: companies competitively perform over-disclosure without considering its actual function, nullifying the initial advantage of standard form contracts.

Second is market disturbance. Judicial activism has penetrated all industries which lack detailed mandatory rules. I examine the disputed automobile liability clauses in the empirical study. All of them are the same as the Comprehensive Automobile Liability Insurance Model Clauses stipulated by the Insurance Association of China. But the courts frequently invalidate these model clauses. With a high rate of voidance, the decisions have emptied the effort of self-regulation, administrative supervision, and the actuarial foundation of the insurance mechanism.

In conclusion, I suggest a narrowed court authority on standard form contract regulations. Although a mandatory approach sounds appealing for consumer protection and market surveillance, the administration, not the courts, should be the implementer of this polycentric task.

Yuxuan Wang is Associate Professor at Beijing Jiaotong University.