On December 5, the Supreme People's Court (SPC) released the Interpretation on Several Issues Concerning the Application of the General Provisions of the Contracts Book of the Civil Code of the People's Republic of China (the "Interpretation"), with effect on the said date of release.

The Interpretation comprises nine sections, covering general rules, conclusion of contracts, effect of contracts, performance of contracts, preservation of contracts, modification and assignment of contracts, termination of rights and obligations under a contract, default liability, and supplementary provisions. Regarding the identification of a preliminary contract, according to the Interpretation, if the parties agree to conclude a contract within a certain period of time in the future by means of a letter of subscription, letter of order, letter of reservation, and the like, or if they deposit earnest money to secure the conclusion of a contract within a certain period of time in the future, thereby establishing clarity on the parties, subject matter, and other essential elements of the contract to be concluded in the future, the court should recognize the formation of a preliminary agreement. However, if the parties merely express their intention to transact by signing a letter of intent or memorandum without agreeing to conclude a contract within a certain period of time in the future, or if it is difficult to ascertain the parties, subject matter, and other essential elements of the contract to be concluded in the future, the court will reject a party's claim of the establishment of a preliminary contract, even if an agreement exists.

(Source: Supreme People's Court of China)