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Reproduced with permission of 8 Vindobona Journal of International Commercial Law & Arbitration (2004) 145-164.

The Chinese Declaration against Oral Contracts under the CISG [d1]

Xiaolin Wang [a1]

Camilla Baasch Andersen [aa1]

  1. Introduction
  2. Background
  3. Defence of the Reservation
  4. Opposition to the Reservation
  5. Analysis and Evaluation
  6. The Gordian Knot of Applicable Formalities
  7. Conclusions and Suggestions for the Future

1. INTRODUCTION

1.1 The CISG and China

The 1980 United Nations Conventions on the International Sales of Goods (hereinafter referred to as the 'CISG'), is -- as most lawyers and commercial businessmen will know -- a uniform international sales law. It has to date been ratified by 62 nations [1], representing over two thirds of world trade. One of these nations is China, a nation which is currently undergoing major changes in terms of legal transition and trade policy. [page 145]

The CISG entered into force in China on January 1st 1988,[2] with two reservations to the convention. The first reservation, an Article 95 reservation, disregards the application of Article 1(1)(b) of the CISG so its application is limited to cases where both seller and buyer reside in CISG States, restricting the role of private international law.[3] This reservation has been taken by other CISG States,[4] and the policies of certainty and predictability which underpin it are unchanged from the date of ratification until today. The second reservation, however, is more questionable regarding its use of application in China today. It is a reservation made against the conclusion of contracts which are not in writing very similar to a reservation made under Article 96, albeit with a slightly different wording.[5] In essence, the declaration reserves the application of Article 11 allowing oral contracts and contracts with no consideration. In other words, the reservation brings to the application of the CISG in China a formal requirement that contracts be evidenced in writing.

1.2 Article 96 CISG

One of the keys to the success of the CISG lies in its drafting, which was based on a lengthy diplomatic process, springing from the ashes of the unsuccessful duo of the 1964 Hague conventions ULF (Uniform Law on the Formation of Contracts for the International Sale of Goods) and ULIS (Uniform Law on the International Sale of Goods).[6] These antecedents were seen to have failed because their approach was too uncompromisingly 'western', with only nine states (none of which was China) ratifying them.[7] The lesson learnt from this was to ensure development of uniform sales law which was wide in appeal and flexible, and delegates from all UN members were invited to participate to ensure the acceptability of the convention(s).[8] The flexibility of the convention was attained, amongst other means, through certain reservations regarding unique public policy in certain prospective member states.[9] [page 146]

Article 96 is one example of such a clear public policy reservation. It represents a compromise between the freedom of form requirement in CISG Article 11 and the notion of form requirements which appeal to many States. The freedom of form included in CISG Article 11 was also included in Article 15 of the preceeding ULIS, but it was -- from the beginning -- a controversial issue at the drafting of the CISG in the UNCITRAL working group as 'the bureaucratic needs especially of large-scale entities (business enterprises, states, or governmental organisations, etc.) to control their transactions require written evidence and the respect of form requirements.'[10] On to this came the problem of different domestic requirements for written contracts. At the tenth session of UNCITRAL at Vienna, it had been decided that the written form would not be compulsory, although many countries such as the United States required it for most contracts. The USSR had considered it important to add a reservation similar to the existing Art. 96 (known as Art. X during drafting). Proposals for reservations were then made to attain a compromise between the included freedom of form rule in the CISG and the possibility of introducing form requirements.[11] Hence, Art. 96 came into existence, as a way to avoid application of Art. 11 relaxing formal requirements for contracts when read with Art. 12.

In context of the strict formation of contract laws and closed market policies of a socialist regime this reservation is understandable, and it is no surprise that the States who have taken out this reservation were primarily representatives of this regime at the time of ratification.[12] However, when viewed in the context of the recent Chinese legal transitions and developments in law as well as policy, it is unclear in its reason for being, and it also presents business people and legal practitioners with a Gordian knot in terms of gap-filling.

1.3 The evolution of Chinese trade policy and law

The winds of historical and political change have swept through China in recent years, bringing with them many changes of policy. Amongst these changes is a noteable opening of the Chinese markets to trade and foreign investment. With these trade-policy changes and the opening of China's trade have come the accession to numerous international bodies and conventions, including -- very recently -- the World Trade Organization (WTO).[13] [page 147]

Although undergoing changes towards the free market economy and trade forces, there are still voices of apprehension on the wind. The shift of political and ideological ideas in China in recent years has been immense. In ancient times, the Chinese philosophy of 'ti tian xing dao' meant to do justice for heaven, heaven being represented by the emperor. This inferred that the feudal lords would do everything for the people better than the people themselves could. During the communist period, this philosophy was modified by Chairman Mao Tse Tung, who stated the importance to: 'serve the people heart and soul', i.e. meaning that the government would be responsible for everything, including trade, amongst the people. In both these ideologies, the people are considered incapable of looking out for themselves, or at least not as capable as the administration controlling them. They are not free to serve themselves, they are served from above. The major change in philosophy and ideology comes with the arrival of the commercial realities of the market economy which now allows the people to serve themselves, to be masters of their own business. The freedom of the free market economy is remarkably tangible. This change is enormous; the commercial freedom presents a significant change in political ideology. And not all elements of Chinese society are ready to embrace this shift in political policy and ideology, although it is being embraced by most.

One school of thought in China tends to resist the rush to embrace everything western and 'modernist' in the philosophical sense, on the grounds of legitimate national self-interest. The reservation to Art. 11 can be seen as an example of the cautious adoption of western concepts, by resisting freedom of formation of contract. In the eyes of those who do not believe in such caution, some may view it as nothing more than bureaucratic conservatism reflecting hostility to western mercantile practice, posing the question whether, paradoxically, the Reservation is not a consideration of outdated Chinese public policy, reflecting ideology as it was, not as it is or purports to be, today with the arrival of the free market economy in China.

However, even without bringing questions of policy into the picture, the fact still remains that a complete overhaul of the Chinese law of contracts with the new Uniform Contract Law (hereinafter referred to as the 'UCL'),[14] has meant that oral contracts are possible under domestic Chinese law now. Why, then, cling to the reservation and the formality of written contracts in international sales contracts? Moreover, does the abolition of the formality of written contracts under Chinese domestic law not present a puzzling position of law when trying to determine which formal requirements to fulfill?

This Article, while examining the Art. 96 reservation in the light of Chinese law today, raises the question if it forms a coherent part of Chinese international contract law, or is outdated and in need of withdrawal. The following outlines the nature of [page 148] reservations in the context of the uniformity of the CISG, as well as the historic and jurisprudential background to the CISG principle of form requirements (Section 2), and the policy arguments for and against China's adherence to the reservation (Sections 3 and 4) and a conclusion on the policy considerations (Section 5), as well as describing the choice of law conundrum which the reservation presents in effect today (Section 6). The conclusion suggest that the Reservation be withdrawn since it is fundamentally contradictory to, not only the principle of freedom of requirements as to form underlying the CISG, but also the corresponding principle embodied in China's domestic law including the newly effected Uniform Contract Law and a Gordian knot of choice of law. It is hence, to a certain degree, becoming an obstacle rather than a promoter to the Sino-foreign transactions of goods as well as an obstacle to uniformity of the CISG (Section 7).

2. BACKGROUND

2.1 The universal appeal of the CISG

On 10 April 1980 a diplomatic conference meeting in Vienna adopted the CISG, and China was one of the first signatories to the convention, depositing the signature in September of the next year, where it waited along with others for the deposit of 10 signatures before the CISG could enter into force,[15] which it did on 1 January 1988 after China, Italy, and the United States simultaneously deposited ratifications nine, ten and eleven. Since then, it has governed both the formation of many international sales contracts, and the rights and obligations of parties to these contracts.

The universal appeal of the CISG is largely based on the fact that it was drafted in diplomatic working group to accommodate all legal systems and legal cultures represented in the UN; civil law and common law countries, developed and developing countries, and a multitude of countries with different languages and cultures. And this appeal is reflected in the success of the convention in terms of ratification. As mentioned in Section 1.1 above., 62 countries including China as well as most EU member states, Russia and the U.S.A. have ratified the CISG, effectively representing international transactions accounting for more than two-thirds of all world trade. Moreover, further countries, including the United Kingdom,[16] are either currently considering ratification or being pressured to do so, which demonstrates that the CISG is gaining even further support globally to add to its already astounding popularity.

The increasing popularity of the CISG throughout most corners of the world can also, in addition to its drafting history, in part be contributed to the principles on which it is based. Namely flexibility (it will respect contract terms and trade customs, Arts. 6 and [page 149] 9), reasonableness (evidenced throughout the convention, and specifically in Art. 8) and the prevalence of liberal, mercantile principles which permeate the entire convention. A good example of this includes those concerning the contract requirements as to form.

2.2 The challenge to uniformity in the CISG

The CISG is an instrument of uniform law, which means it should ideally be construed equally/very similarly throughout the 62 countries which have ratified it. The uniformity of the convention is evidenced by its preamble and drafting process, as well as in Art. 7(1), which provides:

"In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade."

Observing uniform law across such diverse legal and cultural backgrounds, however, is an immense challenge and not done with the drafting of uniform words. There are many challenges to uniformity, and one category of these challenges is seen by some to be represented in the very reservations which lent it its original universal appeal. It can in fact be viewed as an obstacle to uniformity and trade: The argument is, that by adopting a convention which seems familiar, the conflicting versions of the same convention lull the practitioner into a false sense of security, for although he thinks he knows the law which will apply, he can find himself faced with a version which may surprise him.[17] This argument fails to take into account the fact that without the compromises that these reservations represent, the success of the CISG would likely have been much more limited. Moreover, the quest for perfect uniformity is a futile one -- when analysing the need for uniform application of a law such as the CISG the question 'how uniform' arises along with the question of how to obtain it. Another, more nuanced, argument cautioning against such reservations is the fact that where conflicting versions of the CISG compete, the rules of private international law will decide which version shall govern.[18] Consequently, if an oral agreement is made between two traders in USA and China, the PIL rules will decide if there is a valid contract, as the PIL rules will decide which version of the CISG applies.

Differences in application by way of reservations, which are clear and easily discoverable, would not seem to present the most significant danger to uniformity. Nevertheless, if taking this argument into consideration, it would seem well suited for [page 150] arguing that unnecessary reservations, especially those which contradict the application of domestic law (as will be demonstrated that the Chinese article 96 reservation does, below), should be withdrawn in the interest of uniformity and predictability as well as in the interest of legal coherence.

2.3 The philosophy of form requirement

The CISG rules on formation of contracts maintain a compromise whereby freedom of form is the basic rule in Arts. 11 and 29, but the reservation clause in Art. 96 enables States to opt out of these Articles if they prefer formation of contract by formal writing means only, or solely where there is consideration. The form requirements ensuing from such a declaration are rendered mandatory by Art. 12.[19] This means that Arts. 6 and 9, which under normal circumstances set out a hierarchy by which the contract terms and trade customs take precedence over the provisions of the convention, are not applicable regarding contract formation/modification where an Art. 96 reservation has been declared.[20]

Article 11 sets out the main rule of the CISG, namely the freedom from form requirements when entering into agreements. It provides that:

"A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirements as to form. It may be proved by any means, including witnesses."

The Article establishes as one of the basic rules of the Convention a concept well-known in continental European law: the theory of consensualism. According to this theory, contracts are not subject to any specific formal requirements. The parties are entirely free to determine the form of their contract of sale.[21] This means that any such requirement prescribed by the domestic law of the Contracting State does not apply to contracts subject to the Convention, irrespective of the nature of the requirement and of the purposes it is supposed to serve. The first sentence of Art. 11 implies the second sentence. The second sentence confirms that the rule established in the first sentence also applies for procedural purposes. This means that the rule of [page 151] freedom of contract form is fully enforceable in appropriate arbitration or judicial proceedings. Thus, except where a reservation has been made and Art. 12 is thus in effect, any restriction or limitation established by the law of any Contracting State is not applicable to cases governed by the Convention.[22]

The principle of freedom from form requirements is also reaffirmed in Art. 29 concerning the modification or termination of agreements. Article 29 provides that:

"(1) a contract may be modified or terminated by the mere agreement of the parties"

and

"(2) a contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement; however, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct."

Where it has been agreed that writing is necessary to modify or terminate a contract, Art. 29(2), first sentence, requires all such amendments to comply with the formal requirements agreed and, therefore, applies also to agreements to discontinue the need for writing. Theoretically, Art. 6 still makes it possible for the parties to derogate from Art. 29(2), first sentence, and thereby to open the way to modifications free of formal requirements.[23]

It is unclear whether the Chinese declaration reserving the application of Art. 11, which specifically does not mention Art. 29 as all other Art. 96 reservations do, means that it will not apply as such. The reservation has been filed as an Art. 96 reservation, and is often referred to as such; the actual effect of the reservation is to bring into play requirement that contracts be evidenced in writing. This would seem to include modifications.

All in all, the relaxing of requirement as to form is of great magnitude in international sale of goods transactions. The liberal standpoint towards the form of a contract stipulated by the CISG has exerted drastic impact on the international sale of goods practically and academically as well. That is to say, the principle of informality has also been widely adopted in international commercial practice, and by various international interstate or professional organisations and associations in their [page 152] formulations of general conditions for sales contracts.[24] Each contracting country will produce a unique body of case law interpreting the principle, and scholars from all over the world have already commented on it.

There are numerous advantages to liberal requirements as to the form of a contract included in the CISG, nevertheless some States cling to their reservations on this point, which causes a multitudes of problems. The issues arising from China's reservation will be dealt with below.

2.4 Problems with China's reservation

When China adopted the CISG on 30 September 1981, it made a reservation on Arts. 11 and 29, insisting that the formation, revision and termination of an international sales contract should be in a written form. At the time, such a reservation was, in the light of the existing formally strict domestic contract law, more logical, albeit a deviation from the proposed uniform law and thus contrary to the ideals of the CISG.

However in 1999 a new Uniform Contract Law (hereinafter referred to as the 'UCL') was enacted throughout China to replace the three previous contract laws, and in this law the modernisation of trade in China is expressed, amongst other things, with the relaxation of form requirements. Article 10 of the UCL provides:

"A contract may be made in writing, in an oral conversation, as well as in any other form."[25]

The question is thus: Since the enacted UCL relaxes form requirements, will or should China change its attitude toward the requirement as to the form of a contract in international sales as well?

It is unclear whether the Ministry of Commerce [26] or the Ministry of Foreign Affairs will declare China's withdrawal of the former reservation to the depository of the [page 153] CISG.[27] But it can be argued that China's reservation contradicts the principle of freedom of form requirements or informality provided by the CISG, and that it has no independent significance now.

The answers to all the above and related questions are well worth debating, and the various arguments can be classified into two main opposite categories: the reservation-defending argument (Section 3) and the reservation-opposing argument (Part 4).

3. DEFENCE OF THE RESERVATION

The defenders strongly claim that it was and still is of both economically and legally great significance for China to declare the reservation on the requirement as to the form of a contract. They base their proposition upon the grounds presented below:

3.1 Reduction or avoidance of commercial risks

From the economic viewpoint, the reservation could and can help the Chinese foreign traders reduce or avoid the possibility of being trapped in the form of an international sales contract. Since 1978, China has followed a path of experimental economic system reform alongside an overriding commitment to maintain system stability through gradual political democratisation.[28] At the time when China acceded to the CISG and even around a decade after its adoption of the CISG, its foreign trade was conducted solely through State-owned foreign trade corporations under MOFTEC.[29] The staff in these corporations are generally not experienced traders, sensitive to merchant customs, but tend to have more bureaucratic functions. On the one hand such State personnel are not familiar either with the contract rules for international sales of goods, which are popular in the developed countries, or with other forms of communication that might constitute forms of contracts apart from writing. On the other hand, it is doubtful that all of them have a strong sense of responsibility to the State, the so-called property owner. If China had not declared reservation on the principle of freedom from form requirement, foreign trade corporations [30] managed by such staff would have encountered more chances of falling into the traps of contract formation. Even today -- although MOFTEC on behalf of the State has loosened, and [page 154] will continue to loosen,[31] its control over the foreign trade a great deal, and more legal persons and natural persons have thus been empowered to conduct foreign trade, including sale of goods -- it can not be overestimated that those staff involved in Sino-foreign transactions for goods are able to enhance their responsibility and/or ability overnight.

3.2 Compliance with China's domestic law

In view of the law, the reservation complies with the Chinese business laws concerning contract form of international sale of goods.

Since the reform and 'open-door' policy was implemented in early 1980s, China has promulgated a series of laws and regulations governing foreign trade. For example: 1986 General Principles of Civil Law (effective from 1 January 1987) ('GPCL');[32] 1985 Foreign Economic Contract Law (effective from 1 July 1985) ('FECL'); and Foreign Trade Law (effective from 1 July 1994) ('FTL'). Enactment of these laws has ended the long period in which there was no legislation relating to international sale of goods. Other laws and regulations having a peripheral effect on international sale and purchase of goods contracts have been enacted and range from intellectual property, taxation, customs, import licences, commodity inspection, maritime law, foreign exchange control, etc.[33] In the meantime, China has concluded bilateral agreements on economic co-operation and trade with a number of countries.[34]

As asserted by those who would defend the formal requirements reservation, all the laws and regulations mentioned above stipulate or imply that a contract for the international sale of goods should be in a written form.[35] For example, a written contract is required to be submitted to Customs when goods pass through according to the Chinese Customs Law. It is clear that China's reservation declared on the [page 155] principle of freedom from form requirements embodied in the CISG keeps in harmony with the provisions of the related Chinese law. As such, there is (limited) argumentation in favour of its continued existence.

4. OPPOSITION TO THE RESERVATION

The defending opinion holds some merit, but those who object to keeping the reservation air -- with more emphasis -- their view that China's Reservation on the informality principle should be withdrawn.

They derive their argument from the following two separate grounds:

4.1 Economic objections

The Reservation can serve as no more an obstacle than a promoter for the international sale of goods for it prevents the parties from concluding, modifying, or terminating a contract by employing non-written forms, always more convenient, which they prefer.

In the years of the early 1980s, China practiced a very classical socialist planning economy and the State was the only owner of the assets of the whole country, hence the sole subject in the economic field. All the State-run companies including corporations dealing with international sales of goods were subject to the State as agents, which did not enjoy their own rights and obligations to share the profit and risks resulting from the transactions. Therefore it was of great necessity for the State to exercise tight control over the process of concluding, modifying and terminating a contract of international sale of goods, from where often emerged loopholes that were often cashed in on by those better-motivated and veteran foreign parties, as well as any irresponsible and unskilled agents on behalf of the State if written form was not required besides other related protective measures. The lack of informality of contracts was, in other words, an extension of State control of contracts.

However, as China's economy has transformed itself from a State sector dominated economy to an increasingly market-oriented economy, the government should try to reduce its participation in the daily economic activities and to assume the role of macro-manager of the national economy and impartial regulator of market activities. Legal entities engaged in international sale of goods have been empowered to trade with foreign partners as independent subjects with their own interests and contractual autonomy, hence it entails the capacity as well as the freedom to choose any effective forms including non-written form to enter into legal relationships in international sale of goods.

Further, as part of its WTO commitments, the Chinese government confirmed that upon accession, China would only impose, apply or enforce laws, regulations or [page 156] measures relating to the foreign trade that were not inconsistent with the WTO Agreement on international sale of goods. The Agreement has strong emphasis on the impartiality and non-discrimination of government regulations in international economic transactions. Chinese bureaucratic restrictions that unnecessarily raised the cost of doing business and limited market opportunities for foreign firms led to other disappointments.[36] The case is the same with China's reservation on the freedom of contract requirement as to form, which will inevitably continue to raise the cost of transactions of goods and decrease the efficiency of the flow of commodities as well as documents. Therefore, the existing reservation needs to be re-thought. The principle of informality would seem more in keeping with the open-market policies of China today, as well as in keeping with its recent political commitments to free trade.

4.2 Conflict with China's UCL

The inconsistency with the open-market and free-trade policies is not, however, the only reason arguing for the abolition of the Art. 96 reservation. China's reservation on the principle of freedom from form requirements under the CISG is in contrast with the informality principle in the 1999 UCL.

Prior to 1 October 1999, China's national contract framework for international transactions of goods was mainly built upon its various national specialised contract laws, namely, the Economic Contract Law (ECL),[37] the Technology Contract Law (TCL),[38] and the Foreign Economic Contract Law (FECL),[39] Writing as a necessary contract requirement as to form is stipulated in the three previous contract laws. With respect to the form of a contract, the ECL imposes strict requirements. Under the ECL, economic contracts must be in writing except those that are performed immediately after the formation of contract.[40] Economic contracts between legal persons [41] are signed by legal representatives.[42] Contractual obligations and other liabilities resulting from operational activities undertaken by legal representatives or others shall be borne [page 157] by the legal persons.[43] The FECL's requirements are equally strict. Under the FECL, a foreign economic contract emerges when the parties sign a written contract.[44] If letters, telegrams or telexes provide the medium of communication, and one party requests a signed letter of confirmation, the signature on the confirmation letter forms the contract.[45] In practice, faxes often serve this purpose. Although the CISG permits oral contracts, China took a reservation that requires foreign economic contracts to be in writing. Under the FECL, contracts that are subject to the approval of governmental agencies, as provided for by law or administrative regulations, are formed upon grant of approval.[46] Generally, most foreign economic contracts including Sino-foreign equity joint venture contracts, Sino-foreign co-operative joint ventures contracts, technology transfer contracts, and Sino-foreign joint oil exploration contracts are subject to approval.[47] Sino-foreign contracts of sale of goods are no exception.

However, the UCL imposes much more flexible requirements on contractual form. A contract can now be made in any manner. Unlike former contract laws that adhered to the written requirements, the UCL allows contracts to be reached in any other mode than writing. [48] Writing may take the form of contracts on papers, letters and electronic messages including telegrams, telexes, faxes, electronic interchange of data and electronic mail.[49] This flexible interpretation of the form of writing 'lays the foundation for the development of a legal structure to support electronic commerce (e-commerce).'[50]

It can be concluded that the same attitude towards the contract requirement as to form of the CISG has been adopted by the UCL, which implies that the UCL has departed [page 158] from China's reservation on the principle of freedom from the requirements as to form. If China still adheres to the reservation, such adherence will necessarily contradict not only the principle of freedom from form requirement under the CISG but also the principle of freedom from form requirement embodied in the UCL.

5. ANALYSIS AND EVALUATION

The holders of either opinion have cited some facts to prove their point to some degree respectively. As stated by those who defend China's reservation, it is true that the reservation could and can help prevent the Chinese traders from falling into the contract traps set by those cunning foreign traders for the Chinese parties were and are not well experienced in entering into a contractual relationship concerning sale of goods with their foreign partners; it is also the fact that the Reservation complied with China's domestic rules regarding international sale of goods, which were stipulated in the previous contract laws and the FECL in particular governing the international transaction of goods. Such an argument is sound and reasonable when it is held due that only the interest of the Chinese parties other than that of their foreign counterparts deserves more sufficient protection in international sale of goods, and when one can turn a blind eye to the freedom of contract as to form requirements embodied in the UCL, which has invalidated the FECL and two other contract laws.

Evidently the reservation-defending argument is partisan or biased for it does not place the Chinese traders and their foreign partners in an equal status. In striking contrast, it has been a well-established principle around the world that contracting parties are equal in their legal status. It is no exaggeration to say that equality as a legal principle has been rooted in all modern laws, either domestic or international such as the CISG.[51] As noted by John Felemegas when commenting on the preamble of the CISG, 'it is more sound and appropriate to view the act of joining the community formed by CISG as an apt recognition of the equal status of less developed countries. [ ... ] Only the correct interpretation and uniform application of the text can safeguard the benefits conferred to both developing States and developed States by the CISG's principles of equality and fairness.'[52] Actually the Contracting States are conceived as equal; no hierarchy of power or authority is recognised.[53] Individual traders as contractual parties are also regarded as equal by the CISG.

Moreover, the reservation-defending argument does not conform to the first and supreme principle of contract law, i.e. that of the freedom of contract. The freedom of [page 159] contract has three distinct aspects: Each party is free to decide whether it wishes to contract at all; with whom it wishes to contract; and on which terms it is willing to contract.[54] Above all each party is free to determine in what form it voluntarily contracts. Namely, the parties enjoy the freedom to opt for contract form or freedom from formal requirement; if not, the parties will have to bear the extra burden incurred from the compulsory contract requirements as to form. Freedom of contract including freedom from requirements as to form is the basic principle of contract law because it expresses on the legal level the basic economic system, namely that of the market economy. The economic system of the market economy rests on the assumption that every citizen is best qualified to determine for himself whether he needs supplies or wishes to sell, who will best serve his needs and on what conditions and in what form. If all these decisions are to be made by every individual for himself, he must be granted freedom of contract as to whether at all, with whom and on what terms and in what form he wishes to contract. Article 6 of the CISG provides that individuals are free to structure their relationships according to their choice, even if this means straying from the terms of the Convention.[55] Article 11 stipulates that a contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form; it may be proved by any means, including witnesses. The principle of freedom of contract is also well expressed in the General Principles of Civil Law of the P.R.C.('GPCL') in Arts. 3 and 4 [56] and in the UCL in three articles (Arts. 3, 4 and 8) [57] as well. The principle of freedom of contract relating to form requirement is incarnated in the rules as to form prescribed in Art. 56 GPCL [58] and Art. 10 UCL [59], both of which express that parties are free to contract in any form they prefer unless otherwise provided by laws, hence enhancing the efficiency in transactions as well as in transnational sale of goods. Apparently China's reservation on the freedom from contract requirement as to form not only departs significantly from the principle of freedom from formal requirement under the CISG but also contradicts the related principle embodied in the UCL and the draft of the Civil Law [page 160] of the P.R.C. [60] It is well established by the GPCL that the provisions of the international conventions enjoy superiority over those of domestic laws when they contract each other.[61] If the Reservation is not eliminated, there must be difficulty in choosing what law concerning the form requirements of contract, the CISG or the domestic, to be applied to determine the validity of the contract in dispute. In this sense it can be drawn that the reservation-opposing argument is better grounded and it is no more necessity to stick to the reservation on the freedom of contract requirement as to form.

6. THE GORDIAN KNOT OF APPLICABLE FORMALITIES

The trade policy and legal context considerations behind the recommendations to abolish the reservation are not, however, the sole arguments supporting it. Another, more tangibly practical, aspect is also to be considered.

Looking at the 96-reservation in choice of law terms, it presents some difficulties in terms of applicable formalities even where the basis of the reservation is still in place.

The consequences of a reservation are that Art. 12 does not apply to the formalities of a contract, and that otherwise applicable formality requirements (or lack of them) are to be found. There are two different approaches to this in theory.[62]

One school of thought is that when excluding any provisions of the CISG, PIL rules are to be employed to determine the otherwise applicable law. In this case, where Art. 96 excludes Art. 12, PIL rules must thus be employed to discover which law would otherwise be identified to determine the form of the contract.[63] That is, the conflicts of law rules of the lex fori determine which formalities will apply. Some care is to be taken in this construction, as the concept of the lex fori PIL appointing the formalities of a non-reservation State is objectionable where this brings into play formality rules [page 161] which were never intended by either State to be introduced to the CISG regime.[64] Moreover, it would seem to leave the applicable formalities of contract, which the reservation-State perceives as a mandatory ordre-public requirement, to the arbitrary determinations of the PIL of the lex fori. A strict construction of this gap-filling rule to this area of law seems overly formalistic.

Another view is that the declaration of a reservation automatically entails an obligation in regard to formalities of contract. In other words, the true effect is the preservation of the formal requirements of the declaring Contracting State to all contracts involving companies from such States, because the Convention should respect the underlying purposes of such legislation, e.g. protection against claims unsupported by a written agreement.[65] This construction seems to be more in keeping with the idea of the reservation, but it should be noted that a proposal to phrase the reservation in this way was rejected, as it was thought to lend too much weight to the formality of the law in question.[66] In practical reality, a compromise between these two schools of thought would seem preferable. If the lex fori PIL appoint formal requirements from a non-reservation State then it would not seem reasonable to employ them. The application of formalities of PIL appointed laws would seem best limited to those originating from the State making the reservation.

Regardless of the authors' opinions on this topic, it is evident that even without the complications of the lack of formalities where a reservation is taken out, the problem of deciding the applicable formalities where an Art. 96 reservation is taken out is a difficult one to solve. And it becomes exasperated where the underlying consideration of formality behind the reservation is gone.

Consider the following if a case concerning contract formation were to surface before Chinese Courts today:

With the formalities of Chinese law gone, a Chinese judge wishing to comply with the reservation will have to look elsewhere if a CISG case lands on his gavel-desk. When an international sales contract is formed between China and another CISG State, [67] Chinese companies cannot, on the face of the reservation, be bound by oral contracts due to the wording of the reservation. According to one school of thought applying the principles of gap-filling of the CISG, the Chinese judge must use Chinese PIL to [page 162] appoint another law. If this law is Chinese law, it appoints the UCL which does not have any requirements as to form. The same legal vacuum is reached if he assumes the formalities of the reserving State (China) to be immediately applicable. Is the judge then required to find some formalities of contract somewhere else, and if so, where? Or is he to exhume the corpse of the former Chinese commercial law in search of the original formality upon which the reservation was based?

Further complications arise when another CISG State, who has not taken out the reservation but whose domestic law does contain formalities for contracts, is the other contracting party. If the PIL rules appoint the laws of a non-reservation State, where is the sense in applying formal requirements from this jurisdiction (if indeed there are any)? The parties may find themselves suddenly subjecting their contract to a principle of consideration where the Chinese PIL appoint the law of another CISG State who has consideration in its domestic law but not in its international sale law as it has not taken out the reservation. Although this will be true for any 96-appplication, such unintended applications of domestic law from non-reservation States seem even more nonsensical where there is no formal requirement in the reserving State to protect.

The reservation would seem to have no practical effect in terms of Chinese formalites. And this only serves to reaffirm the need for its abolition.

7. CONCLUSION AND SUGGESTIONS FOR THE FUTURE

The foregoing remarks amply demonstrate that the CISG endeavors to increase international trade through the creation of a uniform law of international sales, it is -- by all accounts -- the international community's most ambitious effort to promote efficiency and sustained growth of international trade. China's reservation authorised by Art. 96 on the principle of freedom from contract requirement as to form diverges from the uniformity, a fundamental theme and a central value in the CISG.[68]

Moreover, China's reservation not only contradicts the principle of freedom from contract requirement as to form that has been embodied in the GPCL and underpinned by the UCL focusing on a 'market-oriented' economy unlike the three previous laws around a 'planned economy', but also will fetter the hands of the Chinese traders or sap the confidence of the foreign parties in Sino-foreign sale of goods. It also presents the practitioner with a problem of deciding which formalities of contract to apply, as the underlying formalities of Chinese domestic law have been changed.

It could be argued, on a legal technicality, that the Chinese Art. 96 reservation no longer exists, as it is based on a formality which is no longer there, and which was a [page 163] requirement upon taking out the reservation in the first place. However, such formalistic argumentation is not practical, primarily for reasons of certainty and predictability, but also for reasons of diplomacy. The reservation must be removed officially for reasons of clarity, and at the request of China herself.

A withdrawal of the reservation [69] will require the Ministry of Commerce and the Ministry of Foreign Affairs to co-draft a proposal on China's withdrawal and submit it to the State Council for a decision of whether the proposal should be submitted to the NPC Standing Committee for approval.

If approved, the NPC Standing Committee will make a decision on the proposal and then a declaration on the decision will be signed by the Prime Minister and second-signed by the minister of MFA. A withdrawal can then be submitted to the depository of the CISG.

In conclusion, the authors of this paper strongly recommend that in light of the developments in Chinese trade and domestic law, the reservation made by China over twenty years ago on the principle of freedom from contract requirement as to form under the CISG should be withdrawn. [page 164]


FOOTNOTES

d1. An abridged version of this document will appear in the 'International Developments/Activities internationales' of the 2003/04 Uniform Law Review/Revue de Droit Unfiorme.

a1. BA, MA, Judge at The First People's Court of Chongqing (People's Republic of China); PhD candidate at China Southwest University of Political Science and Law.

aa1. Lecturer in International Commercial Law, Queen Mary University of London (United Kingdom); Fellow of the Pace Institute of Commercial Law, White Plains, N.Y. (United States of America).

1. As of January 1st 2004, the UN Treaty Section reported the following countries: 'Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Burundi, Canada, Chile, China (PRC), Columbia, Croatia, Cuba, Czech Rep., Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Guinea, Honduras, Hungary, Iceland, Iraq, Israel, Italy, Kyrgystan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, Netherlands, New Zealand, Norway, Peru, Poland, Romania, Russian Federation, Saint Vincent & Grenadines, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, United States, Uruguay, Uzbekistan, Yugoslavia & Zambia.

2. China was one of the ten original signatories to the convention, allowing it to come into force January 1st, 1988.

3. The authorised Art. 95 declaration is worded as follows: 'The People's Republic of China does not consider itself to be bound by subparagraph (b) of paragraph 1 of article 1 ....'

4. Also adopted by China (PRC), Singapore, St. Vincent & Grenadines, and the United States.

5. The reservation is worded as follows: 'The People's Republic of China does not consider itself bound by [ ... ] article 11 as well as the provision of the Convention relating to the content of article 11.' This declaration by China is a requirements-as-to-form declaration that is like the Art. 96 declarations taken by various other countries, but its language is not as encompassing. This difference in declaration language would seem to be without significance regarding the effect of the declaration.

6. For more information on the antecedents to the CISG, see: <http://www.cisg.law.pace.edu/cisg/text/antecedents.html>.

7. The nine States are: Belgium, Germany (Federal Republic), Gambia, Israel, Italy, Luxembourg, The Netherlands, San Marino, and the UK. The CISG antecedent conventions were denounced by those states who subsequently ratified the CISG.

8. The drafting was originally based on two conventions, one on formation and one on substantive issues. The two were not combined to make a 'double convention' until late in the drafting.

9. For more information on the drafting of the CISG, see Honnold, J.O., Documentary History of the Uniform Law for International Sales (Kluwer, 1989).

10. As explained by Peter Schlechtriem, delegate of Germany (Federal Republic) to the UNCITRAL working group, in Uniform Sales Law -- The UN-Convention on Contracts for the International Sale of Goods, Manz, Vienna 1986, at fn 134.

11. A proposition from the Dutch delegation that certain types of contracts be subjected to form requirements was rejected, see UN Doc. A/Conf. 97/C, I/L.71, 76 and I/SR.8 at p. 4 ff.

12. Argentina, Belarus, Chile, Estonia, Hungary, Latvia, Lithuania, Russian Federation and Ukraine have declared that any provision of Art. 11, Art. 29 or Part II of the Convention that allows a contract of sale or its modification or termination by agreement or any offer, acceptance, or other indication of intention be made in any form other than in writing does not apply where any party has his place in the country that has filed this declaration.

13. China entered into the World Trade Organization on 11 December 2001.

14. When it took effect on 1 October 1999, the UCL according to its Art. 428 simultaneously repealed the Economic Contract Law, the Foreign Economic Contract Law, and the Technology Contract Law. See Art. 428 UCL.

15. In accordance with Art. 99(1) CISG.

16. See <http://www.cisg.law.pace.edu/cisg/countries/cntries.html> and notes on United Kingdom.

17. See Bailey, 'Facing the Truth: Seeing the Convention on Contracts for the International Sale of Goods as an Obstacle to a Uniform Law of International Sales', (1999) 32 Cornell International Law Journal 273.

18. See Flechtner, H., 'The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and other Challenges to the Uniformity Principle in Article 7(1)' in (1998) 17 Journal of Law and Commerce 187.

19. Article 12 provides: 'Any provision of article 11, article 29 or Part II of this Convention that allows a contract of sale or its modification or termination by agreement or any offer, acceptance or other indication of intention to be made in any form other than in writing does not apply where any party has his place of business in a Contracting State which has made a declaration under article 96 of this Convention. The parties may not derogate from or vary the effect or this article.'

20. The fact that the Chinese declaration is not worded as a standard Art. 96 reservation does not bar the application of Art. 12, as it is clearly intended as an Art. 96 reservation at least with regard to formation of contract. Regardless of the fact that it may not constitute an exact Art. 96 reservation, the reference in Art. 12 to 'a declaration under Article 96' should not be interpreted as a technicality which could exclude a declaration in the style of Art. 96.

21. Bianca,C.M & M.J.Bonell, Commentary on the International Sales Law the 1980 Vienna Sales Convention (Giufre, Milan, 1987), at p.122.

22. Ibid, at p.123.

23. Schlechtriem, P., Commentary on the UN Convention on the International Sale of Goods (Oxford: Clarendon Press, 1998), pp 212-213.

24. Among them are the general conditions elaborated by the U.N. Economic Commission for Europe (see, e.g., Article 7 of the following Economic Commission for Europe General Condition of Sale: For Potatoes of 1980; For Fresh Fruit and Vegetables Including Citrus Fruit of 1979; For Dry, Shelled and Unshelled, and Dried Fruit of 1979). Moreover, in its comments on Article 11 the International Chamber of Commerce stressed the importance of consensualism because a considerable part of international trade relies on unwritten contracts.

25. Contract Law of The People's Republic of China, adopted and promulgated by the Second Session of the Ninth National People's Congress on 15 March 15 1999; translated & Compiled by John Jiang & Henry Liu.

26. Formerly known as the Ministry of Foreign Trade and Economic Co-operation of China (MOFTEC), the Ministry of Commerce was established by the 1st session of the Tenth National People's Congress in March 2003.

27. See Ding, D., 'China and CISG' in Will, M.R., ed., CISG and China: Theory and Practice (available at <http://www.cisg.law.pace.edu/cisg/biblio/dingding.html>.), at fn 27, referring to discussions with Mr. HU Kangsheng, Vice Director of the Legal Affairs Department of the Standing Committee of NPC in 1999.

28. This path contrasted strongly with the reform path of the former USSR. While the Russian political system and economy disintegrated in the 'sale of the century', China's non-orthodox approach produced outstanding results in terms both of output growth, with an average annual growth rate of GDP of over 10 percent from 1980 to 1990.

29. Vout, P.T., Ye,J.S. & Bai-hua Gong, China Contracts Handbook (Hongkong & Singapore, Sweet &Maxwell, 1997), at pp. 28-29.

30. Foreign trade corporations here refer to those conducting business with foreign partners.

31. In accordance with China's WTO commitments.

32. The title of Chapter 8 is 'Application of Law to Foreign Civil Relationships.'

33. Set out below are the various types of legislation affecting foreign trade in China together with the dates on which they took effect: (a) Arbitration Law (1 September 1995); (b) Customs Law (1 July 1987); (c) Import and Export Duty Regulations (Revised) (15 October 1987); (d) Provisional Regulations of Imported Commodity Licensing System (10 January 1984); (e) Procedures for Administration of the Quality Licensing of Exports (1 December 1987); (f) Tentative Provisions on Foreign Trade Agency System (29 August 1991); (g) Maritime Law (1 July 1992); (h) Trademark Law (Revised) (3 March 1983); (i) Patent Law (Revised) (1 April 1985); (j) anti-Unfair Competition Law (1 December 1993); (k) Regulations on the 5ale and Purchase of and Payment in Foreign Exchange (1 July 1996); (l) Standardisation Law (1 April 1999); (m) Foreign Investment Enterprise and Foreign Enterprise Income Tax Law (1 July 1991); (n) Import and Export Commodity Inspection Law (1 August 1989); (o) Rules of Export Products Place of Origin (1 May 1992); (p) Product Quality Law (1 September 1993); (q)Law for Protection of the Rights and Interests of Consumers (1 January 1994); (r) Regulations on Customs Protection of Intellectual Property (1 October 1995); and (s) Anti-dumping and Anti-subsidy Regulations (25 March 1997).

34. Vout, P.T., Ye,J.S. & Bai-hua Gong, China Contracts Handbook, supra fn 29, at pp.26-27.

35. Shi, Xueying, Kong & Sun, International Commercial Law (Tianjin, PRC: Nankai University, 1999), at p.44.

36. Lardy, N. R., Integrating China into the Global Economy (Washington D.C.: Brookings Institution Press, 2002), at p. 1.

37. Zhonghua Renmin Gongheguo Jingji Hetong Fa [Economic Contract Law of the People's Republic of China] (adopted 13 December 1981, implemented 1 July 1982) [hereinafter ECL]. CCH, China Laws for Foreign Business -- Business Regulation, Vol. 1, at para 5-550.

38. Zhonghua Renmin Gongheguo Jishu Hetong Fa [Technology Contract Law of the People's Republic of China] (adopted 23 June 1987, effective 1 November 1987) [hereinafter TC L]. CCH, China Laws for Foreign Business -- Business Regulation, Vol. 1, at para 5-577.

39. Zhonghua Renmin Gongheguo Shewai Jingji Hetong Fa [Foreign Economic Contract Law of the People's Republic of China] (adopted 21 March 1985, effective 1 July 1985) [hereinafter FECL]. CCH, China Laws for Foreign Business -- Business Regulation, Vol. 1, at para 5-550.

40. Article 19 CISG.

41. See Art. 3 Economic Contract Law; Art. 7 Foreign Economic Contract Law; Art. 9 Technology Contract Law.

42. Su Huixiang, ed., Zhongguo Dangdai Hetongfa Lun [Essays on Comtemporary Chinese Contract Law] 87 (Jilin Daxue Chubanshe [Jilin University Press], 1992), at p. 87.

43. See Zhonghua Renmin Gongheguo Hetong Fa [Contract Law of the People's Republic of China], Art. 10. For the full text of the Contract Law, as well as an English translation thereof, see CCH, China Laws for Foreign Business -- Business Regulation, Vol. 1, at para 5-650.

44. These include, for example, Sino-foreign joint venture contracts (zhongwai hezuo jingying hetong) and equity joint venture contracts (zhongwai hezi jingying hetong). Out of necessity, these contracts have to be in writing when submitted to the relevant registering and approving authorities. See Art. 7(3) Zhonghua Renmin Gongheguo Zhongwai Hezuo Jingying Qiye Fa [The People's Republic of China Law on Sino-foreign Cooperative Enterprises] (adopted 13 April 1988, effective 13 April 1988) and Art. 3 Zhonghua Renmin Gongheguo Zhongwai Hezi Jingying Qiye Fa [The People's Republic of China Law on Sino-foreign Joint Equity Enterprises] (adopted 1 July 1979, effective 1 July 1979). An English translation of these laws can be found in CCH, China Laws for Foreign Business -- Business Regulation, Vol. 1, at paras 6-100(5) and 6-500(3), respectively.

45. Zhonghua Renmin Gongheguo Hetong Fa [Contract Law of the People's Republic of China], supra fn 26, Art. 41.

46. Cao Shiquan and Zhu Guangxin, 'Hetong Fading Jiechu De Shiyou Tantao' [An Exploration of Legal Causes for Contract Termination], in Zhongguo Faxue [Chinese Jurisprudence], No. 4, 1998, at pp. 34-47.

47. Wang, L. & C. XU, 'Fundamental Principles of China's Contract Law', in (1999) 13 Colum. J. Asian L. 1.

48. See Art. 10(1) UCL.

49. See Art. 11 UCL.

50. Ibid.

51. See the preamble of the CISG.

52. Felemegas, J., 'The United Nations Convention on Contracts for the International Sale of Goods: Article 7 and Uniform Interpretation', Pace University Essay, February 2001, available as of 10 January 2003 at: <http://www.cisg.law.pace.edu/cisg/biblio/felemegas-pre.html>.

53. Kastely, A.H., 'Unification and Community: A Rhetorical Analysis of the United Nations Sales Convention', (1988) 8 Northwestern Journal of International Law and Business 574, available as of 10 January 2003 at: <http://www.cisg.law.pace.edu/cisg/biblio/kastely.html>.

54. Article 6 CISG: 'The parties may exclude the application of this Sales Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.' Article 12, the one exception, involves domestic requirements of written evidence of a contract.

55. Sarcevic, P. & Volken P., eds., International Sale of Goods: Dubrovnik Lecture (Oceana, 1986), at Ch. 9.

56. Article 3. Parties to a civil activity shall have equal status. Article 4. In civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed.

57. Article 3 establishes the equality in legal status of the parties, which provides the logical premise of freedom contract. Article 4 enunciates the principle of voluntaries that embodies the core content of freedom of contract Article 8 sets forth the legal consequences of the exercise of freedom of contract and affirms the binding character of contract.

58. Article 56 GPCL provides: 'A civil juristic act may be in written, oral or other form. If the law stipulates that a particular form be adopted, such stipulation shall be observed.'

59. Article 10 UCL stipulates 'parties may conclude contracts in written, oral or any other form. If laws or administrative regulations provide for the use of written form, written form shall be used. If the parties agree to use written form, written form shall be used.'

60. The draft of the Civil Law of the P.R.C. has been submitted to the National People's Congress (the NPC) and it passed the first reading in December 2002.

61. See Art. 142 GPCL: If any international treaty concluded or acceded to by the People's Republic of China contains provisions differing from those in the civil laws of the People's Republic of China, the provisions of the international treaty shall apply, unless the provisions are ones on which the People's Republic of China has announced reservations.

62. See Saff, C., in 'A Study of the Interplay between the Conventions Governing International Contracts of Sale', at para 6.5.3; available at: <http://www.cisg.law.pace.edu/cisg/biblio/saf.html>; Enderlein & Maskow International Sale of Goods, at p. 383.

63. See Enderlein & Maskow International Sale of Goods, at p. 383; Schlechtriem in Uniform Sales Law -- The UN-Convention on Contracts for the International Sale of Goods (Mainz, 1986); available at: <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-96.html>; Stoll, H., 'International-privatrechtliche Fragen bei der landesrechtlichen Erganzung des Einheitlichen Kaufrechts' in Festschrift fur Murad Ferid (Frankfurt, 1988); Flechtner, H.M., in 'The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and other Challenges to the Uniformity Principle in Article 7(1)' in (1998) 17 Journal of Law and Commerce 187.

64. See Schlechtriem Einheitlichen Kaufrecht at Article 12.3 and Harry Flecthner's example of the 'ironic' application of US statute of frauds law to a US-Argentinian contract due to the Argentiniann reservation in 'The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and other Challenges to the Uniformity Principle in Article 7(1)', supra fn 63.

65. E.g. Ferrari; Reinhart; Rehbinder; Stoffel; and Medwedew / Rosenberg, cited by Schlechtriem, Art. 12, para. 2, fn. 5. See also Honnold in his 3rd edition, supra fn 9.

66. According to Prof. Rajski of Poland, an original delegate to the CISG drafting, see Rajski in Bianca & Bonell (eds.), supra fn 21.

67. Article 1(1)(b) applications of the CISG are not possible where PIL rules appoint Chinese law, so the contracting party must be from another CISG state.

68. Flechtner, H.M., 'Ten Years of the United Nations Sales Convention: the Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and Other Challenges to the Uniformity Principle in Article 7(1)' in (1998) 17 J.L.& Com. 187.

69. According to Art. 7 of the Procedure Law of Concluding a Treaty with a Foreign Country or an International Organization that was promulgated by the 17th session of the Seventh National People's Congress (NPC) Standing Committee and took effect on 28 December 1990.


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