Reproduced with permission from Michael R. Will ed., CISG and China: Theory and Practice, Faculté de droit, Université de Genève (1999) 25-37

This year of 1999 heralded the beginning of a unified contract law in China, which had been expounded since early 1993.[1] This new and uniform law will take effect on October 1, 1999 – the 50^th National Day of the People's Republic of China. The coincidence was not painstakingly made by the legislators to present a gift for the special occasion. The reason was to leave some time, as for other legislation, (such as the Securities Law, adopted on December 29, 1998 and effectuated on July 1, 1999), for the relevant organizations to sort out, or clear up the old administrative regulations based on the three old contract laws.[2] In the meantime the legislators expected to have a 6-month period in order to give the necessary publicity to the new contract law.[3] From October, the new contract law taking the place of FECL, will witness the achievements of the CISG in China.

In order to upgrade the future contract law, the legislators invited some eminent scholars to participate in the negotiation of the new contract law. These [page 25] scholars referred to their research on the contract laws of other countries and the international practice on the unification of contract laws.[4] The Legal Affairs Committee also organized delegations to examine the legislation of some major foreign countries. The CISG was one of the main references which had been followed on different occasions.[5] The theoretical and practical preparation of the CISG facilitated the public appearance of the uniform contract law of China.

The CISG witnessed the adjustment of Chinese domestic contract law. The respective contract law(s) of China mirrored the Chinese perspective of the CISG. To recall the emerging role of the CISG in China, this paper divides the history of the Chinese Contract Law(s) into three episodes:

I. The very beginning of the CISG in China: 1978-1984

II. FECL and CISG: 1985-1999

III. Stepping forward into the New Era: Since March 1999

I. The very beginning of the CISG in China: 1978-1984

The internal legislation still had to follow up the so-called “international trend”, which had emerged clearer and clearer in front of academics. Adopted in 1981, ECL still assumed the responsibilities under the planned economy, viz., parties establish contracts while the government stands behind or above to evaluate the merits of the contracts. The contract exchange shall be at equal values. The parties are not decisive to balance the value of their own contract. If there are disputes, the Bureau of Industrial and Commercial Administration may be involved and decide the fate of contractual parties before the parties can go to court.[13]

Furthermore, the domestic economic contract shall be completed as a written document. Oral contracts are regarded as void. Hence the law did not mention the practical measures to conclude an economic contract offer and acceptance. It was very common to ask how and on what basis judges and arbitrators decided that the contract had been set up. The plausible method was to skip the phase on whether offer and acceptance had been achieved, instead, the court might just sum up that the parties had expressed their real meaning and agreed upon the terms of contract in consensus, therefore the contract was established. On the other hand, the business people practiced their own terms like “FA PAN”, which is divided into “firm quotation -- SHI PAN” and “informal quotation -- XU PAN”, the former is offer, and the latter means invitation to offer, and “JIE SHOU” -- acceptance.[14] These customs helped judges and arbitrators to draw the proper conclusion.[page 28]

There is no published evidence to demonstrate that there were cases referring to the CISG as international customs during this period. However, some business companies practiced similar rules to solve real problems of their own. Some local legislation on contract filled the blanks and instructed judges to solve the disputes with foreign interests. [15]

II. FECL and CISG: 1985-1999       

The first four years of this episode witnessed a great harvest of Chinese legislation:

The same year the CISG took effect in China. All these legislative activities symbolized that the “opening-door” policy had made considerable headway.

If China approves a treaty, it will become part of the sources of Chinese law. There shall be no internal conflict between international treaties and relevant internal laws. Even before the ratification of the CISG – and despite the limited sphere of application to international sales of goods (Articles 2-5) – the Chinese legislator kept in mind, that the future foreign economic contract law should [page 29] conform more to the international trend and advanced knowledge of contract law than ECL and the law on technology contracts.[16]

Legislators knew very clearly that FECL would not cover all the issues pertaining to the economic contracts involving foreign elements. And it had to coordinate well with other laws which involved foreign economic contracts. However, they succeeded in implanting some similar concepts and rules from the CISG into FECL, such as liability without fault (Art. 25 CISG, Art. 18 FECL), measures to specify damages (Art. 61(1)(b), (2), Arts. 74, 77 of CISG, Arts.18-19, 22 FECL) and the application of international customs (Art. 9 CISG, Art. 5 FECL). The Supreme Court adopted two judicial explanations on the application of FECL so as to deepen the understanding of judges for those provisions with which they might not have been familiar before.[17]

There are still some obvious differences between FECL and the CISG:

Under Art.2 FECL contracts with foreign elements mean those between Chinese enterprises or other economic organizations on the one hand and foreign enterprises and other economic organizations or individuals, so-called “subjects with foreign elements” on the other hand,[18] while the CISG relies on places of business (Art. 1). It follows from the same Art. 2 FECL that Chinese individuals are not allowed to set up economic or trade contracts with foreign parties.

In harmony with the General Principles of Civil Law, ECL and other specific laws concerning economic contracts, Art. 7 FECL denied the validity of oral contracts and contracts by conduct: “A contract is established when the terms of the contract are agreed upon in writing and signed by the parties to it.” To emphasize the mandatory character of the written form, MOFTEC, on behalf of the Chinese government, declared a reservation on this matter (Art. 11 CISG).[page 30] On the other hand, the parties did not have to seal their contract, which was another prerequisite in the process of concluding internal contracts. [19]

Once again another law pertaining to economic contracts (FECL) did not draw up the specific steps on the formation of contract -- offer and acceptance. But it was not totally blank, the CISG filled the gaps if there were contracts of sales. Judges and arbitrators might refer to “FA PAN” and “JIE SHOW” used by businesspersons in foreign trade and economic cooperation, with the permission of parties or quoting Article 5 FECL.

Some cases were reported for studies of specific issues relating to the CISG or FECL, such as damages, specific performance and anticipatory breach of contract.[20] Judges and arbitrators were expected to profoundly grasp the context of the CISG and FECL, to decide how to calculate interests as damages, whether the conditions to suspend performance were sufficient, to what extent the claimant had proved his damages, and what kind of explanation was needed according to the circumstances of the contract, etc. Furthermore, they encountered and learned to apply international customs like INCOTERMS and Uniform Customs and Practice for Documentary Credits. [21] Arbitration and the China International Economic and Trade Arbitration Commission (“CIETAC”) became popular in settling disputes with foreign elements during this period. Both foreign and Chinese clients preferred arbitrators to hear their disputes since arbitration, compared with judicial and quasi-judicial means, turned out to be more flexible,[page 31] confidential and conducted with experts the parties appointed. [22]

No regular reports have ever been circulated on how often the CISG was applied because arbitration cases are confidential with respect to the parties’ decision and subject to CIETAC’s approval to send out. However, it was said by CIETAC that Sales of Goods reached 40-50% (1990-1994) or even more (1997) of their annual disputes. Anyway CIETAC did play an active role in expanding the influence of the CISG in China. It facilitated arbitrators, attorneys-at-law and contracting parties to grasp the intention and particular meaning of the CISG. Meanwhile CIETAC gained experience to combine the CISG with FECL in deciding international economic and trade arbitration cases. If the parties are silent on the choice of law and their places of business are in different Contracting States of the CISG, a CIETAC tribunal will refer to the CISG. The CISG shall prevail no matter whether or not FECL differs. But for those cases which the CISG does not cover, FECL is used according to the general principles of international business law. FECL shall play the additional role toward the CISG, such as the validity of contracts with foreign interests, provided China does not declare a reservation on the specific matter. There is at least one recent case reported by CIETAC on the application of both the CISG and FECL. A Chinese company (seller and claimant) and an American company (buyer and defendant) signed a sales contract on January 17, 1995. But on February 8, the buyer informed the Chinese seller of its refusal to accept any goods from China including those under this contract. The seller filed a claim with CIETAC according to the arbitration clause in the contract. He claimed damages for price difference, interests and V.A.T refund. The defendant first rebutted the validity [page 32] of contract and application of law and then invoked the claimant’s obligation to mitigate damages. The arbitrators correctly decided to apply the CISG on damages and FECL on validity. They also referred to the Supreme Court's explanation on the application of FECL as to the international private law rules pertaining to the closest connection doctrine. The Supreme Court's explanation stated that sales contract disputes shall be settled according to the law of the business place of a seller where the contract is signed. Therefore FECL was applied to this case in respect of validity of contract and no power of agency. When the tribunal concluded that there was a formal contract, the arbitrators turned to the CISG to decide the substantial matters of contract.[23]

II. Stepping forward into the New Era: Since March 1999

The unified contract law was published on March 15 of this year – coincidentally on the “consumer rights protection day”. Many books have been published to elaborate on the merits and background of this law. Overall speaking, the legislators expected to make a law unifying the three old ones, well coordinating all their provisions, peculiarly reflecting new contractual exploration and demand in real life and thoroughly referring to international and foreign experiences. In doing so, they cooperated with the academic circles closer than ever before. [24] Many foreign contract laws and civil laws and international unification laws had been under thorough comparison and discussion. The CISG and the Unidroit Principles were the main references.[25]

In content, the new contract law is much broader than the CISG. It consists of 428 articles including both domestic contracts and contracts involving foreign interests. At least 15 listed contracts constitute specific provisions from [page 33] Chapter 9 to Chapter 23 of which contracts for sales is only one group (Chapter 9: Articles 130-175).[26] The new law features notable achievements compared with the old ones and is marked closer to international trends than the old ones:

Generally parties may conclude a contract in written, oral or any other form (Art. 10). The work left is purely technical. It has not been clear yet whether MOFTEC or the Ministry of Foreign Affairs will declare China’s withdrawal of the former reservation to the depository of the CISG.[27]

The strict restriction of contract form encountered more and more challenges in practice when people can use more advanced communication channels. Parties may try alternative ways to negotiate with each other. If the courts ignore the unauthorized routines, then the context of contract may not reflect the parties’ real intention. It was said that in practice, if the parties did not argue the validity of their contract form, and one party had performed most of his obligations, even if part of the contract was oral, courts would not query the validity of contractual form. As a matter of fact, academics have already observed the trend of “non-strict contractual form” doctrine in other countries’ legislation and international treaties, e.g. the CISG. [28] The new contract law finally follows up the actual changes in practice. Meanwhile some kinds of foreign economic contracts or valuable contracts are still limited to the written form, e.g., joint venture contracts, in order to guarantee the safety of the transaction and to coordinate it with other specific statutes of China, such as the Insurance Law adopted in 1995.[29] [page 34]

For the first time in China there is a contract law which contains rules on offer and acceptance – Chapter Two: Conclusion of Contracts, Articles 9-35. The legislators adopted greatly from the CISG and the Unidroit Principles to reflect the international trends. [30] In this respect, foreign businesspersons need not worry about the “gaps” between the Chinese Contract Law and the CISG, if they consider the former as a possible alternative to the CISG.

In the past, not very well-accepted standards to evaluate what were contracts involving foreign elements existed. Generally speaking, they are those which involve foreign subjects or/and objects in foreign countries or/and contracts signed or performed in a foreign country. But the scholars pointed out that the analyses should not end here. Further questions should be satisfied as to whether so-called foreign elements give rise to the possibility of applying foreign laws. If the answer is yes, then it is indeed a contract involving foreign interests or foreign elements.[31] FECL defined that only those with foreign parties fell into its sphere (Art. 2). It did not consider other elements agreed on by scholars. The 1999 Contract Law blurred the scope. It does not give any definition, as usual, in the black letter rules on what are contracts involving foreign interests. Only the parties of a contract involving foreign elements “may choose the law applicable to the settlement of their contract disputes, except as otherwise stipulated by the law . . .” (Art. 126). We do not know yet whether the Supreme Court will narrow down the definition of contracts involving foreign interests to foreign subjects only, or maybe not give any further statements at all. If not, the understanding of academics may prevail. According to the explanation of the Legal Affairs Committee, they are mainly aimed at the contracts involving foreign subjects or/and objects.[32] Since this explanation is made by the people who were personally dedicated to the preparation of the Contract Law, their explanation should be very reliable. In this respect, the CISG and the Contract Law still [page 35] differ. The CISG shall prevail over the latter when there are international sales of goods except where the parties have chosen FECL.

The General Principles of Civil Law expressly included specific performance as a remedy, and so did ECL.[33] But FECL stated “to adopt [other] reasonable remedial measures” (Art. 18) with the understanding that specific performance was reasonably implied in FECL. The new contract law makes it obvious to continue to perform the contract even before other remedial measures are given (Art. 107). In practice, the parties usually choose damages instead of specific performance, no matter whether under the CISG or FECL. [34]

Conclusion

Since the entry into force of the CISG in China, more and more foreign trade contracts have added the Convention as the applicable law to the contracts with their Chinese counterparts. But when China had three laws regarding economic contracts, the CISG’s influence and popularity was limited only to those contracts involving foreign trade and economy. In the past, when Chinese parties negotiated with foreigners, they naturally regarded FECL as a reliable protector, while the foreign parties, for bargaining, insisted on their own internal laws. As a compromise, the CISG and other international sources such as INCOTERMS may finally prevail as neutral alternatives. The ratification of the CISG expressed the government’s attitude toward it: it attained beneficial experiences from different countries but not necessarily tainted by one or two countries’ super-will. Therefore it will not accordingly impair the legal rights and [page 36] interests of Chinese enterprises and other economic organizations. [35] The CISG and its application in China enhanced at least the foreign trade companies, used to affiliate to MOFTEC, to seriously evaluate the merits of their sales contracts with parties whose place of business is in another contracting state. In order to deepen the understanding of the CISG, MOFTEC selected it as required referential material to disseminate an elementary knowledge of law. [36]

What will happen after October 1, 1999? Will the Contract Law be a strong competitor to the CISG as applicable law in contracts involving foreign interests? It needs time to tell. If FECL with its total of 43 articles was unable to do much in those matters, which the CISG has left for internal laws, the new law is positive to fix definite some answers no matter how fiercely professors argue with one another. The education, based on the new law, will help more people understand the CISG in the long run. After September 1, 1995, domestic arbitration committees have been organized according to the Arbitration Law of China. Both parties of internal contracts and contracts involving foreign elements may go to these arbitration committees instead of going to CIETAC. The CISG has already found its new practicing agencies. [37] The Supreme Court sponsored judge training programs on the new contract law. Judges from all over the country came to Beijing to study the new law. Their newly-acquired knowledge will help them directly to understand CISG, which might otherwise have been far away from them. . . . [page 37]

FOOTNOTES

* Ding Ding, Lecturer, School of Law, University of International Business and Economics (“UIBE”), Huixinli East Road, Chaoyang District, Beijing, P.R. of CHINA, 100029.

1. “Five Years, One Law”, in “Beijing Morning Post”, 14 March 1999, p.2.

2. The three contract laws of China are the Law of the People’s Republic of China on Economic Contracts Involving Foreign Interests (“FECL”), the Economic Contract Law of the People’s Republic of China (“ECL”) and the Law of the People’s Republic of China on Technology Contracts (“TCL”). There are some administrative and local rules on specific contracts which need to be modified, checked up or invalidated if incompatible with the new contract law.

3. HU Kangsheng (ed.), “The Explanations of the Contract Law of the People’s Republic of China”, Beijing: Law Press, April 1999, p.603.

The bracket phrase page followed by a number is used to identify the page number of the original publication.

4. “The Contract Law of the People’s Republic of China (suggested draft)” in LIANG Huixing (ed.), “Civil and Commercial Law Review”, Beijing: Law Press, February 1996, Vol. 4, pp.439-539. LIANG Huixing: “On the 3^rd Revised Draft of the Unified Contract Law of P.R. of China”, in “Civil and Commercial Law Review” (LIANG Huixing ed.), July 1997, Vol. 7, pp.717-732.

5. YAO Hong (ed.), “Comparison Between the Contract Law of the People’s Republic of China and the Related International and Foreign Contract Articles”, Beijing: Law Press, April 1999, Vol. 7, pp.11-126.

6. HUAN Xiang, “Strive for the Founding of the Science of International Law of New China”, in “Chinese Yearbook of International Law (1982)”, November 1982, p.4.

7. ZHANG Yuqing (ed.), “Revised Preface” to “The Uniform Law on International Sales of Goods—Explanations on the CISG”, Beijing: China Foreign Economic Relations and Trade Press, February 1998, pp.1-3.

8. HAN Depei (ed.), “Private International Law”, Wuhan: University Press, 1983, pp.221-223.

9. Prof. LIU Ding from the People’s University published the first book on International Economic Law, in which he broadly framed out the basic branches of international sales of goods, such as the formation of contract, terms of condition, guarantee of contract of sales, and INCOTERMS revised by ICC: LIU Ding (ed.), “International Economic Law”, Beijing: China People’s University Press, December 1984, pp.33-80.

10. Prof. SHEN Daming and Prof. FENG Datong, both teaching at Beijing Foreign Trade College, published the first books, after the “opening door” policy, on International Business Law and International Trade Law in 1982 and 1983 respectively. Beijing Foreign Trade College, attached to MOFTEC, is the predecessor of the University of International Business and Economics. It has been long closely coordinated with MOFTEC in many ways. So the professors and students in this university naturally pay attention to the development of China’s foreign trade including the auxiliary measures to enhance the development.

11. ZHANG Yuqing’s research work actually started in late 1982 or early 1983, and basically finished in 1985, after the ratification of CISG by the Chinese government, but the first edition of his book was only published in 1985 (supra n. 7). JIANG Fengwen also came from MOFTEC and received her LL.M. from a famous American Law School. Her later publication obviously benefited from her working experience in the Law and Treaty Department of MOFTEC and from her thorough study of CISG in the United States: JIANG Fengwen, Legal Issues of the Unification of International Sale of Goods Law, Beijing: Law Press, May 1988.

12. Prof. FENG Datong and Prof. SHEN Daming initiated the comparative studies on CISG with the national laws of the main western countries in their books on International Business Law and International Trade Law (supra n. 10). They expanded the tradition with further and up-to-date references in the later revisions and other works on CISG. See FENG Datong / SHEN Sibao (eds.), “Lectures on International Economic and Trade Law”, Beijing: China Foreign Economic Relations and Trade Press, March 1988, pp.12-63. FENG Datong (ed.), “The Law on the International Sales of Goods”, Beijing: Foreign Trade Education Press, May 1993. FENG Datong (ed.), “International Business Law”, Chapter Three: “The Law on International Sales”, Beijing: China People’s University Press, March 1993, pp.159-242. FENG Datong / SHEN Sibao (eds.), “International Business Law (textbook for colleges for professional training)”, Chapter Two: “The Law on International Sales”, Beijing: Foreign Trade Education Press, September 1994, pp.42-108.  Their methods to approach the CISG shed light on different generations of students of UIBE, such as Mr. ZHANG Yuqing, whose instructor was Prof. SHEN Daming from 1979 to 1982.

13. Art. 33 of the Rules for Economic Contract Arbitration adopted by the State Council on August 22, 1983. SONG Jinbo (ed.), “A Course on the Economic Contract Law”, Beijing: China People’s University Press, June 1994, pp.142-152. The “quasi-judicial” arbitration system for internal contract disputes was invalidated until the effectuation of the Arbitration Law from September 1, 1995.

14. WU Baifu, etc. (eds.), “The Negotiation and Formation of Export Contracts”, Shanghai: People’s Press, March 1983.

15. WU Baifu, etc. (eds.), “The Performance of Export Contracts”, Shanghai: People’s Press, October 1985, pp.115-133. YE Hui / FENG Ming (eds.), “40 Examples of Cases Involving Foreign Interests”, Jiangsu People’s Press, July 1992, pp.36-40.

16. SONG Rufen, “Bits of Memory of my Participating in Legislation”, Beijing: China Legal System Press, 1994, Vol. 1, p.60.

17. The Supreme Court of the P.R. of China, “Reply Concerning Several Issues Relating to the ‘Law on Foreign Economic Contracts Involving Foreign Interests’” and “Reply Concerning Several Issues on Hearing Economic Disputes Involving Hong Kong and Macao Interests”, both from October 19, 1987.

18. SONG Jinbo (supra n. 13), pp.292-293.

19. WU Baifu, etc. (eds.),supra n.15), p.292.

20. YE Hui / FENG Ming (eds.), (supra n. 15), pp.16-20. CIETAC (ed.), “Selected Works of CIETAC Awards (1963-1988)”, Beijing: China People’s University Press, May 1993, and its authorized English version translated by China Law and Culture Publications Ltd., “Selected Works of China International Economic and Trade Arbitration Commission Awards (1963-1988) Updated to 1993”, Hong Kong / London: Sweet & Maxwell, 1995. LIU Ruifu (ed.), “A Comprehensive Analysis of Modern Legal Precedents from the PRC”, Beijing: International Culture Publishing Company, February 1995, pp.1725-1729. WANG Chuanli (ed.), “Comments on International Economic Cases”, Beijing: China University of Political Science and Law Press, January 1999, pp.1-12.

21. YE Hui / FENG Ming (eds.), (supra n. 15), pp.40-42. WU Baifu, etc. (eds.), (supra n. 15), pp.115-133, 161.

22. Some statistics, though incomplete, delineate the rapid development of arbitration involving foreign interests:

23. CICC Arbitration Study Institute (ed.), “Comments and Analyses on Typical International Economic and Trade Cases”, Beijing: Law Press, June 1999, pp.353-364.

24. HU Kangsheng, “Statements Concerning the Draft on the Contract Law of P.R. of China”,  in “Selected Legislative Documents Concerning the Contract Law of P.R. of China” (SUN Lihai, ed.), Beijing: Law Press, March 1999, pp.3-4.

25. Legal Affairs Committee of NPC (ed.), “ Comparison of Provisions between the Contract Law of China and Other Related International and Internal Contract Legislation”, Beijing: Law Press, April 1999.

26. The Contract Law of the People’s Republic of China, Beijing: China Legal System Press, March 1999, pp.3, 64-81, 185.

27. Discussion with Mr. HU Kangsheng, Vice Director of the Legal Affairs Department of the Standing Committee of NPC, at the conference on the new Contract Law of P.R. of China, which was organized by Beijing International Law Association of Beijing Law Society on April 3, 1999.

28. FENG Datong (ed.), “The Law on the International Sale of Goods”, (supra n. 12), pp.69-71.

29. Art. 12 Insurance Law of China.

30. ibid. (supra n. 25), pp.5-25.

31. LI Shuangyuan, “International Private Law — Conflict of Laws”, Wuhan: University Press, June 1987, pp.339-340. YU Xianyu (ed.), “Law on the Conflict of Laws”, Beijing: Law Press, March 1989, p.179. GAO Shuyi (ed.), “International Private Law”, Jilin University Press, Dec. 1987, p.111.

32. HU Kangshen (ed.), (supra n. 3),  p.195.

33. Art. 111 of the General Principles of Civil Law of China. Art. 31 of ECL. See “ Collection of Judicial Explanations of Common Use in Judicial Practice (Revised edition in 1994)”, Beijing: People’s Court Press, May 1995, pp.433, 666.

34. CIETAC (ed.), “Selected Works of the CIETAC Awards (1963-1988)” (supra n. 20). MU Zili / WANG Junpu, “On the Principle of Reducing Losses”, in “Arbitration and Law News”, Beijing: CIETAC 1993, No. 5-6, pp.4-9. CAO Jiarui: “On the Discussion of Some Issues Concerning Contract, Breach and Damages”, in “Arbitration and Law News”, Beijing: CIETAC 1993, No. 1, p.4; No. 2, p.20; No. 3, p.3; No. 4, pp.8-17.

35. ZHANG Yuqing, (supra n. 7), pp.7-8.

36. Treaty and Law Department of MOFTEC (ed.), “Selected Collection of Economic and Trade Laws, Regulations and Provisions”, in “Editor’s Statement”, China Foreign Economy and Trade Press, May 1997, pp.1.

37. CHENG Dejun, “Working Report of the 13^th Committee of CIETAC”, in “Arbitration and Law News” April 1998, No.2, pp.11-14.

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Pace Law School Institute of International Commercial Law - Last updated January 11, 2000

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