Stepping Up to the Needs of the International Market Place
| Description: |
An Analysis of the 1999 ‘Uniform’ Contract Law of the People’s Republic of China
|
|
THE “UNIFORM” CONTRACT LAW
|
|
1. Autonomy of the parties
|
|
5. Gap filling and interpretation
|
|
6. Contract formation is now much less rigid
|
|
1. Assignment and delegation
|
|
2. Rescission and early termination
|
|
3. Greater freedom of movement
|
|
3. New remedies facilitate a market-based economy
|
|
G. Direct Government Involvement in Contracts
|
|
H. Other Contract Laws with Other Provisions Govern
|
|
Twenty years ago, when Deng Xiaoping2 announced that legal modernization was necessary to promote economic modernization, 3 China took its first step to develop a civil legal
|
|
1 This paper retains the term “uniform” in referring to the new contract law. Articles that first analyzed the draft contract law referred to it as the “draft uniform contract law.” See, e.g., infra note 17. Though one may argue that the new contract law is not truly uniform because it only supercedes the Economic Contract Law (amended 1993) (“ECL”), the Foreign Economic Contract Law (1985) (“FECL”), and the Law on Technology Contracts (1987) (“LTC”), this paper concludes that the 1999 Contract Law was intended to be the primary contract law of the PRC. See PRC, Contract Law, translated in CHINA L. & PRAC., (1999), [hereinafter U. CONT. L.] art. 428. See also infra II.H. Nonetheless, the new contract law “clarified many confusing matters and filled in many gaps in the [the] current contract law framework.” E. Anthony Zaloom & Hongchuan Liu, China’s Contract Law Marks a New Stage in Commercial Law Drafting, CHINA L. & PRAC. 15 (May 1999).
|
|
system to support a market-based economy.4 Since Deng’s pronouncement, the Communist Party of China (CPC) has adopted laws to reflect the country’s economic and social demands. Now, to better facilitate economic growth, the National People’s Congress (NPC) has unified China’s various national specialized contract laws.
|
|
The 1999 “Uniform” Contract Law (“UCL”)5 unifies prior economic and non-economic
|
|
contract law, 6 gives obligees more protection from unscrupulous obligors, and provides parties
|
|
2 (1904-1997). Chinese Premier (1978-93).
|
|
3 The Supreme People’s Procuratorate was re-established in 1978 and the Ministry of Justice in 1979. See
|
|
ALBERT H.Y. CHEN, AN INTRODUCTION TO THE LEGAL SYSTEM OF THE PEOPLE’S REPUBLIC OF CHINA 37 (1992).
|
|
Though China’s legal system under socialist modernization is relatively young, the country created one of the most influential legal codes in world history nearly 1400 years ago and has contract documents and laws dating back just
|
|
as long. See VALERIE HANSEN, NEGOTIATING DAILY LIFE IN TRADITIONAL CHINA: HOW ORDINARY PEOPLE USED CONTRACTS 600-1400 1 (1 st ed. 1995). See also RALPH H. FOLSOM ET AL., LAW AND POLITICS IN THE PEOPLE’S
|
|
REPUBLIC OF CHINA 335-36 (1992). The oldest surviving Chinese code that contains articles on contract law is the Tang Code promulgated during the Tang Dynasty (618-907). HANSEN, supra this note, at 17. The Tang Code greatly influenced the legal systems of Japan, Korea, and SE Asian nations. See JOHN HENRY MERRYMAN ET AL.,
|
|
THE CIVIL LAW TRADITION: EUROPE, LATIN AMERICA, AND EAST ASIA 405, 407 (1994).
|
|
4 Nonetheless, the PRC’s contract law borrowed legal precepts from both civil law and common law systems to address the needs and the state of its economic development. See HENRY R. ZHENG, CHINA’S CIVIL AND COMMERCIAL LAW 47-50 (1988).
|
|
5 Passed on March 15, 1999. See China’s Parliament Passes Unified Contract Law, AGENCE FRANCEPRESSE, Mar. 15, 1999. Effective from October 1, 1999. See Zaloom & Liu, supra note 1, at 15.
|
|
6 The LTC was an example of a non-economic contract law that addressed a specific contractual subject matter. The ECL and FECL focused on economic contractual relations.
|
|
each consisted of three parts. The domestic contract laws included the Economic Contract Law that represented comprehensive contract legislation, individual contract regulations governing special categories of contract, and regional or local contract rules. The foreign economic contract laws include[d] the comprehensive Foreign Economic Contract Law, several separate foreign economic regulations dealing with contract issues in special fields, and regional contract rules[.]
|
|
ZHENG, supra note 4, at 50-51. Importantly though, “the rights and obligations of parties involved in a mandatory planning contract are not governed by the [Economic] Contract Law,” rather appropriate regulations and laws govern. Daniel Rubenstein, Legal and Institutional Uncertainties in the Domestic Contract Law of the People’s Republic of China, 42 MCGILL L.J. 495, 509 (1997). Appropriate regulations and laws may still govern some contracts. See infra II.G.
|
|
The ECL was intended to “safeguard the healthy development of the socialist market economy, to protect the legal rights and interests of the parties involved in economic contracts, to maintain social and economic order and
|
|
facilitate the development of socialist modernisation.” ECONOMIC CONTRACT LAW OF THE PEOPLE’S REPUBLIC OF CHINA (amended 1993) [ECON. CONT. L.] art. 1. The ECL “was enacted precisely to regulate the inevitably expanding number of transactions falling outside the mandatory plan and state-determined prices.” Rubenstein,
|
|
more freedom and flexibility in their contractual relations than existed before. The UCL departs from previous contract regimes by nurturing a market-based economy over a State-planned one. Under the Economic Contract Law (1981) (“1981 ECL”), economic contracts stressed traditional socialist principles and served the interests of the Chinese economy. To those ends, the State restricted the ability to form a contract7 and used contracts and contract law to achieve its goals.8 Later, the NPC enacted laws that loosened the State’s control over contractual relations. First, the CPC encouraged foreign economic relations by passing the Foreign Economic Contract Law (1985) (“FECL”). Unlike the 1981 ECL, the FECL allowed contracts with unclear or indefinite terms to be enforceable, permitted parties to choose a contract’s governing law, and required courts to use applicable international treaties. Yet, the FECL still protected the State’s interests.9 Second, on a domestic scale, the General Principles of Civil Law (1987) (“GPCL”) relaxed contractual formalities by allowing parties to enter into oral contracts and unclear or indefinite
|
|
supra this note, at 509. Moreover, the National People’s Congress (NPC) originally limited the law’s scope to domestic enterprise contracts (see 1981 ECON. CONT. L. art. 2
|
|
(1994) [hereinafter Doing Business in Asia]
|
|
In contrast, the FECL was intended “to protect the lawful rights and interests of the concerned parties to foreign economic contracts and promote the development of China’s foreign economic relations.” FOREIGN ECONOMIC
|
|
CONTRACT LAW OF THE PEOPLE’S REPUBLIC OF CHINA (1985) [FOREIGN ECON. CONT. L. ] art. 1. See also ZHENG,
|
|
supra note 4, at 51-52. The FECL generally applied to all economic contracts entered between PRC enterprises or other domestic economic organizations and foreign individuals or other foreign organizations. See FOREIGN ECON. CONT. L. art. 2. The FECL did not govern if the contracts concerned either international transport or the international sale of goods where the foreign entity or person was a national of a country that had ratified the UN Convention on Contracts for the International Sale of Goods (“CISG”). See id. art. 6. Under Article 6, where an appropriate international treaty bound the nations of both parties, the sections of that treaty not reserved trump the relevant FECL provisions. See id. Thus, as the PRC and the U.S. ratified the CISG, the CISG applied to such contracts concluded between the parties of the respective nations. This has not changed under the UCL. See infra note 142 and accompanying text.
|
|
Pitman Potter correctly forecast that as China’s economy advanced, the ECL and FECL would collapse into one.
|
|
See PITMAN B. POTTER, FOREIGN BUSINESS LAW IN CHINA: PAST PROGRESS AND FUTURE CHALLENGES 8 (1990).
|
|
See 1981 ECON. CONT. L. arts. 1, 54.
|
|
8 See Carole J. Peterson, No longer a “Tool of the State Plan “?: An Analysis of the 1993 Amendments to China’s Economic Contract Law, 24 H.K.L.J. 416 (1994). “[E]conomic contracts must subordinate themselves to the state plan. Economic contracts are a powerful tool in ensuring implementation of the state plan.” Guo Ming, The Economic Contract Law is a Powerful Tool in Ensuring Implementation of the State Plan, 18 CHINESE L. & GOV’T., No. 1, 50-51 (1985).
|
|
9 See FOREIGN ECON. CONT. L. art. 5. See infra II.B.
|
|
terms to be enforceable. The GPCL and the FECL each removed an arm of State control. Though China’s contract law progressed, the later-enacted laws did not supplant earlier laws because each contract law applied to specific parties or contract subject matter. This created inconsistencies because the laws read as separate independent entities. 10 The UCL now creates a legal precept that better deals with complex contractual issues, eliminates inconsistencies in the national contract laws, and liberalizes contract and performance requirements.
|
|
The UCL faces three predominant problems though. First, the NPC borrowed many foreign legal standards that Chinese jurisprudence has not yet defined.11 Second, the new contract law reserves some power to the State in contractual matters.12 Third, China’s legal structure may not fully effectuate the law because the nation’s legal structure is still nascent. 13 Unless the NPC redresses these three issues, they will hinder China’s socialist economic modernization.
|
|
This comment analyzes how much contractual freedom the UCL provides.14 Part II presents and analyzes general provisions of UCL as well as contrasts them to prior PRC contract laws. Part III concludes that on paper the freedom to contract exists, but in reality, the new law may not produce the effects for which contracting parties were hoping because the legal infrastructure has not yet matured enough to enforce contracting parties’ rights adequately.
|
|
10 For example, the statute of limitations was two years under the ECL and only one under the LTC. Thus, if a contract had both economic and technology elements, which contract law governed was unclear. Nan Wang, The
|
|
New PRC Contract Law, 10 CHINA L. & PRAC. 42 (1998).
|
|
11 For example, “usage of trade” or “customary standards” (U. CONT. L. art. 61) or “reason to believe.” Id. art. 19.
|
|
12 See U. CONT. L. arts. 44, 77.
|
|
13 CHEN, supra note 3, at 37.
|
|
14 Freedom to contract does not mean that parties can contract free of governmental limitations
|
|
II. THE “UNIFORM” CONTRACT LAW 15
|
|
The UCL is the PRC’s first comprehensive step to promote contractual freedom. This new law proposes to protect the “lawful rights and interests of contracting parties” and strives to “maintain social and economic order and promote socialist modernization.”16 Though the UCL clarifies contract law to a great extent, empowers innocent parties, and tries to make the parties more autonomous, the fact that it still provides for governmental participation in contractual relationships, borrows legal precepts from civil and common law traditions, 17 leaves amorphous imported contract standards undefined, 18 and permits other contract laws with other provisions to govern a contract demonstrates that Chinese contract law is but transitioning from a fractured dysfunctional system to a unified functional one.
|
|
Though many of the provisions in the PRC’s new contract law may be very familiar to both civil and common law contract jurisprudence, the UCL codifies many at the national level for the first time. Due to the familiarity of the contractual concepts, one may assume too much or associate the wrong standard with a particular concept. To avoid false assumptions, this section presents problematic provisions of the UCL and analyzes how they function or are defined.
|
|
15 This section presents new general contract law concepts in the “Uniform” Contract Law (“UCL”) that foreign entities will most likely encounter in their contractual relations in China. In the notes of this section, this recent development cross-references civil, common, and international contract concepts as well as past ECL, FECL, and General Principles of Civil Law (“GPCL”) provisions.
|
|
17 For example, like French and German civil law, the GPCL requires fault to establish breach and damages. See GEN. PRIN. CIV. L. art. 106
|
|
The mélange of contractual concepts continues in the UCL, but “[i]n spite of [an overlap with international standards and common law] the conceptual structure of the UCL remains firmly rooted in civil law approaches.” Hugh T. Scogin Jr. & Brett D. Braude, New Contract Basics, CHINA BUSINESS REVIEW, Jan. 1, 1999, at 3, available in 1999 WL 11878205. Civil law influences in the UCL are force majeure, consequential damages, and the UCL’s approach to acceptance. See infra II. For a thorough comparison of the civil and common contract traditions, see
|
|
KONRAD ZWEIGERT & HEIN KOTZ, AN INTRODUCTION TO COMPARATIVE LAW (Tony Weir trans., Clarendon Press
|
|
1 st ed. 1987) (North-Holland Pub. 1 st ed. Co. 1977) [hereinafter ZWEIGERT & KOTZ].
|
|
18 See Rubenstein, supra note 6, at 511. For a description of imported concepts for performance, see Chun Wei et al., Contract Performance under the New Chinese Contract Law, CHINA L. & PRAC. 43 (June/July 1999).
|
|
The new law expands contractual relationships by now allowing Chinese and foreign natural persons to contract together,19 relaxes formation by requiring that only minimal terms be present to conclude a valid contract and by empowering legal organs to determine disputed or missing terms, and for the first time requires that an offer and acceptance support a contract.20 Each of these changes should improve the economy because more contracts are now possible, contractual transactions will stabilize because contracts will not fail easily as they may have in the past, and the parties understand what constitutes a contract
|
|
1. Autonomy of the parties
|
|
The UCL stresses contractual autonomy between the parties.21 As in previous contract laws, the UCL provides that a contract is an agreement by which parties “establish, modify or terminate relationships of civil rights and obligations”22 and that all parties to a valid contract have “equal legal status.”23 Further, the parties “enjoy the legal right to voluntarily conclude contracts, and no work unit or individual may illegally intervene” in the contracting parties’
|
|
19 See Doing Business in Asia 30-005.
|
|
20 See Lam Wing Wo, Scrutinizing the Contract Law: Scope, Ofer and Acceptance, Invalid Contracts, Agency, and Consequences of Breach, CHINA L. & PRAC. 59-60 (Aug. 1999).
|
|
21 The FECL provided for government supervision of economic contracts involving foreign parties. See FOREIGN ECON. CONT. L. arts. 5, 7. Where the parties had to obtain approval, the contract did not become binding until the appropriate organ approved it
|
|
22 U. CONT. L. art. 2. Cf. GEN. PRIN. CIV. L. arts. 84, 54
|
|
23 U. CONT. L. art. 3. Equality in contractual relations referred to “independent subjects of civil law” voluntarily concluding a contract. BASIC PRINCIPLES OF CIVIL LAW IN CHINA 197 (William C. Jones ed., 1 st ed. 1989) [hereinafter CIVIL LAW IN CHINA]. “[R]egardless of differences in administrative levels or the relative size of the enterprise units, [the contracting parties] occupy a position of equality between themselves. Neither may impose his will on the other.” Id. See also U. CONT. L. art. 3.
|
|
The ECL and FECL referred to mutual benefit, rather than preventing one party from imposing his will on the other.
|
|
See ECON. CONT. L. art. 5
|
|
relationship.24 This strong statement rings hollow because the UCL does not define illegal intervention. For public officials though, parties may be able turn to the Administrative Litigation Law (1989) and the Administrative Review Regulations (1990) to determine whether actions by officials are illegal. Though not on point, the GPCL provides that “[w]here a State agency or workers in a State agency in the course of performing their official duties violate the lawful rights and interests of [natural] or legal persons and cause damage, there must be civil liability.”25 Thus, where a public official’s interference is legal, but causes damage, there is liability. Unclear, though, is whether a public official’s illegal interference requires actual damages to be actionable. Further, what constitutes illegal intervention for non-governmental entities or individuals remains undefined. Though there is protection from illegal interference, the UCL neither provides whether actual damages are necessary or what constitutes illegal interference.
|
|
The UCL relaxes adherence to past formation requirements. First, the UCL now permits contracts, regardless of the parties, to be written, 26 oral, or “in an another form.”27 Second, though contracts may take any form, they should consist of at least eight essential terms: the names and domiciles of the parties
|
|
25 GEN. PRIN. CIV. L. art. 121.
|
|
26 A writing “refers to a form which is capable of tangibly representing its content, such as written instruments, letters and electrically or electronically transmitted documents[.]” U. CONT. L. art. 11. This facilitates e-business by permiting cyber-contracts. See generally Volker Pasternak, Contract Law Lays Foundation for E-commerce, 11 CHINA L. & PRAC. 53 (Apr. 1999).
|
|
27 U. CONT. L. art. 10. Under the previous contract scheme, all contracts with foreign parties had to be written whereas those among Chinese parties could be either written or oral. See GEN. PRIN. CONT. L. arts. 56-57
|
|
28 See U. CONT. L. art. 12. Reflecting the flexibility of a market-oriented economy, price is no longer required and a legal organ can fill it in based on fair market value.
|
|
contract may still be legally effective.29 To begin, the parties may agree to supplementary terms. If they cannot, the missing or vague terms “shall be determined in accordance with the relevant clauses of the contract or usage of trade.”30 If those methods fail, then judicial organs turn to Article 62, which explains how to establish such essential terms as quality, price or remuneration, and place, time, or method of performance.31 Besides methods for determining those essential terms, the UCL provides a liability standard32 and a dispute settlement procedure.33 Consequently, as neither the UCL nor the GPCL contains provisions to determine the parties, the contract’s subject matter, or the quantity, those terms are the only terms truly required to find a valid contract, which are the mandatory terms under the Uniform Commercial
|
|
The UCL requires that a traditionally defined offer and acceptance35 support a contract.36 Points worth exploring, however, are (1) when an offer and acceptance become effective and (2) where an offeror may become inadvertently bound by an offer.
|
|
First, an offer37 becomes effective when “it reaches the offeree”38 but the offeree need not have the offer in hand. For example, if correspondence occurs via a computer network, the offer
|
|
See id. art. 107. See also id. art. 12(7). See id. art. 128. See also id. art. 12(8).
|
|
34 This is similar to the U.C.C. requirements. The U.C.C. requires “some writing sufficient to indicate a contract between the parties” and states that a “contract is not enforceable beyond the quantity of goods shown in such writing.” U.C.C. § 2-201(1). “The only term which must appear is the quantity term which need not be accurately stated but recovery is limited to the amount stated.” Id. cmt. 1. Thus, the requirements are the parties, subject matter, and quantity. In contrast, the CISG requires that a “proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.” U.N. Convention on Contracts for the International Sales of Goods (entered into force Jan. 1, 1988) [hereinafter CISG] art. 14(1).
|
|
35 An offer is a “party’s declaration of his intent to conclude a contract with another party.” U. CONT. L. art. 14. An acceptance is a “declaration of his intention to assent to an offer.” U. CONT. L. art. 21.
|
|
reaches the offeree when it enters into his designated system.39 So, an offer becomes effective when it is in the offeree’s zone of influence,40 rather than when it leaves the offeror’s zone of influence as under the common law mailbox rule.41 Similarly, an acceptance42 becomes effective when it reaches the offeror43 unless business custom or the offeror does not require notice.44
|
|
Second, an offeror may become bound by a perceived irrevocable offer or by an acceptance that is not a mirror image. Though an offeror may generally revoke his offer,45 he
|
|
37 An offer must be definite and “indicate that the offeror will be bound by [the offer] upon its acceptance by the offeree.” Id. art. 14(1)-(2).
|
|
A contract becomes legally enforceable when it is formed in accordance with the law. See id. arts. 8, 44. To be in accordance with the law, the contract must have a subject matter and quantity and the offeree must have accepted the offer. See id. arts. 13, 25. If a party request “the execution of a letter of confirmation the contract is formed when the letter of confirmation is executed,” rather than when the contract is executed. Id. art. 33. Cf. FOREIGN
|
|
ECON. CONT. L. art. 7. Under the GPCL, a contract becomes legally enforceable, if the performing party is competent, the parties’ express intent is real, and the contract’s purpose is not illegal or contrary to public policy.
|
|
See GEN. PRIN. CIV. L. art. 55.
|
|
In the past, parties only had to contract for their mutual benefit. Because the ECL and FECL required equality, they also required the parties to conclude a contract for mutual benefit. See ECON. CONT. L. art. 5
|
|
38 See U. CONT. L. art. 16.
|
|
40 Similarly, a civil law acceptance first becomes effective when it arrives in the offeror’s zone of influence. See BGB § 130.
|
|
41 See generally RESTATEMENT (SECOND) OF CONTRACTS§ 63. “Unless the offer provides otherwise, an acceptance is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror[.]” Id. § 63(a).
|
|
42 Acceptance is effective upon timely reaching the offeror where notice is required. See U. CONT. L. arts. 26, 28-29. Where the acceptance is by notice, the offeree may withdraw it before or simultaneously upon the offeror receiving it. See id. art. 27. When using computer networks the same rules apply as under Article 16. See supra note 38 and accompanying text.
|
|
See U. CONT. L. arts. 21-22. See also id. arts. 25-26. Cf. RESTATEMENT (SECOND) OF CONTRACTS§ 69.
|
|
See U. CONT. L. arts. 22, 26. Cf. RESTATEMENT (SECOND) OF CONTRACTS§ 63. See U. CONT. L. arts. 18.
|
|
cannot do so in two instances: 1) where it is clearly irrevocable or 2) the offeree has “reason to believe that the offer [is] irrevocable and has already made preparations to perform[.]”46 The second instance, Article 19(2), may bind offeror against his intentions.
|
|
Both prongs of Article 19(2) raise issues because the first does not provide a standard to evaluate the offeree’s belief and the second is contrary to Article 22. The first prong appears to require a subjective inquiry because it analyzes whether the offeree “had reason to believe” rather than whether his belief was reasonable.47 As the UCL does not indicate that a legal organ should evaluate the reasonableness of an offeree’s reasons, the first prong does not require an objective standard. The second prong, too, is problematic because it provides no level of preparation. Additionally, permitting preparation alone to constitute notice runs contrary to Article 22, which does not permit an offeree to accept without notice unless usage of trade or the offeror permits acceptance without notice.48 Consequently, even if an offeree has reason to believe that an offer is irrevocable, unless the usage of trade or the offeror permits, the offeree cannot theoretically bind the offeror regardless of the offeree’s level of preparation. If, however, Article 22 is not read in tandem, an offeree, upon demonstrating his reason to believe, can easily bind an offeror because minimal preparation can satisfy the second prong. On its face, this twoprong test weighs heavily in the offeree’s favor because it applies a subjective standard for the offeree’s belief and permits minimal preparation to estop the offeror from revoking the offer.
|
|
Another way that an offeror may become bound by unexpected terms is the UCL’s elimination of the mirror image rule.49 As long as an acceptance “makes non-material modifications to the [terms] of the offer,” the offer is still effective, unless the offeror timely
|
|
46 See id. art. 19 (emphasis added). Cf. RESTATEMENT (SECOND) OF CONTRACTS§ 90. Otherwise, an offer remains effective until the offeror receives a rejection or the offeree timely accepts. See U. CONT. L. art. 20(1), (3)-(4). See also id. arts. 23, 28. Cf. BGB § 147, but cf. RESTATEMENT (SECOND) OF CONTRACTS § 25. A late acceptance is a new offer unless there is good cause. See U. CONT. L. arts. 28-29.
|
|
47 If this concept is equitable estoppel, the UCL may have changed the inquiry standard because common law only permits equitable estoppel as a remedy if the offeree reasonably relied on the offer, an objective standard, rather than a subjective standard of having reasons to believe. See RESTATEMENT (SECOND) CONTRACTS § 90 cmt. b.
|
|
48 See U. CONT. L. art. 22.
|
|
49 See ZHENG, supra note 4, at 72 (citing MINFA YUANLI (PRINCIPLES OF CIVIL LAW JURISPRUDENCE) 262
|
|
(Minfa Yuanli Editorial Group 1985)).
|
|
objects or the offer is not subject to modification. 50 Thus, an acceptance constitutes a new offer only where it materially modifies any of the offer’s essential terms. 51
|
|
In sum, though Chinese contract law now requires that an offer and acceptance support a contract, they function in both common and civil law manners. So, a lawyer trained in the common law must remember that the mailbox rule does not apply and a lawyer trained in civil law must remember that the UCL no longer demands that an acceptance be a mirror image.
|
|
The UCL provides different relief for invalid contracts. Invalid contracts, which are void at common law, are ineffective from formation. “Void” invalid contracts52 are those formed: under fraud or coercion “thereby harming the interests of the State
|
|
U. CONT. L. art. 31. See also id. art. 30.
|
|
See id. arts. 30-31. Cf. U.C.C. § 2-207
|
|
Parties’ names (Article 12 (1)) are immaterial because an offer is effective to the offeree only (see U. CONT. L. arts. 14-15
|
|
52 The UCL does not differentiate between void and voidable contracts as common law does
|
|
53 Id. art. 52. Where parties maliciously collaborate to harm the interests of the State, collective, or third party, the properties acquired are confiscated by the State or returned to the collective or third party. See id. art. 59. Moreover, where a party harms the State or public interests by illegal means, the organ responsible for the contract supervision handles the claim. See id. art. 127. This provision does not allow the alleged breaching party a neutral forum to hear his case. Thus, read with Article 59, State organs have much power to confiscate property generated under a contract.
|
|
54 See id. art. 40. Cf. RESTATEMENT (SECOND) OF CONTRACTS§§ 178-79. Standard clauses are invalid on their face if they indemnify the drafter from his liability or deprive the non-drafting party of principal rights. See U. CONT. L. art. 40.
|
|
The UCL regulates the use of standard contract clauses to prevent surprise and reinforce the principles of fairness and equality. “Standard clauses are clauses which a party formulated in advance for repeated use, and which he did
|
|
are voidable at common law, may be modified or rescinded. 55 “Voidable” invalid contracts are unconscionable, concluded “as a result of a major mistake,” or formed under fraud, coercion, or duress.56 Thus, the UCL use the term “invalid” for the common law “void” and “voidable.”
|
|
5. Gap filling and interpretation
|
|
To enhance economic stability, the UCL provides specific methods or standards for filling gaps created by missing, vague, or disputed terms,57 which should prevent contracts from failing. The parties, however, do not know how the courts will define new standards, such as “usage of trade,”58 “customary standards,”59 or “method conducive to the achievement of the objective of the contract,”60 for gap filling and interpretation61 because the People’s Supreme Court have not interpreted them.62 In light of China’s relatively young legal system, the unsettled gap-filling standards of the UCL give the decision-maker arguably far too much discretion to find his way to a fair resolution. 63 Therefore, though the UCL intended to improve
|
|
not negotiate with the other party when concluding the contract.” U. CONT. L. art. 39. To level the bargaining positions of the parties where standard clauses are involved, the law (1) requires the party providing the boilerplate language “in a reasonable manner, [to] draw the attention of the other party to clauses which exempt or limit his liability” (id.) and (2) interprets disputed terms against the drafter. See id. art. 41. Cf. RESTATEMENT (SECOND) OF
|
|
For an analysis of the standard clause provisions of the UCL on financial institutions, see Andrew Godwin, Scrutinizing the Contract Law: Implications for Financial Institutions, CHINA L. & PRAC. 37 (Sept. 1999).
|
|
Id. art. 54. Cf. GEN. PRIN. CIV. L. art. 59.
|
|
See U. CONT. L. arts. 61-62.
|
|
Id. art. 62(1). Id. art. 62(5). See supra II.A.2.
|
|
See Perry Keller, Sources of Order in Chinese Law, AM. J. COMP. L. 711, 752-53 (1994).
|
|
63 See FOLSOM, supra note 3, at 343
|
|
THE ECONOMIC CONTRACT LAW OF CHINA: LEGITIMATION AND CONTRACT AUTONOMY IN THE PRC 116-17 (1992)
|
|
[hereinafter POTTER, ECL]. Absent an evolved understanding of the legal concepts, ministry bureaucrats and a judiciary of varying skills cannot effectuate the imported contract concepts. See also infra Section II. G.
|
|
business conditions by making contracting more flexible, contracting parties will have difficulty assessing their risks and liabilities because how a legal organ will apply the gap-filling and interpretation standards remains unclear.64
|
|
6. Contract formation is now much less rigid
|
|
Besides facilitating freedom of contract by relaxing strict adherence to formation requirements, the UCL expands contractual freedom by setting out when parties become bound and saving contracts that under previous contract laws would have failed by allowing judicial organs to fill gaps. In the short-run, however, the UCL will make the parties’ obligations less clear because it does not state how judicial bodies should define newly adopted international standards.
|
|
Unlike prior laws, the UCL provides for order of performance and performance standards and duties. Parties must now perform their obligations simultaneously unless they agree otherwise.65 In performing their contractual obligations, parties must act in good faith and abide by public morals.66 As the UCL does not define “public morals,” someone unfamiliar with Chinese culture may find them problematic because he may unknowingly breach them.67 If a
|
|
64 Whether judges will continue to apply heqing, heli, hefa (“according to people’s feelings or affection, according to propriety or reason, according to the law”) to determine cases is unclear. Lucie Cheng & Arthur Rosett, Contract with a Chinese Face: Socially Embedded Factors in the Transformation from Hierarchy to Market, 1978-1989, J. CHIN. L. 143, 224 (1991). Judges applied “relationship, rightness, and the law” when China had a “very incomplete legal framework[.]” Id. Now, however, that the UCL presents a nearly complete legal framework for contracts, courts may be less reliant upon heqing, heli, hefa or at least, less reliant upon those factors in that order, to resolve conflicts.
|
|
65 See U. CONT. L. arts. 67-68. Cf. RESTATEMENT (SECOND) OF CONTRACTS§ 234.
|
|
66 See U. CONT. L. arts. 6-7. Cf. BGB § 242 (requiring good faith in performance). Similarly, common law imposes duties of good faith and best efforts in performance. See RESTATEMENT (SECOND) OF CONTRACTS§ 205
|
|
“Public morals” do not refer to li. Li refers to the rule of man, which the Confucianists proliferated because li “stressed the merits of government by education, persuasion, and moral example[.]” CHEN, supra note 3, at 8. The new law uses the terms “shehui gongde (the commonness of the society).” U. CONT. L. art. 7.
|
|
contracting party does not comport with public morals, his actions or omissions may provide the basis to find a contract illegal because it “harms the public interest”68 and such a finding would render the contract unenforceable.69 Besides acting in good faith and following public morals, parties must “giv[e] notice, provid[e] assistance and maintain[] confidentiality, etc. in accordance with the nature and the objective of the contract, and usage of trade[.]”70 Thus, in performance, the UCL requires a good faith performance in accordance with public morals and provides concrete examples of conduct, so contracting parties better understand what is expected of them and how they should act. 71
|
|
Prior contract regimes restricted the parties’ ability to leave a contract for two reasons. First, the State needed to control the economy readily and implement its economic plans easily. 72 Second, the contract law tried to promote equality and mutuality between the contracting parties. Consequently, after the parties had formed a contract, “neither c[ould] change or terminate [the contract] on his own without the other party’s consent.”73 In that vein, a party could not assign his contractual obligations without the other’s consent74 or for a profit.75 Yet, where one party did not perform, the Economic Contract Law (1981) (amended 1993) (“ECL”) and the FECL permitted innocent parties to act unilaterally. The circumstances under which a party
|
|
See id. art. 8. “Legally formed contracts are protected by law.” Id. Id. art. 60.
|
|
71 Guiding by example or educating the populace about behavior is a characteristic of li. Confucianists preferred to “stress[] the merits of government by education, persuasion, and moral example” rather than use legal coercion as the Legalist did. CHEN, supra note 3, at 8.
|
|
72 See supra note 8 and accompanying text.
|
|
73 CIVIL LAW IN CHINA, supra note 23, at 197. See also GEN. PRIN. CIV. L. art. 57
|
|
See GEN. PRIN. CIV. L. art. 91.
|
|
could terminate a contract varied, however, 76 and the standard of proof was nearly absolute. 77 Because there was no incentive to leave a contract and terminating a contract was very difficult, the parties had to work with each other. Thus, the law boxed parties into their relationship and promoted stability, predictability, and control.
|
|
Today, to facilitate flexibility in contractual relations, the drafters of the UCL empowered an obligee or any aggrieved party to leave a contract in two ways. First, obligees may now assign their rights without the obligor’s consent.78 Second, innocent parties may rescind or terminate a contract for sufficient cause.79
|
|
1. Assignment and delegation
|
|
The UCL liberalizes assignment but does not change delegation restrictions.80 This double standard probably exists because (1) the obligee engages a particular obligor based on that obligor’s ability to perform and (2) the obligee completes his performance first.81 An obligee may freely assign his contract rights unless they are not transferable due to the nature of the contract, the contract terms, or legal restrictions.82 If an obligee transfers his rights, the transfer is not effective until the obligee receives notification.83 An obligor, on the other hand, may not delegate his duties unless the obligee consents.84
|
|
See ECON. CONT. L. art. 26
|
|
See ECON. CONT. L. art. 29
|
|
See infra note 85 and accompanying text.
|
|
80 Under the GPCL, the government restricted freedom in assignment and delegation by not allowing the parties to profit from such a transfer. See GEN. PRIN. CIV. L. art. 91. Because the UCL is silent on this point, the GPCL still controls. See infra II.H.2.
|
|
81 Others believe this represents the concept of privity, in that it makes the contractual obligations personal to the contracting parties. China Business Law Guide 15-280.
|
|
82 See U. CONT. L. art. 79. But cf. RESTATEMENT (SECOND) OF CONTRACTS §§ 317(2), 322.
|
|
83 See U. CONT. L. art. 82. Perhaps, like an effective acceptance, the obligee receives notice when it reaches the obligee’s zone of influence. See supra note 40.
|
|
84 See U. CONT. L. art. 86.
|
|
2. Rescission and early termination
|
|
The UCL permits all parties to rescind or terminate a contract on grounds that were previously only available to parties to a foreign-involved contract.85 Any party may rescind a contract if “it was concluded as a result of [fraud, coercion, or] a major mistake[,] or was clearly unconscionable” at formation. 86 Yet, a party must exercise his right of rescission within one year of having “learned or ought to have learned of the cause for rescission[.]”87 If a party does not timely exercise his rescission right though, he may be able to use the ground for rescission within the statute of limitations to have a court invalidate the contract as being contrary to public policy or in violation of the UCL. 88
|
|
A party may now terminate a contract where the other party
|
|
expressly states or through his conduct indicates that he will not perform his main obligations[,] delay[s] the performance of main obligations, and still fails to perform them within a reasonable period of time after [being] reminded[, and] delay[s] the performance of an obligation or commit[s] another breach of contract which makes the objective of the contract unachievable[.]89
|
|
Thus, no longer must an aggrieved party wait until he incurs serious injury to leave a contractual relationship.90 The terminating party must, however, notify the other party, who in turn may file with a court or arbitral institution to confirm the validity of the termination. 9 1
|
|
85 See FOREIGN ECON. CONT. L. art. 17. A court or arbitration institution grants a rescission, but a party may terminate a contract without leave of court if he demonstrates sufficient grounds. See U. CONT. L. arts. 54, 93-94, 96.
|
|
87 Id. art. 55(1). A party may expressly or implicitly waive the right within the year. See id. art. 55(2).
|
|
88 See id. art. 52(4)-(5). The remedies for rescission are restitution and compensation for any other losses caused by the breaching party. See id. art. 58. If, however, both parties are at fault, each is responsible for his liability. See id. art. 120. Rescission does not affect the settlement or liquidated damages clauses. See id. art. 98.
|
|
89 Id. art. 94(2)-(4). If the parties do not limit the period for exercising the right of termination, either party must exercise it “within a reasonable period of time.” See id. art. 95. “The contract is terminated upon the notice of termination reaching the other party.” Id. Again, perhaps like an effective acceptance, a termination notice need not be in the other party’s hand, just his zone of influence. See supra note 40.
|
|
But cf. supra note 77. See U. CONT. L. art. 96.
|
|
Notably, the law does not provide a standard of proof for an injured party to justify his termination. The FECL required a party who wished to rescind a contract or suspend performance to provide “conclusive evidence.”92 Even if the standard of proof now required to terminate a contract under the UCL is lower than the FECL’s, an aggrieved party may still incur liability for breach if he terminates on grounds that the other party later shows are false.93 As fault, which was based on a willful or negligent act,94 is no longer a requirement to show breach under the UCL, 95 liability increases for the terminating party. Thus, if an aggrieved party in good faith terminates a contract but is without proper cause, the aggrieved party is liable because fault based on negligence is no longer an issue. Such potential liability may limit the freedom to leave a contract.
|
|
3. Greater freedom of movement
|
|
On the whole, the UCL empowers a contracting party to leave a bad contractual relationship by permitting an obligee to assign his rights without the obligor consent and by providing clear examples where an injured party may terminate a contract. Yet, in the later case, until the NPC or legal organs establish a clear burden of proof, parties may not risk termination.
|
|
An injured party may claim relief under the UCL from injury arising either at formation or during performance. First, when defining rights and obligations, the parties must be fair.96 So, where a party “negotiate[s] in bad faith[,] deliberately conceal[s] an important fact relevant to the conclusion of the contract[,] provide[s] false information[,]” or acts contrary to good faith, he is liable for injury resulting therefrom.97
|
|
FOREIGN ECON. CONT. L. art. 17.
|
|
See infra notes 102-104 and accompanying text.
|
|
See infra notes 98-99 and accompanying text.
|
|
97 Id. art. 42. Cf. BGB § 138
|
|
Second, a party may file a claim where the other party “fail[ed] to perform his contractual obligations or perform[ed] his contractual obligations in a way other than agreed upon[.]”98 This statutory provision departs radically from previous contract laws because it, like the common law, does not require fault to prove breach. 99 In the past, fault, as in the civil law tradition, was an essential component in determining breach. 100 The issue now is whether the common law “faultless” breach applies to all contracts. Though the UCL provides for many types of contracts, the UCL only superceded the ECL, FECL, and LTC. As the UCL did not supercede the GPCL, if there is a non-economic or non-technological contract or a purely domestic civil contract, proving breach still requires fault because the GPCL still governs such contracts. 101
|
|
Force majeure excuses liability arising from non-performance caused by “objective circumstances which cannot be foreseen, avoided or overcome.”102 If force majeure renders
|
|
98 See U. CONT. L. art. 107. If both parties breach, each should bear his corresponding liability. See id. art. 120. Naturally, the parties must file within the statute of limitations but the UCL only provides statutes of limitations for two types of contracts: technology contracts and foreign-involved contracts concerning the purchase and sale of goods. The statute of limitations for either is four years. See id. art. 129. This clarifies the statute for most foreign-involved contracts, but leaves the other types undefined. As the UCL is silent, the GPCL provides the statutes of limitations for other types of contracts. See GEN. PRIN. CIV. L. arts. 135-37.
|
|
99 See GEN. PRIN. CIV. L. art. 106. Cf. BGB § 279
|
|
100 See ZHENG, supra note 4, at 78. See BGB § 279, 286
|
|
To impose damages Chinese courts first determine[d] [whether:] (1) the party ha[d] failed to perform the contract in part or in whole
|
|
ZHENG, supra note 4, at 79. To procure damages at civil law, breach generally requires fault. See 2 ZWEIGERT & KOTZ, supra note 17, at 182-83.
|
|
101 See GEN. PRIN. CIV. L. art. 107
|
|
102 U. CONT. L. art. 117. See also GEN. PRIN. CIV. L. art. 153
|
|
L. art. 24. Whether an event, besides a natural disaster, constituted force majeure, depended on whether the parties could have foreseen it. See ZHENG, supra note 4, at 68. “In Chinese contract practice, force majeure usually includes war, flood, storm, earthquake, or fire [but t]he provisions often vary depending on the nature of the subject matter of the contract.” Id. For a detailed discussion of force majeure in the PRC, see Lester Ross, Force Majeure and Related Doctrines of Excuse in Contract Law of the People’s Republic of China, 5 J. CHIN. L. 58 (1991).
|
|
subsequent performance impossible, it does not excuse any breaches having previously occurred.103 Where force majeure prevents a party’s performance though, the non-performing party must notify the other and “provide proof within a reasonable period of time” to be
|
|
In sum, the UCL introduces “faultless” breach from the common law to China’s civil law structure. The UCL, however, retains the civil law force majeure rather than adopting the common law impracticability or frustration.
|
|
In the past, the parties did not have many options for damages and relief. First, damages were limited to breach penalties, if provided,105 and to either liquidated damages106 or actual loss.107 Generally, Chinese law did not favor penalizing breach, so it did not provide for punitive
|
|
The GPCL defines force majeure as “objective situations that are unpredictable, unavoidable and irresistible.” GEN. PRIN. CIV. L. art. 153. Cf. BGB §§ 275, 280, 306, 325, 327
|
|
103 See U. CONT. L. art. 117.
|
|
104 See id. art. 118. The UCL does not explain what type of proof is adequate. Under the Draft Uniform Contract Law (“DUCL”), a certificate issued by a relevant agency met the burden of proof. See Draft Uniform Contract Law of the People’s Republic of China, translated in CHINA ECON. NEWS, (1998), [hereinafter DRAFT U. CONT. L.] art. 120.
|
|
105 See ZHENG, supra note 4, at 61 (the “Civil Code does not specify whether penalties shall be part of the damages or in addition to the damages”)
|
|
106 See FOREIGN ECON. CONT. L. art. 20. See also GEN. PRIN. CIV. L. art. 112. If the liquidated damages where much more or less than the foreseeable loss at formation, the court adjusted them accordingly. See FOREIGN ECON. CONT. L. art. 20. Cf. supra note 105 and accompanying text
|
|
107 See ZHENG, supra note 4, at 61
|
|
damages.108 Though the UCL does not provide for punitive damages, it introduces consequential damages to Chinese jurisprudence. Second, to facilitate the government in planning the nation’s economy, legal organs preferred to compel specific performance to damages.109 Specific performance was more important than money damages because the State needed contracts fulfilled to implement its plans to reach its economic goals. 110 Today, however, as China’s economy evolves from a state-planned one to a market-based one, the dependence on specific performance is diminishing.
|
|
108 See ZHENG, supra note 4, at 66. Though the FECL was compensatory rather than punitive and in both “foreign economic litigation and in the arbitration of the China International Economic and Trade Arbitration Commission (CIETAC), claims for punitive damages [we]re seldom upheld,” unless the legal organ applies foreign law, damages for breach under the ECL were “punitive in nature.” Jun Wang, Punitive and Compensatory Contract Damages: A Comparative Study of UCC, Chinese, and International Law, 29 LOY. L.A. L. REV., 1071, 1072 (1996).
|
|
In China, punitive damages included legal and liquidated damages for breach. First, legal damages were statutory and ranged from a penalty of 1%-30% of the contract value, regardless of “whether the breach [] led to the loss suffered by the other party or not,” as long as the breaching party was at fault. Id. at 1073. Second, Chinese contract law permitted parties to determine liquidated damages. See supra note 106. The breaching party had to pay even where there was no loss. See Wang, supra this note, at 1079. Though a court could also reduce excessive damages to an appropriate amount where breach resulted from negligence, a court could not where breach was intentional. See id. at 1079. China adopted punitive damages for a breach of a domestic economic contract because “the planned economic system still play[ed] an important role in the country’s national economy [and punishing parties in breach was] the most effective way to prevent breach of economic contracts and ensure the completion of scheduled economic plans.” Id. at 1082.
|
|
109 See ZHENG, supra note 4, at 80-81. See also GEN. PRIN. CIV. L. arts. 108, 11 1. In China, “an accepted principle of contract law [makes] performance a priority[.]” Doing Business in Asia 30-013. Cf. BGB § 241. This preference reflected the CPC’s doctrinal views of contract. See POTTER, ECL, supra note 63, at 115-16.
|
|
Complete specific performance did not exonerate the breaching party from liability for breach penalties. See ZHENG, supra note 4, at 79. “Chinese contract practice suggests providing specific performance does not necessarily release the party in breach from liability for damages” because, as he already breached, he is liable for breach penalties. Id. See also id. at 81. Cf. ECON. CONT. L. arts. 36-40 (permitting various remedies for various contract types)
|
|
110 The group that drafted the ECL stated that the
|
|
purpose of concluding an economic contract by the parties is to implement the state plan and achieve a specific economic purpose. To pay penalties and damages penalize the party in breach. The contractual relationship is not dissolved and the purpose for which the contract is concluded is not achieved. Therefore, where the other party requires performance, the economic contract shall certainly be performed.
|
|
ZHENG, supra note 4, at 81 (quoting ZHONGHUA RENMIN GONGHEGUO JINGJI HETONGFA WENTIHUIDA [QUESTIONS AND ANSWERS ON THE ECONOMIC CONTRACT LAW OF THE PEOPLE’S REPUBLIC OF CHINA] 2 (Drafting Group of the
|
|
Economic Contract Law ed., 1985)). See also Guo Ming, Guanyu Zhonghua Renmin Gongheguo Jingji Hetongfa Caosan de Shuoming (Explanation on the Draft of the PRC’s Economic Contract Law), report to the Fourth Session of the Fifth National People’s Congress, Dec. 1981, reprinted in Chinese in Manual of Economic Contract Law 402 (Wang Zhong et al. eds., 1985). See also CIVIL LAW IN CHINA, supra note 23, at 204.
|
|
Besides providing for actual damages 111 and permitting liquidate damages,112 the UCL expands damages now to include consequential damages. 113 Consequential damages are the “benefits which could have been obtained after performance of the contract [but] such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen” at formation of the “contract as a possible consequence of the breach of contract.”114 “Possible consequence” as a standard for determining consequential damages is a lower standard than the common law standard “probable result.”115 As the standard in Chinese contract law is lower, the reach of contract liability in the PRC is longer. Thus, consequential damages are greater under the UCL than at common law, unless the judiciary restrains the term “possible.”
|
|
A fundamental change in contract remedies under the UCL is the waning dependence on specific performance. 116 The UCL restricts specific performance because the market-based economy does not require it as the planned economy did. Though the law no longer guarantees
|
|
111 Contracting parties have a duty to mitigate losses. See U. CONT. L. art. 119. The UCL requires the injured party to “take appropriate measures to prevent amplification of the loss.” Id. Cf. GEN. PRIN. CIV. L. art. 114
|
|
112 See id. art. 114. If the liquidated damages are inappropriately high or low though, either party may file with the appropriate legal organ to adjust them accordingly. See id. Cf. supra note 106.
|
|
113 See U. CONT. L. art. 113. “The only limit [on liability] is that there be a legally relevant causal connection between the behaviour which renders the defendant liable and the consequential harm.” 2 ZWEIGERT & KOTZ, supra note 17, at 295. See BGB §§ 249, 252
|
|
But see PAUL T. VOUT ET AL., CHINA CONTRACTS HANDBOOK 318 (1997) (stating that the FECL provided for
|
|
consequential and incidental damages because Article 18 “assume[d] that the remedy of damages [was] generally sufficient to make full compensation for loss resulting from a breach”). Arguably, this interpretation provided for consequential and incidental damages, but the language clearly provides for such damages.
|
|
U. CONT. L. art. 113 (emphasis added).
|
|
RESTATEMENT (SECOND) OF CONTRACTS§ 351(1).
|
|
See U. CONT. L. art. 110.
|
|
performance, it provides other options such as assignment, rescission, termination, and consequential damages.
|
|
Where a party fails to perform, the UCL no longer compels specific performance. Nonetheless, the claimant may choose specific performance. 117 A court will not, however, compel performance if “performance is impossible in law or in fact[,] the subject matter of the obligation is not suited to specific performance[,] the cost of performance would be excessively high[,] or the obligee failed to demand performance within a reasonable period of time.”118 Yet, when specific performance is appropriate, it does not preclude damages for remaining losses. 119
|
|
3. New remedies facilitate a market-based economy
|
|
The new remedies accommodate the needs of a market-based economy better than previous ones because a party is now free to breach as long as he can pay his way out of the contract because performance is no longer compulsory. Yet, the reach of liability may limit the parties’ freedom to breach due to the lack of definition of the consequential damages standard, “possible consequence.”120
|
|
No longer must parties consult or mediate.121 Under prior contract laws, parties were “encouraged to re-negotiate or alter the contract in light of the changed circumstances, rather than rigidly relying on the rights and duties set out in the terms of the original contract.”122
|
|
117 See id. But cf. su pra note 109. Additionall y, where a party delivers g oods of non-conformin g q ualit y, the injured party may return the goods or request that the other party repair, replace, reproduce, or discount them. See U. CONT. L. art. 111. As with specific performance, the injured party may file for other losses resulting from the non-conforming quality. See id. art. 107.
|
|
Id. art. 110. Cf. C. CIV. art. 1142. See U. CONT. L. art. 110.
|
|
120 On the other hand, the lack of definition may encourage unscrupulous parties to breach the contract. In not wanting to penalize parties for breach, the courts may measure consequential damages conservatively. See supra note 108.
|
|
121 “The parties may resolve their disputes through settlement or conciliation.” U. CONT. L. art. 128. “If the parties are not willing to resolve a dispute through settlement or conciliation, or settlement or conciliation fails, application may be made to an arbitral institution ” Id.
|
|
122 Doing Business in Asia 30-013. See also, Rubenstein, supra note 6, at 501-502. “Mandating that disputes be resolved by organs with internal relations to the parties creates incentives for mediators to minimize
|
|
These customs lightened the demand on the legal system and encouraged the contracting parties to develop a working relationship.123 Today, however, if parties are unwilling to consult or mediate, they may apply for arbitration.124 Notably though, where a contract involves a foreign element and a valid arbitration clause, the parties may still only arbitrate.125 Thus, if a foreigninvolved contract does not provide for arbitration, the parties may file directly with the courts.
|
|
G. Direct Government Involvement in Contracts126
|
|
Though the UCL espouses contractual freedom and protects parties from illegal interference outside the contractual relationship,127 the UCL does not completely free parties of governmental involvement in their contract. The State’s involvement is both direct and indirect. Directly, the State may provide contractual procedures and administrative authorities may handle illegal acts that harm the State’s interests without judicial review. Indirectly, the State may greatly influence the outcome of contracts because its legal organs have newly-granted discretion in interpreting and replacing terms.
|
|
financial damages (since their parent organ would absorb the loss) and to press for specific performance.” Id. at 502.
|
|
Nonetheless, the contract laws permitted the parties to consult, mediate, arbitrate, or go to court. See ECON. CONT. L. art. 42
|
|
123 The “Chinese view [of bilateral resolution of disputes was] conducive to maintaining a friendly relationship and mutual confidence between the parties.” ZHENG, supra note 4, at 67. Others have stated that because the Tang and its successor codes dealt largely with criminal law, private law “developed a wide variety of forms of conflict resolution outside the courts.” 1 ZWEIGERT & KOTZ, supra note 17, at 364. See also MERRYMAN, supra note 3, at 404. Besides encouraging internal supervision, Chinese law discouraged external supervision by making the loser pay. See Neil B. Tanner, Note and Comment, The Yin and Yang of Foreign Economic Contract Law in the People’s Republic of China–A Legalistic and Realistic Perspective, 16 J.L. & COM. 155, 168 (1996).
|
|
124 See U. CONT. L. art. 128.
|
|
126 The UCL still provides for some government supervision of contracts, but not to the extent that the DUCL did. Under the DUCL, priority for government contract supervision was at the county level industrial and commercial administrations. See DRAFT U. CONT. L. art. 432.
|
|
127 See U. CONT. L. arts. 3-4.
|
|
The State may directly control contractual relations first by establishing administrative procedures that contracting parties must follow in certain instances.128 Consequently, in such instances, parties do not establish their relationship, the governmental organ does. Second, the UCL vests appropriate administrative authorities with judicial autonomy by allowing them to supervise and “handle” illegal acts that harm the public or state interests.129 This new found judicial autonomy for agencies may hinder contracts between non-governmental parties and governmental ministries because non-governmental parties will not have a neutral forum in which to defend charges brought by the governmental ministry. 130 Moreover, the ministry that charges wrongdoing in a contract into which it entered with a non-governmental party could be the same ministry that would have jurisdiction over the subject matter of the contract and thus, the investigation. Such a claim completely denies the alleged wrongdoer a neutral forum because, even if the wrongdoer could appeal, he cannot move outside the agency handling the
|
|
Indirectly, gap filling measures and interpretative powers give legal organs much discretion in establishing a contract’s terms.132 Though parties may supplement their contract where there are missing or vague terms, 133 a legal organ has a few options to determine a
|
|
128 First, in formation (see id. arts. 7, 10, 36), modification (see id. art. 77), assignment (see id. art. 87), and termination (see id. art. 96), where “the laws or administrative regulations provide [] procedures such provisions shall govern” the contract. Id. The contract law does not provide procedural examples. In the past, “various administrations for industry and commerce and other relevant competent departments [were] responsible for the supervision of economic contracts.” ECON. CONT. L. art. 44.
|
|
129 U. CONT. L. art. 127.
|
|
130 The UCL does not provide that parties may appeal an administrative decision to a court after having exhausted administrative remedies, unlike the Unites States.
|
|
131 China’s governmental structure is vertical-horizontal, which means that appeals occur within a certain organ on each level and no other organ may interfere.
|
|
U. CONT. L. art. 61. Another article provides:
|
|
If a dispute arises between the parties concerning the understanding of a clause of the contract, they shall determine the true intention of that clause by making reference to words and sentences used in the contract, the relevant clauses of the contract, the objective of the contract, usage of trade and the principle of good faith.
|
|
If a contract is drawn up in two or more languages and it is agreed that all versions are equally authentic, the corresponding words and sentences in all versions are presumed to have the same
|
|
contract’s terms if the parties cannot agree to new terms. First, if the parties do not agree, a legal organ will fill the gap “in accordance with the relevant clauses of the contract or usage of trade .”134 If the parties cannot agree and the legal organ cannot establish the terms as prescribed under Article 61, the UCL provides methods for a legal organ to determine such terms under Article 62.135 Though the UCL provides standards or methods for gap filling and interpretation, a judicial organ’s discretion is relatively unrestrained as the UCL does not provide guidelines that judicial officials must follow in applying many newly imported contract concepts.
|
|
Governmental supervision of contractual relations, investigation of alleged illegal acts, and contract interpretation will affect the parties’ freedom of contract. Though the supervision and investigation provisions do not allow the parties full autonomy to contract, their impact may be minimal. Actually, the State wields the most power in its interpretative powers. So, until reach of government supervision, investigation, and interpretation is clear, contract will not be truly free in the PRC.
|
|
H. Other Contract Laws with Other Provisions Govern
|
|
The UCL brings many general contractual concepts and kinds of contract subject matter under one roof and supercedes the ECL, FECL, and LTC. 136 Though the UCL unifies central contract laws, it does not include all laws that could concern contracts. Two factors demonstrate that the UCL does not provide exhaustive contract rights and duties. First, Article 123 permits
|
|
meaning. If the words and sentences of different language versions are not consistent with each other, they shall be interpreted in light of the objective of the contract.
|
|
134 Id. art. 61. Cf. U.C.C. § 1-205(4). If the parties modify the contract with indefinite terms, the modification is ineffective. See U. CONT. L. art. 78.
|
|
There is a special provision where the State sets product prices and allows them to float during delivery. See id. art. 63. If a delay occurs and prices have risen, the contract price will apply, but if the prices fall, the price shall be lowered accordingly. See id.
|
|
In interpreting ambiguous terms, German law requires good faith and applies an objective standard. See BGB § 133. French law applies a subjective standard and chooses the interpretation most suitable to the contract. See also C. CIV. arts. 1156-58. American courts tend to apply objective standards, such as business custom or the parties’ prior
|
|
interactions, to clarify ambiguous terms. See U.C.C. § 1-205(2)
|
|
See U. CONT. L. art. 428.
|
|
other laws with other contract-related provisions to govern.137 Second, the UCL is silent on essential issues that the GPCL addresses.
|
|
Article 123 demonstrates that the UCL is not intended to be a truly uniform law. Article 123 permits “other laws [that] make other provisions concerning a contract” to govern.138 This provision does three things: it permits gap filling, allows other codes to govern contractual activities or relations, and promotes local autonomy.
|
|
First, “other laws [that] make other provisions concerning contracts” refers to provisions concerning contracts for which the UCL does not provide. Therefore, local contract regulations may only govern issues, which the drafters did not foresee, but may not preempt the national UCL provisions. 139 Where local regulations are inconsistent, the UCL trumps because only laws that make other provisions may govern. Inconsistent laws conflict because they approach a legal issue differently. As such, if the UCL has already provided for an issue, local regulations cannot govern.
|
|
Second, “other laws” can refer to other codes. Therefore, the UCL lets the legal organ know that its provisions do not limit or exclude the application of other laws, such as criminal or tort, to redress issues that arise in a contractual relationship.
|
|
Third, China’s decentralization policy may have also driven the provision. The Cultural Revolution resulted not only due to a lack of law, but also due to the concentration of power in a few hands. 140 Thus, to prevent central governmental officials from becoming too powerful, the CPC allows local governments more autonomy by empowering them to experiment with contract law. Therefore, the UCL only unified contract law that the central government enacted. 14 1
|
|
See GEN. PRIN. CIV. L. art. 142.
|
|
140 See Robb M. LaKritz, Comment, Taming a 5, 000 Year-old Dragon: Toward a Theory of Legal Development in Post-Mao China, 11 EMORY INT’L L. REV. 237, 256 (1997).
|
|
141 See U. CONT. L. art. 428.
|
|
If local regulations only fill the UCL’s gaps, then the issue is whether local regulations trump international law where there is no UCL provision on point.142 Priority between local regulations and international law depends on one of two situations. First, “[w]here an international treaty that the People’s Republic of China has concluded or participates in contains a provision which differs from the civil law of the People’s Republic of China, the provision in the international treaty applies.”143 Thus, in that instance, the applicable international treaty provision trumps local rules and regulations. Second, “[w]here the law of the [PRC] or international treaties which the [PRC] has concluded or participates in do not contain a relevant provision, international custom may be applied.”144 Therefore, in that instance, whether international custom or local rules and regulations apply is within the discretion of the adjudicating legal organ. As a result of these provisions, local rules and regulations should rarely interfere with the application of national and international contract concepts in China.
|
|
142 To avoid application of local rules and regulations as well as PRC civil law, parties may choose the law that governs the contract. See id. art. 126. Cf. FOREIGN ECON. CONT. L. art. 5. Absent a choice, the law of the country with closest connection to the contract applies, unless all parties involved are citizens of countries that have ratified the same international treaty, in which case, the international treaty applies. See GEN. PRIN. CIV. L. art. 142.
|
|
An important factor in determining which country has the closest connection to the contract is establishing where the parties formed the contract. Under the UCL, the place where an acceptance becomes effective is the place of formation. See U. CONT. L. art. 34. So, the place with the closest connection would be the one where the acceptance reaches the offeror’s zone of influence (see supra note 40 and accompanying text) or where the parties execute a written contract. See id. art. 35.
|
|
An example of a controlling international treaty is the CISG. China ratified the CISG in 1986. Pursuant to Article 95, China, like the United States, made a reservation to Article 1(1)(b),
|
|
which provides that the Convention applies where rules of private international law lead to the application of the law of a Contracting State. [Such a reservation means that] the Convention applies and replaces or modifies applicable Chinese domestic law only where a contract of sales is between a Chinese party and a party of another Contracting State.
|
|
Jianming Shen, Declaring the Contract Avoided: The U.N. Sales Convention in the Chinese Context, 10 N.Y. INT’L L. REV. 7, 9 (1997). Thus, the Convention applies to contracts for the international sale of goods between a Chinese and American party. The fact that the CISG applies to contracts between Chinese and American parties for the international sale of goods is important because only compensatory damages are available under the CISG for breach. See Wang, supra note 108, at 1080.
|
|
143 See GEN. PRIN. CIV. L. art. 142.
|
|
As the UCL does not expressly supercede the GPCL and Article 123 permits other laws not inconsistent with the UCL to govern contract, the GPCL still govern contractual issues on which the UCL is silent. There are three important contractual issues for which the GPCL provides but the UCL did not address. First, the GPCL restricts assignment and delegation by not allowing the parties to profit from such a transfer. 145 Second, the UCL only has statutes of limitations for technology contracts and foreign-involved contracts for the purchase and sale of goods.146 Therefore, the GPCL provides the statute of limitations for all other contracts. 147 Third, the UCL does not provide a method of ascertaining the priority of domestic law where applicable international agreements or treaties are on point, but the GPCL does. 148 Consequently, as the GPCL provides other laws governing contracts that are not inconsistent with the UCL, the GPCL governs in these areas.
|
|
The UCL proposes significant changes in Chinese contract jurisprudence. In formation, the new law stresses contractual autonomy, provides standards of conduct, establishes methods for remedying incomplete or disputed contracts, and requires and defines offer and acceptance. In performance, the UCL now binds the parties by good faith and duties that the parties should accord each other. Additionally, the new law strengthens a party’s position by easing the ability to withdraw from a contractual relationship and expanding damages. Yet, governmental agencies continue to regulate contractual relations, newly borrowed contract standards are still undefined, and the UCL does not truly unify contract law. Until these hindrances are resolved and stability is established, the freedom to contract, though greater than before, will not provide the PRC with the economic mobility that it needs to develop its socialist market economy
|
|
146 See U. CONT. L. art. 129
|
|
147 For example, the GPCL provides a one-year statute of limitations for “delay or default in [payment of] rent[.]” GEN. PRIN. CIV. L. art. 136(3). Theoretically, as the UCL governs leases, the UCL should provide this statute of limitations.
|
|
effectively. Consequently, in the near term, contracting parties may continue to find contractual justice elusive. 149
|
|
The new legal concepts in the UCL reflect China’s evolving socio-economic status: transitioning from a planned economy to a market-based economy. 150 Vestiges of prior contract law, such as a piecemeal approach to lawmaking for fear that the system will fail 151 and governmental supervision of contract, remain. Nonetheless, the UCL increases contractual freedom and justice in an attempt to bring Chinese contract law up to the standards of advanced market economies.
|
|
149 See Rubenstein, supra note 6, at 495-97. Many business people will likely continue to find contracts not worth the paper on which they are written. See id.
|
|
150 See China: Law to Cut Down Dodgy Dealing, CHINA BUS. INFO. NETWORK, Aug. 31, 1998
|
|
151 See CHEN, supra note 3, at 94-95. The NPC enacted many legal provisions that were too broad and imprecise, or lagged behind economic reforms. See id.
|
|
152 Class of 2000, William S. Richardson School of Law.
|
|
