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Reproduced with permission of 40 American Business Law Journal (Spring 2003) 459-510

The Mountains Are High and the Emperor Is Far Away:
Sanctity of Contract in China

Patricia Pattison [*] Daniel Herron [**]

  1. Introduction
  2. The UCL: A Comparative Analysis
    A. Nature and Application
    B. Formation of a Contract
          1. Offer and Acceptance
          2. Consideration
          3. Legality
          4. Statute of Frauds
    C. Performance
          1. Risk of Loss
          2. Warranties
    D. Third Party Rights: Assignments and Beneficiaries
          1. Assignments
          2. Third Party Beneficiaries
    E. Termination
    F. Contract Remedies
    G. Summary
  3. Chinese Culture
    A. Philosophy
          1. Confucius
          2. Lao Tzu
          3. Sun Tzu
    B. Family
    C. Guanxi
    D. Rules of Society
          1. Relationships
          2. Mianzi
    E. Implications for Business
          1. Litigation/Conflict-Aversion
          2. Linear vs. Cyclical Time: Accountability
          3. Negotiation of Contracts
  4. The Legal Environment in China
    A. Rule of Law
          1. Rule of Law -- the Positivist View
          2. Rule of Law -- the Normative View
          3. Rule of Law in China
    B. The Constitution of China
          1. Constitutional Articles that Support Democracy and Freedom
          2. Constitutional Limits on Democracy
    C. Legislative Power
    D. Dispute Resolution
          1. Mediation
          2. Arbitration
          3. Litigation
    E. The Legal Community
  5. Conclusion

I. INTRODUCTION

"They do not follow any ethics," he protested. "They're only looking to make a quick profit. And when dealing with foreigners, their main concern is how much extra money they can cheat out of them!"[1]

In anticipation of China's admission to the World Trade Organization (WTO), the Chinese government enacted legislation entitled the Uniform Contract Law (UCL) in 1999.[2] Both China's subsequent admission to the WTO and its enactment of the UCL have broad implications for world-wide business transactions. [page 459]

China is the world's largest market, larger than any single country, and in fact larger than any single trading bloc such as the European Union or NAFTA. Yet, the Western stereotypes regarding Chinese business dealings remain as quoted above: "they [the Chinese] do not follow any ethics .... And when dealing with foreigners, their main concern is how much extra money they can cheat out of them." As with most stereotypes, this one is also not true. It is grounded in fundamental Western misunderstandings of Chinese custom and culture-custom and culture that have heavily influenced and molded the Chinese business/legal environment.

A typical example of this kind of misunderstanding is the alternative, and competing, view of contract formation: Westerners view contract formation as the culmination of a negotiating process and period. The contract is the "end result." From the Chinese perspective, the "final" contract signifies that a relationship exists and terms-negotiations may now continue. The "final" contract signals the beginning for real contract negotiations. Is it surprising, then, that Westerners view Chinese, in this context, as unethical in failing to fulfill their supposedly agreed-upon contractual obligations. With Chinese law and, more importantly, Chinese custom refusing to enforce "contractual obligations" in the traditional Western way, is it any wonder that Westerners characterize the reason for the unenforceablity of Western-style contract law in China with the Chinese saying that "... the mountains are high and the emperor is far away."

With the passing of the UCL in 1999, the Chinese government attempted to bring Chinese business practices into some kind of conformity or consistency with general Western practices. The keystone provision that is designed to make the UCL "work" is the adoption of the key concept of the "rule of law." The general Western interpretation of the "rule of law" is that an enacted and accepted set of guidelines and statutory or case-based principles will dictate societal and business behavior. Arbitrariness, capriciousness, personal biases and considerations will be minimized if not eliminated.

In 1999, the Chinese amended their Constitution. Article 5 of the Chinese Constitution states, "The People's Republic of China shall practice ruling the country according to law, and shall construct a [page 460] socialist rule-of-law state."[3] Most likely, this amendment came as a result of the WTO's requirement for admission, an internal legal system administered in a "uniform, impartial, and reasonable manner."[4] Instituting the rule of law is probably the most important step China can take to insure economic growth and attract global business.[5]

With the adoption of the "rule of law" constitutional provision and with the adoption of the UCL, China was poised to enter the world of twenty-first century global transactions. So thought the Chinese and so thought the Western world. Commercial contractual relations with the Chinese would serve as the vehicle for bringing the world's largest market into the global marketplace. However, the Chinese perception of the concept of the "rule of law" and the Chinese culture's impact on the interpretation of the UCL do not eliminate the deeply-rooted cultural differences which make Sino-Western business transactions so frustrating and difficult. After all the necessary legislation is enacted, one problem will still remain. How will all the new laws be enforced? One commentator has noted that, "non observance of these laws is quite universal;"[6] the mountains are high and the emperor is far away.

To that end, this paper will explore those cultural differences and the impact such differences make on business contractual relations. The first part of the paper will compare the major provisions of China's Uniform Contract Law to its Western counterparts: comparing and contrasting it with the Uniform Commercial Code (UCC),[7] the United Nations Convention on Contracts for the International Sale of Goods (CISG)[8] and the common law on [page 461] contracts where applicable. Several legal scholars have noted that the main concern for international lawyers is to not be lulled into a false complacency.[9] On the surface, the UCL appears to be very similar to common law contracts and the UCC. Closer examination, however, reveals significant differences that can alter agreements and thwart the intentions of unsuspecting contracting parties.

The second part of this paper will clarify the connections between Chinese culture and business to help Western businesspeople understand the cultural foundations of Chinese business and law, particularly, the concept of sanctity of contract.[10] It is asserted that, " to truly 'get inside the heads' of your business partners and competitors, it is essential to have a thorough understanding of what underlies their thinking."[11]

After a careful consideration of the culture, one can see that, indeed, the Chinese do have a dramatically different perception of ethics and law, contracts in particular.[12] It is possible to appreciate the fact that their conduct may be entirely ethical, but based on a different priority of values.[13] The core concepts of the classical Chinese philosophy revolve around relationships and situational [page 462] specificity,[14] not on task accomplishment, as is emphasized in most Western cultures.

The third part of the paper discusses significant problems with the legal environment in China in the context of doing business with the West. First, although the Chinese have apparently embraced the rule of law, there is a very real question whether the phrase is interpreted the same way as in Western countries. Second, sections in the Chinese Constitution and various pieces of legislation, including the UCL, suggest that undue state control of contracts may still exist. The fact that some power is still reserved to the state inhibits freedom of contract for the parties. Contracts that "disrupt social and economic order or harm the public interests" will be deemed illegal.[15] Third, the methods of dispute resolution differ between China and the West. Last, in China there is a real paucity of legally trained professionals, both lawyers and judges. Since the UCL is based on both common law and civil law,[16] the Chinese judiciary and lawyers do not have the experience or precedent case law to adequately enforce it. All of these problems must be resolved before Westerners can be confident that their contracts with the Chinese will be enforceable.

II. THE UCL: A COMPARATIVE ANALYSIS

This overview of the UCL, comparing it to the UCC and the CISG, is not intended to be inclusive, but only to draw attention to the subtle, yet significant, differences that might cause problems for persons lulled into false complacency by the similarities to the UCC and the CISG.

Over twenty years ago, Deng Xiaoping [17] announced an open door policy for China and expressed a need for legal modernization.[18] Since that time many contract laws have been enacted,[19] but until the [page 463] Uniform Contract Law (UCL) came into effect in 1999,[20] the laws had not been unified.[21] The UCL makes some significant improvements to the previous contract laws.[22] First, it supports behavior necessary for a market-based economy, instead of the previous state-planned economy.[23] Second, it relaxes contract formalities,[24] and third, it eliminates some inconsistencies created by the previous codes.[25] Over four hundred articles make the UCL a massive document; the first 129 provisions are entitled General Principles. The remaining articles are classified as Special Provisions and generally relate to specialized types of contracts, such as Contracts for Supply of Power, Water, Gas, or Heat. Only the first section of the Special Provisions on Sales (Articles 130-175) will be compared and contrasted with the UCC and CISG.

As of May 1, 2002, the UN Treaty Section reported that 61 countries have adopted the CISG.[26] It applies to "contracts of sale of goods between parties whose places of business are in different states, when the states are Contracting States."[27] However, the CISG, " applauded as the most successful international trade treaty so far,"[28] has a fairly narrow scope that is limited to contract formation and the [page 464] rights and duties of the buyers and sellers.[29] It does not cover several issues that are included in the UCC. It specifically excludes contract validity [30] and product liability for death or personal injury.[31] In addition, the CISG is silent on issues of fraud and contractual capacity of the parties.[32] It does not apply to goods bought for personal, family or household use unless the seller didn't know or didn't have reason to know that the goods were purchased for consumer use.[33]

Countries that share a common law tradition,[34] as well as civil law countries, have adopted it. International practitioners from common law countries need to be alert for civil law principles embedded in the CISG.

A. Nature and Application

Both China and the United States are signatories to the CISG, but both countries have made an Article 95 declaration that they would not be bound by Article 1(1)(b), the application provision of the CISG.[35] An Article 95 declaration " restricts the role of private international law in determining the applicability of the CISG when both contracting parties do not have their relevant places of business in Contracting States."[36]

In other words, signatory states may opt out of the CISG coverage and restrict its application when the parties have places of business in different signatory states. Therefore, when the contracting parties are from the United States and China, both signatory nations to the CISG, either the UCL or the UCC may be the applicable law rather than the CISG. Additionally, if a US company participates in a Chinese-foreign joint venture, the foreign company will be considered [page 465] a Chinese legal entity.[37] The CISG will again not be applicable; the UCL will govern the contractual relationship.

Defining a contract as an agreement by which parties "establish, modify or terminate relationships of civil rights and obligations,"[38] the UCL proposes to protect the "lawful right and interest of contracting parties."[39] This appears to recognize the sanctity of contracts. It specifically prohibits entities or individuals from unlawfully interfering (emphasis added) with contract rights.[40] This could be a loophole permitting state intervention, depending on the definition of unlawfully interfering. This concept of sanctity of contract will be more thoroughly discussed in Section IV below, The Legal Environment in China.

Under the UCL, Chinese individuals and foreign persons can contract together, generally without permission from the state.[41] This is a significant development in Chinese contract law. Under the previous Foreign Economic Contract Law (FECL), a Chinese individual lacked capacity to contract with foreign individuals, enterprises, or other economic organizations.[42] Only an "enterprise" could contract with these entities. Now the UCL, like the UCC and CISG, gives contractual capacity to "natural persons."[43]

B. Formation of a Contract

1. Offer and Acceptance

The UCL requires an offer and acceptance to form a contract;[44] for Chinese contract law this is a new and important change.[45] The UCL defines offer similarly to the UCC [46] and the CISG:[47] [page 466]

An offer is a party's manifestation of intention to enter into a contract with the other party, which shall comply with the following:

(i) Its terms are specific and definite;
(ii) It indicates that upon acceptance by the offeree, the offeror will be bound thereby.[48]

Intention. As in the common law tradition, price lists, advertisements, bids, and announcements of auction are not offers, only invitations to make offers.[49] This is consistent with the CISG, which defines proposals not addressed to one or more specific persons to be mere invitations to make offers.[50] It appears that the UCL is more similar to the UCC, permitting contracts for the sale of goods to be made in any manner to show agreement. In contrast, the CISG adopts a more formal analysis of contracting behavior,[51] determining intent from an objective analysis of what a reasonable person would have intended.[52]

Specific and definite terms. The UCL requires that the terms of a contract shall be prescribed by the parties and generally include: the names and domiciles of the parties, subject matter, quantity, quality, price or remuneration, time, place and method of performance, liabilities for breach of contract, and the method of dispute resolution.[53] When the parties do not prescribe a relevant term, there are gap filling provisions that can be used to enforce the contract.[54] They are very similar to those found in the UCC.[55] For example, if quality was not clearly prescribed, then the state standard or the industry standard will be applied. If the price is omitted, the prevailing market price will be applied. The UCL has no mandatory terms for a contract, unlike the UCC, which requires a quantity term,[56] and the CISG, which requires an indication of the goods and an express or implicit provision for determining quantity and price.[57] [page 467]

Firm Offer. In this aspect the offer and acceptance rules of the UCL are consistent with those of the CISG.[58] An offer may be withdrawn if the revocation reaches the offeree before or at the same time as the offer.[59] Neither the UCL nor the CISG have provisions resembling the UCC's "firm offer" rule.[60] Both the UCL and the CISG provide that if there is a time period set for acceptance or an indication that the offer is irrevocable, then it is irrevocable,[61] and that an offer is irrevocable if the offeree has reasonable grounds to believe the offer is irrevocable.[62]

Acceptance. The effective times for offer and acceptance must be considered carefully. Under the UCL, like the CISG, both offers and acceptances become effective when they come under the control of the recipient.[63] The common law "mailbox rule" is not followed. Some interesting comparisons and potential conflicts can arise because of these conflicting rules.[64]

Additional terms. Technically there is no "mirror image" requirement in the UCL. Offers are effectively accepted when additional terms do not materially alter the offer. The wording in the UCL is very similar to the UCC "battle of the forms."[65] Both the UCL and the CISG provide that an acceptance that does not materially alter the offer will be effective and create a binding contract.[66] However, in contrast to the UCC, both the UCL and the CISG specifically define what will constitute a material change. The UCL stipulates that a change in the subject matter, quantity, quality, price or remuneration, time, place and method of performance, liabilities for breach of contract or method of dispute resolution constitute material change and create a new offer.[67] The CISG has [page 468] a very similar list of material alterations.[68] So, even though "technically" there is no mirror image requirement, in effect the terms of the acceptance should closely reflect those in the offer because a material alteration to the offer will constitute a counteroffer.[69]

2. Consideration

Although in the common law world, consideration is fundamental in the formation of a contract, in accordance with the civil law tradition there is no reference to it in Chinese contract law [70] or in the CISG.[71] One can argue that consideration is impliedly required, on grounds that subject matter, quantities, quality and price are essential exchange terms. Consideration can also be implied from the provision that requires that each party must perform its own obligations as agreed upon in the contract.[72]

3. Legality

In the UCL, the term "invalid contract" is used to cover both the common law concepts of void and voidable contracts. As under the common law, contracts that are the result of fraud, mistake, coercion, lack of capacity, or duress may be modified or rescinded.[73] When there is fraud and coercion that damages the interests of the State, then the contract is per se void.[74]

Additionally, contracts that are formed as a malicious conspiracy to harm the interest of the state, contracts that have illegitimate purposes that are concealed under the guise of legitimate acts (such [page 469] as gambling contracts) and contracts for the sale of ammunition are also classified as invalid.[75] Again, in this instance the word invalid means void.

The UCL's Article 7 on legality has caused some concern for Western legal professionals. Article 7 reads:

"In concluding or performing a contract, the parties shall abide by the relevant laws and administrative regulations, as well as observe social ethics, and may not disrupt social and economic order or harm the public interests."[76]

This section could be read to be quite consistent with Western contract law. U.S. laws also provide that contracts are illegal if they violate public policy.[77] However, the meaning of the terms "public policy," "social ethics," and "public interests" are all open to interpretation, so contract parties on both sides may find them problematic.

4. Statute of Frauds

Consistent with the CISG [78] and most civil law countries, the UCL specifies that "A contract may be made in a writing, in an oral conversation, as well as in any other form."[79] It must be evidenced by a writing only when required by a relevant law or administrative regulation or when the parties have so agreed.[80] The UCL defines writing as a "memorandum of contract, letter or electronic message, (including telegram, telex, facsimile, electronic data exchange and electronic mail), which is capable of expressing its contents in a tangible form."[81] Although the UCC does not yet recognize it,[82] the UCL specifically allows parties to contract by the use of electronic [page 470] data. Unlike the UCC,[83] the UCL does not require a contract for goods valued over a specific amount to be in writing.

C. Performance

In contrast to the previous laws governing contracts in China, the UCL now holds parties to good faith performance standards.[84] This parallels the UCC's requirement of good faith. Unless the parties agree otherwise, they must now perform their contractual duties simultaneously.[85] In a contract that calls for an ordered performance, i.e., when one party is to perform first, that person may suspend performance when the other party's business has seriously deteriorated, the other party has engaged in transferring assets or withdrawing funds to avoid debt, the other party has lost its business creditworthiness, or when the other party is in any circumstance that may cause it to lose its ability to perform.[86]

1. Risk of Loss

Like the UCC and the CISG, the UCL provides for the risk of loss of goods. However, the provisions are slightly different and warrant a close inspection by the international lawyer. First, under the UCL, the status of the seller has no effect on the determination of the transfer of risk of loss. In contrast, if the seller is a merchant, risk of loss is affected under the UCC.[87] No greater standard of care or burden is placed on the merchant-seller as opposed to the non-merchant seller as the UCC differentiates, for example, in the tender of delivery (for non-merchants) versus the actual delivery scenario (for merchants) in order for the risk to transfer in a simple delivery contract to the buyer.[88]

The general rule under the UCL is that, "the risk of damage to or loss of the subject matter is borne by the seller prior to delivery, and by the buyer after delivery .... "[89] The UCL rule is consistent with the guiding principle of the UCC to place the risk of loss with the [page 471] party best able to control the risk or to insure the goods. But, unlike the UCC, the UCL does not use a contractual approach toward the shifting of loss. Where the UCC determines risk of loss by considering the shipping terms,[90] the UCL looks to delivery (receipt of goods),[91] unless otherwise agreed by the parties or stipulated by law.[92] When the parties anticipate using a carrier to ship the goods, risk of loss should transfer at the same time under both the UCL and the UCC if the parties define place of delivery as delivery to the carrier. However, if the parties define delivery as the place of receipt by the buyer, then the risk of loss would pass at the same time as with a UCC destination contract. Under the UCL, if the parties do not stipulate the place of delivery, and it cannot be determined by using gap fillers, then the risk of loss passes to the buyer when the seller delivers the goods to an independent carrier.[93]

The CISG creates a somewhat different problem. When a contract of sale anticipates that the goods will be transported but the seller is not obligated to deliver them to a particular destination, the risk of loss passes to the buyer when the goods are delivered to the "first carrier in transmission to the buyer."[94] Even if the seller is using its own vehicles to transport the good, the risk has still shifted to the buyer.

Considering the potential misunderstandings that could arise under both the UCL and the CISG, it is wise for the parties to allocate risk and to specifically agree when the risk of loss shifts to the buyer.

2. Warranties

The provisions for express warranties, the implied warranty of merchantability, the implied warranty of fitness for a particular purpose and the warranties of title and infringement are almost exactly the same under the UCC and the CISG.[95] The UCL contains provisions regarding product quality, but they are different from those in the UCC and the CISG. [page 472]

There is no mention of "express warranty," but the UCL does require that the seller shall deliver goods in compliance with the agreed quality specifications of the contract.[96] Another provision, similar to those found in the UCC, sets quality provisions in case of sale by sample. It requires that the subject matter delivered by the seller must comply with the sample as well as the quality specifications.[97] The most significant difference in regard to express warranties is the UCC requirement that the descriptions of goods, samples, or models must be part of the "basis of the bargain" to become express warranties.[98] The UCL does not include such a requirement.

It is not entirely clear if the UCL includes implied warranties comparable to those found in the UCC.[99] Several UCL provisions suggest the inclusion of implied warranties: "In a sale by sample, if the buyer was not aware of a latent defect in the sample, the subject matter delivered by the seller shall nevertheless comply with the normal quality standard for a like item, even though the subject matter delivered complies with the sample."[100] Also the UCL provides that if the contract did not make quality specifications, then a gap-filling provision will apply; performance shall be in accordance with existing state or industry standards.[101] In the absence of state or industry standards, then "... performance shall be in accordance with the customary standard or any particular standard consistent with the purpose of the contract."[102] These provisions certainly do not provide the broad coverage of the implied warranty of merchantability, but they do indicate some guarantee as to the quality of goods.

Both the UCC [103] and the CISG [104] provide for the warranty of fitness for a particular purpose. Much like the warranty of merchantability, the UCL does not specifically include the fitness warranty, but suggests it. Reference is made to "specific standards" in [page 473] conformity with the "purpose of the contract."[105] It can be argued that both an ordinary and particular purpose are inherent in any contract, so purpose of the contract can be construed to mean particular purpose.[106]

UCL provisions on warranty of title and against infringement mirror the UCC provisions.[107] In defining a sales contract, the UCL states, "A sales contract is a contract whereby the seller transfers title to the subject matter to the buyer, who pays the price."[108] It continues, "The seller is obligated to warrant that the buyer will be free from any third party claim against it in respect of the subject matter delivered, except otherwise provided by law."[109]

D. Third Party Rights: Assignments and Beneficiaries

1. Assignments

Comparable to the UCC,[110] under the UCL, with notification, an obligee generally may freely assign the rights of the contract,[111] unless, due to the nature of the particular contract, the rights are not assignable. Delegation of duties is restricted to situations where the consent of the obligee has been obtained.[112]

2. Third Party Beneficiaries

In contrast to the UCC, Chinese contract law does not recognize the right of third party beneficiaries. The UCL provides that when the parties have anticipated that performance shall be made to a third person, the obligor is liable to the obligee, not the third person, for breach of contract.[113] [page 474]

E. Termination

Before the enactment of the UCL, it was very difficult for either party to leave a contract before it was fully performed.[114] In order to provide more flexibility, the UCL now permits assignment, delegation and opportunities for innocent parties to act unilaterally.[115] Rescission is now available when there is no genuine assent, as in situations of fraud, coercion or mistake, if the injured party exercises this right within one year of learning of the defect.[116]

The concept of anticipatory breach has also been included in the UCL:

The parties may terminate a contract if:

(i) before the time of performance, the other party expressly stated or indicated by its conduct that it will not perform its main obligations;
(ii) the other party delayed performance of its main obligations, and failed to perform within a reasonable time after receiving demand for performance;
(iii) the other party delayed performance or otherwise breached the contract, thereby frustrating the purpose of the contract.[117]

Previous contract law in China, like the civil law tradition, required proof of fault to determine breach.[118] The UCL, departing from the previous requirement, permits an injured party to file a claim when the other party failed to perform or did not perform according to the contract specifications.[119] One problem still exists for Westerners educated in the common law tradition. The UCL covers economic and technological contracts, but other types of contracts, including purely domestic contracts, may still require proof of fault in order to prove breach.[120]

In regard to avoiding liability for breach because of force majeure, the UCL once again turns to the civil law tradition.[121] Contract liability is excused by "any objective circumstance which is unforeseeable, [page 475] unavoidable and insurmountable."[122] The party is not exempted from liability if the event occurred after a delay in performance.

F. Contract Remedies

The pre-UCL legislation made contract performance compulsory.[123] Because the more market-oriented economy does not require it in the way the state-planned economy did, specific performance is still available as a remedy, but in a more restricted way. Specific performance is now an available remedy except where:

(i) performance is impossible in law or in fact;
(ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive;
(iii) the obligee does not require performance within a reasonable time.[124]

In addition to the remedy of specific performance, the UCL also provides for actual damages,[125] liquidated damages,[126] and consequential damages [127] as remedies. The consequential damages are defined as, "including any benefit that may be accrued from performance of the contract, provided that the amount shall not exceed the likely loss resulting from the breach which was foreseen or should have been foreseen by the breaching party at the time of conclusion of the contract."[128] One translation of the UCL uses the words "possible consequence"[129] instead of "likely loss." Depending upon the interpretation of these words, it is possible that consequential damages are greater under the UCL than under the common law.[130]

G. Summary

As China plays a larger role in the world economy, it will become increasingly important for international attorneys trained in the [page 476 common law tradition to analyze and comprehend the similarities and differences between the UCC, CISG and the UCL. However, it is a mistake to simply assume that reconciling the differences between the UCL, the UCC, the CISG, and common law makes one prepared to tackle "doing business in China." Understanding Chinese contract law is only the first step. The Western business person or lawyer entering into or advising on contracts created with Chinese business entities or persons needs to understand Chinese contract in the context of the Chinese culture and legal environment. Until Western lawyers also understand the Chinese culture and legal environment, they will remain at a distinct disadvantage.

III. CHINESE CULTURE

"With the advent of a truly globalized world, it is not only markets but entire cultures that are coming into contact."[131] It is beyond the scope of this paper to do a comprehensive review of thousands of years of Chinese culture and tradition; what is attempted is an overview of cultural highlights that directly impact the negotiation and performance of contracts in China. "Beneath a thin veneer of socialist ideology and communist practice, Chinese interactions are governed by patterns laid down and developed through the experience of thousands of years."[132]

A. Philosophy

This section will discuss three important Chinese thinkers -- Confucius, Lao Tzu, and Sun Tzu -- who have had a major influence on Chinese society. Of the three, Confucius clearly has the greatest impact on Chinese culture and business today,[133] but, as will be seen in the discussion below, the other two have also extensively impacted the way the Chinese do and understand business. [page 477]

1. Confucius

Although it is claimed that Confucius was not an important influence on the culture of his time,[134] his thinking has impacted Chinese society since the second century, when it became an official state philosophy. It would be hard to overstate the impact of Confucius on Chinese society and law.[135] His goals were to implement peace, order and stability into society. He promoted a philosophy of virtue ethics, emphasizing benevolence, goodness and humaneness; more specifically, duty, loyalty, honor, filial piety, kindness, sincerity, and respect for age and seniority.[136] These virtues combined would lead to a state of grace if an individual followed the correct rituals, or codes of hierarchy in the conduct of everyday life.[137]

One drawback of Confucian philosophy, as seen particularly by many middle and lower class Chinese today, is the emphasis on maintaining appropriate roles in society.[138] "The entire Chinese social system is based on existential inequality."[139] Persons who are originally in subordinate roles are expected to know and maintain their places. This rigorous class system was necessary when the philosophy was created because there was no strong central authority, thus no social order. "Confucianism aimed at the self-government and self-regulation of the people."[140] Confucius established a complex moral convention to be the cement of society.[141] This moral convention resulted in a social organization that is autocratic and hierarchical, not democratic.[142]

The social order was to be established through a hierarchy of fixed moral and social roles. In the distinct social hierarchy, lower levels [page 478] give obedience to higher levels. These roles determine all levels of social interaction and behavior. "Let the ruler be a ruler, the subject a subject, the father a father, and the son a son."[143] Within the hierarchy the highest order of courtesy and moral duty maintains the discrete relationships.[144] When all people remain within their established roles, it can be argued, even today, that the rule of man is sufficient.[145]

Impact of Confucianism on Contract Law. Confucian concepts are critical to remember in the subsequent discussion of contract law. They impact not only the Western understanding of sanctity of contract, but also the whole concept of rule of law. According to the teachings of Confucius, the rule of law becomes necessary only when individuals wish to act outside their assigned roles. "When everyone acted according to their role, rule of law was no longer of consequence since rule by man intervened."[146]

Moreover, the establishment by Confucianism of a rigid hierarchy, in which the role of each person is relative and comparative to another's role, provides the bedrock notion that relationships form the basis of society as well as interaction with each other. The role one has in society and how that role relates to other roles are the basis for the social focus on relationships. Relationships become the glue binding individuals, family groups, and friends to each other. Hence, it will not be surprising to see the role that relationships play in the formation and enforceability of contracts. Inasmuch as contracts form a legal relationship, this legal relationship must be based on a preexisting social relationship determined by one's role in the Confucian society.

2. Lao Tzu

According to legend, Lao Tzu (Old Master or Old Philosopher)[147] [page 479] wrote the Tao Te Ching [148] (The Way and its Power, The Law of Virtue and the Way) in one night.[149] The Tao Te Ching is the foundation of Taoism, which, along with Confucianism, has shaped Chinese culture for centuries. Taoism is viewed as both a philosophy and a religion.[150] Tao is an ambiguous term, most commonly referred to as the Way, but that can also be interpreted as "nature, the eternal way, the path, or the absolute reality from which everything arises and to which everything returns."[151] Different schools of thought have adopted different interpretations of the Way, but all agree that "there is a single, overarching Way that encompasses everything in the universe."[152]

Taoism, like Confucianism, seeks harmony and stability. However, it noticeably contrasts with Confucianism in rejecting hierarchies.[153] Instead, it stresses an individual search for spiritual self-fulfillment through a rejection of false desires.

"No guilt is greater than giving in to desire,
No disaster is greater than discontent,
No crime is more grievous than the desire for gain."[154]

The Chinese aversion to law and legal systems is evident when one looks at the philosophy of the Tao Te Ching. Included here are a few examples that illustrate the apparent disdain held for rules and laws in general.

"When the Way is lost,
afterward comes integrity.
When integrity is lost, [page 480]
afterward comes humaneness.
When humaneness is lost,
afterward comes righteousness.
When righteousness is lost,
afterward comes etiquette.
Now,
Etiquette is the attenuation of trustworthiness,
and the source of disorder."[155]

It is only when one has lost the Way, integrity, humaneness, righteousness and etiquette, that disorder then develops. Once disorder is present, then the need for law arises. The apparent incongruity between Confucianism and Taoism actually becomes congruous in the disdain for law. In Confucianism, the societal restraints and constraints, a role law plays in Western societies, is spelled out by one's societal role and its relationships with other roles in the social hierarchy. In Taoism, it is not the hierarchical roles that dictate the restraints or, in the positive spin, the guidelines for human behavior. Instead, the individual quest and attainment of the Way provides those guidelines and restraints.

In Confucianism and Taoism, the "law" is not the force to provide those guidelines. In fact, such "laws" denigrate either the Confucian hierarchy's purpose or the Taoist individual quest of the Way. This is clear in the following Taoist selection:

"Now,
The more taboos under heaven,
the poorer the people;
The more clever devices people have,
the more confused the state and ruling house;
The more knowledge people have,
the more strange things spring up;
The more legal affairs are given prominence,
the more numerous bandits and thieves."[156]

This section illustrates the political nature of the Tao Te Ching. There are two pervasive themes, "The best way to control is through minimal interference and by keeping the people simple, without [page 481] knowledge and without desires .... "[157] The theme of minimal interference is again expressed as follows:

"When government is anarchic,
the people are honest;
When government is meddlesome,
the state is lacking."[158]

Impact of Taoism on Contract Law. Governmental intervention through rules and laws is not only considered to be unnecessary, but also detrimental to the society. While Confucianism focuses on the nature of societal roles and relationships, Taoism focuses on the disdain for the legal rules that Westerners take for granted. In an extenuated way, Taoism would seemingly put contractual relationship, and subsequent obligations, into some kind of metaphysical or transcendental realm which must be realized, not through some kind of Western-style negotiation, but on self-realization. This model is totally foreign to Western concepts of law.

3. Sun Tzu

Sun Tzu is credited with the authorship of The Art of War, a treatise on war and military science. The treatise, based on the Tao Te Ching, applies to strategy and tactics. Similar to the Taoist principle of nonaction, the basic principle of The Art of War is that the way to accomplish more is by doing the least. "To win without fighting is best."[159] The path to success is indirect, relying on psychological tools; emphasis is placed on outwitting and deceiving opponents, turning weaknesses into strengths, and maintaining cohesion and loyalty in a group. Adaptation to a changing environment with speed, surprise and flexibility is stressed. The superior militarists will remain invisible while learning about others. The Art of War remains relevant today as it is widely applied to a range of disciplines, including business.

Impact of the Tao Te Ching and Sun Tzu on Contract Law. Instead of addressing contractual or legal problem head-on, in a direct manner so typical in the West, the Tao Te Ching focuses not on the direct [page 482] approach but on deception, psychological maneuvering, and the subordination of the individual need to the group need. While some of these characteristics are clearly evident in Western business and contractual strategies, especially in contract negotiations, these characteristics, when adhered to relatively strictly, are anathema to a legal adversarial process in the way that Western litigation theories have developed. In Western societies, it is this specter of litigation that provides much of the impetus for contract enforceability. The lack of a threat of litigation reduces the incentive to honor one's contractual obligations.

B. Family

In traditional Chinese culture, the family serves as the basis for all organizations -- business, educational, social and political.[160] For fifty years the Communist party has tried to replace the traditional regard for family. However, individuals still exist primarily in the context of family; individual achievements still belong to all the individual's family. Where in Western countries there are "family businesses," the Chinese have "business families." The priority is the family, not the business. "Money has no past, no future, and no obligations. Relatives do."[161] Confucian societal roles, or more importantly, family roles extended the family beyond just a working unit, giving it moral dimensions. This societal network, created of morally binding, mutually dependent relationships, connects the family from generation to generation.

Unlike most Western societies, the Confucian state is composed not of "individuals" per se but of their interconnections and interdependencies. Confucian thought prescribes moral social roles to every person and shapes the individual as a link in a social network, cemented and stabilized by the principle of filial piety, among other rules of conduct. Through the assignment of roles, this system internalizes the social code, creating, ideally, a society that is self-regulating.[162]

The main point is that, unlike Western cultures, business is not separate from family and relationships. Of course, the pejorative [page 483] Western stereotype that might lend some understanding to this concept is that of the family-based mafia or organized crime syndicate. Granted, this may be a poor analogy because the pejorative connotations of the image completely overwhelm the metaphor, but it does force the Westerner to deal with the concept of the family relationships being the source from which all other relationships flow. Understanding this concept will enable Westerners to comprehend the unusual traditional concepts of Chinese contract law. Chinese business families are undergoing transformation as a result of both internal and external pressures. However, there is no sign that the "family first, business second" priority is being abandoned.[163]

C. Guanxi

Apparently the closest English synonyms to guanxi are connections and networking. The concept suggests that people don't even exist as individuals; they exist only when in relationship to each other.[164] Without the relationship, there is no possibility of successfully entering into Chinese business. It is not just "Who you know," but "who who you know knows."[165]

More than just connections, guanxi suggests relationships that include mutual obligation, reciprocity, goodwill and personal affection. When viewed by outsiders, guanxi often appears to be no more than cronyism tainted by bribery and corruption,[166] but it is actually more about trust and shared experiences. Chinese business people will devote an extensive amount of time and energy to building guanxi with respectable people.

Although the leadership during both the Communist Revolution and the Cultural Revolution attempted to eliminate guanxi, it actually became a work-around to the state government by providing information and avenues to obtain needed jobs, housing, goods, and services. People who have guanxi can accomplish just about anything, even when it is against the rules.[167] Guanxi has also benefited Chinese citizens when legal protection and/or enforcement have been lacking. [page 484] Personal power has made up for the lack of rule of law and transparency in rules and regulations.[168] In fact, "the entrenched nature of the guanxi system has proven to be one of the most powerful obstacles to establishing anything resembling rule of law in the People's Republic of China, and is probably the biggest headache of would-be legal reformers in China."[169]

There are three levels of guanxi.[170] The highest, inner-circle, is for family members and creates the strongest bond. Non-family members who have a significant connection based on trust or shared experience occupy the next level. The third level is composed of strangers who are not known, and, therefore, not trusted. Since there is no connection with strangers, there is no sense of responsibility to them. In fact, courtesy and hospitality may be lacking in transactions with strangers.[171] The Chinese are likely to wait and see if the strangers are able to overcome the suspicions associated with being unknown before admitting them into the second level.

To cultivate guanxi, one must first understand and appreciate the concept of gift giving or doing favors. The reciprocal offering of gifts and favors creates a mutual indebtedness that can become a basis for guanxi. The indebtedness must always be repaid, but there is no special time limit and the repayment need not be equal. The inequality or imbalance of the gifts and favors is what continues the relationship. "You honor me with a foot; I honor you with a yard. Receive a droplet of generosity; repay like a gushing spring."[172]

D. Rules of Society

1. Relationships

As Confucianism, Taoism and the concept of guanxi foreshadow, relationships, reciprocity, and respect are the foundation of the rules of Chinese society.[173] They are inseparable in both social and [page 485] business roles. It has been noted that the most important and fundamental difference between the Chinese and Westerners is the role played by the individual in society.[174] Contrary to Western thinking, identity is not formed based on a concept of self. Descartes, a Western thinker, said, "I think, therefore I am."[175] A Chinese counterpart might have said, "We think, therefore we are." This doesn't mean that all Chinese people think alike, but it does indicate that they are more inclined to think according to and within their roles and relationships. While in the West we emphasize individual differences and personal achievement, Chinese children are taught that their importance as individuals is not nearly as great as that of the roles they play in larger groups.[176]

The significance of this is that the Chinese will focus more on group actions and the roles played in various groups, not on individual achievement. In exchange for loyalty and obedience to the group, the members receive protection and support. The entire group will be concerned with the well being of every individual member.[177] Because the Chinese view their lives holistically, the concept of roles will manifest itself in all aspects of business, including the negotiation and performance of contracts. It may be difficult for Western business people to understand that these family and social roles may take precedence over business and legal obligations.

The implication of this focus is two-fold when it comes to contract law: the individual's rights, as evidenced in contract formation, are subordinated to a larger group-based or common good; and contractual relationships must first be preceded by some other kind of group or societal relationship. Maintaining such relationships not only positions the individual to cultivate benefits and privileges, such as ones which Westerners might call "contractual," but it also permits the individual to cultivate mianzi, a vital individual attribute of group relationships. [page 486]

2. Mianzi

To keep the social order intact, people must preserve their roles in order to maintain their self-images, mianzi, or face. "Having mianzi is like having good credit, so that one has a lot of purchasing power."[178] It is based on social standing, character and reputation. In order to maintain face, people sometimes will lie and make bad business decisions.

When one person causes another person to lose face, both are harmed. In competitive (and litigious) Western societies, this is truly a mystifying concept. People lose face when they are not treated with respect; patronizing, criticizing or insulting a person in public will cause a loss of face.[179] Family members and associates of the disparaged person also lose face. It is difficult to overestimate the significance of being held in high regard. One Chinese businessman expressed the importance of maintaining face.

"We do not like people with the same surname or people seen with us a lot to go down. If that person is a family friend, the community will say, 'What sort of man are you to allow your friend to go down?' So I feel an obligation to assist him; otherwise it also reflects on me. We have this peculiar sensitivity that induces us to mutual assistance."[180]

Reciprocity is a critical element of mianzi. Reciprocity can include the exchange of gifts, favors or compliments. It certainly includes helping others in business endeavors. "We have to help each other in business. Because when we make a profit, we get it from them. My business is based on trust."[181]

Because business is generally based on trust, the Chinese will frequently bypass the formally negotiated contract, a Western business requirement. A contact is considered unnecessary, [page 487] sometimes offensive, when rules of loyalty and mutual obligation structure the business environment. It is akin to the Westerner's demanding a written contract even though a business associate has "given his word." The implication is that one's word is not "good enough."

E. Implications for Business

1. Litigation/Conflict-Aversion

In contrast to the Western way of thinking -- that way of thinking that Westerners refer to as the scientific method -- the Chinese are not inclined to analyze or break apart the world in order to understand it.[182] As with most Asian cultures, their worldview is more integrated or holistic. Both Confucianism and Taoism encourage individuals to subordinate themselves to the good of the family and society in order to achieve balance and harmony. This subordination is not the same as passivity; it "implies a pensive yielding to, or living in harmony with, the natural flow of events."[183]

Of course, this desire to maintain harmony has significant implications for business. Evaluation and constructive criticism may be avoided. Unproductive employees may be retained and unprofitable companies may continue to exist. Conflict may be avoided at great cost. For example, one Chinese businessman remarked that he could purchase property worth $ 200 million without requesting permission from his father, the head of the company, but that he could not initiate a lawsuit without his father's approval.[184]

2. Linear vs. Cyclical Time: Accountability

The Chinese holistic time perspective also has implications for conducting business.[185] Because time is thought of as cyclical, a long-term viewpoint is emphasized. Unlike in Western thinking, time is not money. Nothing is lost or gained; the cycle just repeats itself with all the successes and failures coexisting.[186] A Chinese commentator [page 488] observed that because time is viewed as "cyclical, elastic, and open-ended," the result might be a lack of accountability.[187] However, one Western businessman experienced punctuality as a virtue, especially regarding meal times.[188]

This concept of time also impacts contract performance because time is best spent cultivating relationships, not in accomplishing tasks. It may appear that the Chinese are not accountable because they may delay tasks in order to visit with people. Also, they prefer to multi-task rather than do one thing at a time, as Westerners are inclined. Because of this cyclical time orientation, Chinese may prefer to leave timing and planning open. Final arrangements may not be made until the last minute.[189] This attitude is likely to frustrate Westerners when attempting to form or perform contracts with the Chinese.

The following table summarizes the societal rule differences that may impact business dealings between the Chinese and Westerners.

[Table not reproduced] [190] [page 489]

3. Negotiation of Contracts

Following the teachings of Sun Tzu, many Chinese when negotiating a contract will attempt to "win without fighting." Sun Tzu argued that the ultimate form of competition is to "conquer the enemy without resorting to war."[191] Instead of confrontational negotiation and potential litigation, the Chinese will attempt to find solutions where no one loses face or the deal. Much like the principles espoused in Getting to Yes,[192] Chinese thinking emphasizes reaching agreement through cooperation and collaboration. They will attempt to redefine the battlefield by developing strategic detours and misdirecting potential adversaries.

In a negotiation session, many of Sun Tzu's military strategies will be evidenced in the Chinese communication style. Effective communication is absolutely necessary when dealing with people who see business as essentially based on relationships and roles. Therefore, the most important aspect of communication is recognizing the cultural context behind the actual words that are spoken. Chinese communication is considered to be high context; the main source of information is found in the gestures, tone, social status and background of the speakers.[193] Western societies tend to be low-context and very legalistically oriented. In the West it is not unusual for a contract action to be brought over disagreement on a single word.

In order to preserve the critical social roles and relationships, messages, especially negative messages, will be delivered indirectly. To save face for both sides of a negotiation, Chinese will seldom directly say "no." There are other methods of refusal, i.e., to say that a request would be inconvenient, is under consideration, or is being discussed, generally means no.[194] Strong emotions are also likely to cause a negotiating party to lose face. Positive emotion, such as praise for a particular individual, may cause disharmony, as well as anger or other negative emotions. Perceptive listening and careful [page 490] choice of words are the wisest choices when negotiating with the Chinese.

Many Westerners make their biggest mistake when they assume that the communication is completed when a contract is signed. In contrast, the Chinese generally view the signing of the contract as just the beginning of the business relationship.[195] Agreements made during formal negotiations have no more, maybe even less, sanctity than the communication exchanged before and after. Negotiation is a process, not a completed transaction. A contract is not necessarily a binding document, but may be only an agreement on general principles that expresses the spirit behind the document.[196] As relationships evolve and situations change, the Chinese may want to take the new circumstances into account. "Hence, there is no stigma attached to changing the terms of an agreement after it has been signed, and Western businesspeople can expect to renegotiate or reinterpret points of the contact during their entire working relationship with the Chinese party."[197]

IV. THE LEGAL ENVIRONMENT IN CHINA

While the Chinese Constitution and various codes are relatively new, the philosophy underlying the system, as practiced, can be traced back at least a couple of thousand years. Significant parts of what were already intrinsic in the culture fit the style and needs of the current Communist regime. However, now, years after the adoption of the Chinese Constitution, even Chinese commentators are still asking, "How can China, such a despotic nation for so long, suddenly embrace democracy?"[198]

It is not the purpose of this paper to describe the ancient and rich political history of the Chinese people. However, it is in aid of better understanding of the Chinese legal system to point out that as far back as the Chin Dynasty Shang Yang (4th Century B.C.), it was taught that the State should be governed by an absolute autocrat exercising a harsh law.[199] Subsequent rulers have built on this idea, [page 491] giving apparent deference to political expedience. The use of the law as a tool precipitated a confusion that continues today concerning the distinction between rule of law as contrasted with rule by law.[200]

A. Rule of Law

As stated above in the introduction to this piece, in 1999, the Chinese adopted a constitutional amendment incorporating the "rule of law" into the Chinese legal system. While the phrase rule of law is commonly used in speeches and in literature, both here and in China, it is often misunderstood. There is not a common understanding among the various constituents, ordinary citizens, bureaucrats, government leaders, party leaders, lawyers, judges, and writers, concerning the ultimate purpose of the rule of law, nor concerning how to achieve it. There appear to be two basic understandings of the appropriate definition of rule of law.[201]

1. Rule of Law -- the Positivist View

Rule of law is a catch phrase after Locke and Montesquieu, echoed in the famous statement by Lincoln: "We are a nation of laws, not of men." It means, inter alia, that the law is a known commodity, stable and predictable; one can ascertain the law and not worry about an individual leader or the government arbitrarily making up rules or arbitrarily changing them along the way.

This interpretation, often referred to as rule by law, follows a positivist legal theory, viewing law merely as an instrument of government. In Western jurisprudence, positivist legal theorists emphasize what the law is, not what it ought to be.[202] The positivist view is that there are only three essentials of a law: a command, a duty and a sanction. Valid law can exist independent of moral principles.[203]

The meaning of the rule of law in China is open to debate, but at this time many speculate it means rule by law.[204] Although this does not meet the ideal of many Westerners, it is a first constructive step. [page 492] It is an improvement over the concept of law according to Mao, " We want the rule of the individual, not the rule of law."[205] One commentator referred to this as the rule of power, "Under the rule of power, the person, company, or ministry with the upper hand appropriates most of the economic gain."[206]

2. Rule of Law -- the Normative View

The second interpretation, a normative rule, rests on rights-based concepts:

"... man, by the dictates of Natural Law, is a free being and that freedom is evidenced politically and economically. Government is prohibited from unreasonably restricting both the political environment (e.g., speech, association, etc.) as well as the marketplace."[207]

The normative view sees the rule of law as the very foundation of human rights. In the Western legal tradition, law is applied equally to all; it is binding on the lawgiver and is meant to prevent arbitrary action by the ruler. Law guarantees a realm of freedom for the members of a political community that is essential to the protection of life and human dignity against tyrannical oppression and to the regulation of human relations within the community.[208] At a minimum, this view of the rule of law requires an independent judiciary, freedom for lawyers and a scholarly legal community that is politically free to research and educate.[209]

3. Rule of Law in China

Works on the subject of rule of law in China and descriptions of the Chinese legal system fill volumes. They constitute extremely interesting and enjoyable reading. There is no way to treat this complex subject matter in a simple way. There are comprehensive [page 493] descriptions of the Chinese system in some of the materials cited in the footnotes.[210] Certain highlights of the Chinese system are included herein, partly because they are of interest, and also because they provide some of the bases for the conclusions reached.

A good start with respect to defining rule of law goals for China might be to complete the "heroic" struggle mentioned in the second paragraph of the Preamble to the Constitution of the People's Republic of China, "for democracy and freedom."[211] In addition, the Constitution was amended to read, " The People's Republic of China shall practice ruling the country according to law, and shall construct a socialist rule-of-law state."[212]

Acknowledging that it is admittedly unfair to dissect statements that have been spoken in Chinese and translated and reprinted in English, nevertheless the following statement from President Jiang's speech at Harvard in November, 1997, is clearly relevant.

"Politically, we will endeavor to develop socialist democracy, govern the country according to the law, build a socialist country under the rule of law and ensure the full exercise of people's rights to govern the country and manage social affairs."[213]

His words are clear enough; they have a familiar and reasonably welcome ring. Western readers cannot know exactly what is meant by "socialist democracy," nor what President Jiang meant by either "rule of law" or the "people's rights to ... manage social affairs." According to Suzanne Ogden, "The term democracy has a very [page 494] different meaning in China from what it means in the West .... China's form of government is a 'people's democratic dictatorship,' represented by the Communist Party."[214]

Deng Xiaoping, the Chinese Premier from 1978 to1993, had said it more clearly and comprehensively. What he said makes more sense from the Western observer's point of view:

"Democracy has to be institutionalized and written into law, so as to make sure that institutions and laws do not change whenever the leadership changes or whenever the leaders change their views .... The trouble now is that our legal system is incomplete .... Very often what leaders say is taken as law and anyone who disagrees is called a lawbreaker. That kind of law changes whenever a leader's views change. So we must concentrate on enacting criminal and civil codes, procedural laws and other necessary laws .... These laws should be discussed and adopted through democratic procedures."[215]

As Von Kamenade remarked, inserting a slightly cynical parenthetical implying not much progress, "During the last decade, much has been done by means of new legislation to introduce (once again) the rule of law."[216] Ronald Keith commented in his book on the subject, "The concept of the rule of law has been supported despite open disagreement with Western emphases on judicial independence and separation of powers."[217] McConnaughay agrees and sums up the situation:

"Even though Western insistence on the rule of law as a condition of cross-border commerce has been met by enthusiastic acceptance and lawmaking by Asian policymakers, it has not occasioned the pervasive change in individual attitudes and beliefs essential to a widespread change in the traditionally subordinate role of law and contracts in matters of private commerce."[218] [page 495]

B. The Constitution of China

The Chinese Constitution [219] and laws are comparable to ours in many respects. The comparison is close enough to lead one to conclude that our systems are not that different. However, the differences, both in content and in practice, are significant.

1. Constitutional Articles that Support Democracy and Freedom

The Chinese Constitution provides, inter alia:

"Every citizen enjoys the rights and at the same time must perform the duties prescribed by the constitution and the law."[220]

When considering the content, it is surprising to see the many similarities to democratic constitutions. Here are a few examples of articles found in the Chinese Constitution that impact on the freedom and sanctity of contract. Article 3 provides that the National People's Congress and the local people's congresses are instituted through democratic election; Article 4 provides that all nationalities in the People's Republic of China are equal. They have the freedom to use and develop their own spoken and written languages, and to preserve or reform their own ways and customs. Article 5 provides that no law shall contravene the constitution, and Article 13 provides that the state protects the right of citizens to own lawfully earned income, savings, houses and other lawful property.

Articles 33 through 56 contain statements of rights more comprehensive than the U.S. Constitution guarantees its citizens. For example, Article 33 provides that all citizens of the PRC are equal before the law. Article 34 provides that all citizens of the PRC who are over the age of 18 can vote and stand for election regardless of nationality, race, sex, occupation, family background, religious belief, education, property status, or length of residence. The only exceptions are those deprived of political rights according to the law. Article 35 provides that citizens of the PRC enjoy the freedom of speech, press, assembly, association, procession and demonstration. [page 496] Article 36 provides that citizens of the PRC enjoy freedom of religious belief. The state must protect religious activities and may not discriminate against citizens because of religion. Article 37 provides for rights of due process and protects citizens against arrest without the approval of a people's procuratorate or court. It also protects citizens against unlawful search. Article 41 provides the citizens the right to criticize and make suggestions to any state organ or functionary. Article 48 provides equal rights for women in all spheres of life -- political, economic, cultural and social and family life.

Although these articles indicate that the Chinese people have been guaranteed very similar civil rights to those enjoyed by Americans, there are also significant differences between the Chinese and American constitutions that could influence the enforcement of contracts.

2. Constitutional Limits on Democracy

The Chinese Constitution is actually based on the Soviet model: "Because both the structure and process of the Chinese legal system were modeled on the Soviet legal system, it conforms closely to the imperatives of socialist ideology and policy: The legal system is explicitly meant to function as a tool of the state."[221] The American perspective is that social and individual rights pre-date the Constitution and the constitutional mandate is for the legal system to preserve such rights.

Article 3 of the Chinese Constitution includes the first difference. In China, the administrative, judicial and procuratorial organs of the state are created by the people's congress. In contrast, the American judiciary is appointed by the executive branch and approved by the Congress. This doesn't appear to be a significant difference, at least on paper. Article 6 notes that the basis of the socialist economic system of the PRC is socialist public ownership of the means of production. Essentially this means collective ownership by the working people, a significant difference from our private ownership. Articles 9 and 10 provide for collective ownership of mineral resources, waters, forests, mountains, grassland, unreclaimed land, beaches, and other natural land in the cities. There are some [page 497] exceptions where property can be owned by local collectives, another significant difference.

Finally, and most significant, Article 51 contains a supremacy provision that could be interpreted to take those rights away in a given set of circumstances:

"The exercise by citizens of the People's Republic of China of their freedoms and rights may not infringe upon the interests of the state, of society and of the collective, or upon the lawful freedoms and rights of other citizens."

This clause shows a distinct perspective away from the Western notion of the supremacy of individual rights.

In comparing our constitutions there are many similarities and a few, but quite significant, differences. Clearly one of the most significant constitutional differences is found in the concept of collective ownership versus private ownership. Another is the lack of judicial review in constitutional and statutory interpretation. Article 67 makes it the province of the Standing Committee of the National People's Congress (not the judiciary),

"(1) to interpret the constitution and supervise its enforcement; (4) to interpret statutes; (6) to supervise the work of ... the Supreme People's Court and the Supreme People's Procuratorate (public prosecutor, who also investigates and reports to the Court); (8) to annul those local regulations or decisions of the organs of state power of provinces, autonomous regions and municipalities directly under the central government that contravene the constitution, the statutes or the administrative rules and regulations .... " (parenthetical added)

C. Legislative Power

Articles 57 through 78 of the Chinese Constitution establish and define the National People's Congress (NPC), "the highest organ of state power." "The National People's Congress and its Standing Committee exercise the legislative power of the state."[222] The Constitution describes a fairly representative Congress composed of "deputies elected by the provinces, autonomous regions and municipalities, ... and by the armed forces. All the national [page 498] minorities are entitled to appropriate representation."[223] Article 64 provides a procedure for amending the Constitution with a two thirds vote of the NPC.

It is apparent that the NPC is different today in terms of its membership and legislation from the way it started out. Almost ten years ago, Suzanne Ogden described its processes as follows:

"In theory, the National People's Congress (NPC) formulates the constitution and passes legislation that becomes law. In fact, the NPC was a rubber stamp until Peng Zhen became the head of it in 1981 and made it into both his own power base and, for the first time, an institution that seriously examined the proposed legislation that came before it. For the most part, however, laws continue to flow, as they always have, from the Party and the State Council; and the Standing Committee of the NPC may amend legislation and the Constitution without consultation with the NPC."[224]

More recently:

"[O]ver the last 16 years, China's lawmaking system can no longer be considered as a unified, top-down policy-making system. Each law moves through approximately five different states: agenda setting; inter-agency review; top leadership approval; NPC debate and passage; and the explication, implementation or adjudication of the law as policy."[225]

However, there is still something about its workings that caused at least one commentator to remark:

"[A] major, if unavoidable, weakness of Western studies of Chinese lawmaking (and policy-making in general) is the lack of a clear picture of top leadership involvement."[226]

China's growing body of law is already quite voluminous. In addition to its Criminal Code, and a plethora of laws dealing with criminal activities, China has published, inter alia, a comprehensive set of "General Principles of the Civil Law ...," a code of civil procedure, economic contract law, [page 499] foreign economic laws, laws on land management, laws protecting endangered species and protecting antiquities, a forestry law, patent, copyright, and trademark laws, laws on Sino foreign joint equity enterprises, laws concerning enterprises with sole foreign investment, laws on lawyers, company laws, foreign trade laws, income tax laws, commercial banking laws, laws on negotiable instruments, an administrative law, a marriage law, and a law of succession.

China has quickened the process of drafting law to meet the requirement for a perfect legal system that has arisen with the development of a socialist market economy. In the 19 years of reform and opening, the highest organs of state power have legislated 310 laws and related regulations; the State Council has passed 750 administrative regulations; and the local People's Congresses have enacted 5,300 regulations. Since March of 1993, after the First Session of the Eighth National People's Congress (NPC), the NPC and its Standing Committee have created 110 laws and related regulations, two-thirds of which concern the economy.[227]

There is no doubt that the interactions of foreign investors have had an influence on the administration of justice as well as on the administration of business law. The Chinese are eager to accomplish reasonable changes that will foster further trade. It is clear that the law is evolving rapidly, and sometimes is not easy to find.

D. Dispute Resolution

History and culture guide Chinese legal practice in other ways. In civil matters,

"If a man is entangled in a conflict, his only salvation lies in being so clear-headed and inwardly strong that he is always ready to come to terms by meeting the opponent halfway. To carry the conflict to the bitter end has evil effects even when one is in the right, because the enmity is then perpetuated."[228] [page 500]

This view of refusing "to carry the conflict to its bitter end," reflects that litigation-aversion that was forshadowed in Sun Tzu's philosophy. Additionally, there is a certain "law blindness"[229] or "legal blindness"[230] among the Chinese, the result of which is, "that most Chinese live not according to a fixed set of rules but according to the improvised demands of their struggle for a better life." This, again, reflects the underlying philosophy of Confucianism and Taoism.

1. Mediation

It is readily apparent, when one is dealing with the courts in China, that the preferred method of resolving civil disputes is mediation.[231] Mediation is a very effective means of dispute resolution.[232] Currently it has several advantages over judicial resolution.

Advocates assert that mediation provides flexibility in handling cases where there are gaps in the law, allows the courts to devote their limited time and resources to the more difficult cases, enables the parties to have the greatest possible control over their rights and interest, prevents full-blown conflicts, enhances unity, and yields better compliance because the outcome is based on the agreement of the parties.[233]

It is possible to conduct mediation in one of two ways, either by the people's mediation committee or by judicial mediation. People's mediation committees, elected by the people, have political power. They are representative groups for village self-management, education and services. These committees administer village matters and are responsible for handling public affairs and undertakings, mediating disputes, maintaining order, and conveying villagers' opinions, suggestions and demands to the people's government.[234] [page 501]

The citizens elect members of the people's mediation committees every three years. Mediators should possess several qualities. First they should be upright, following laws, regulations, rules and policies, or in their absence, social ethics.[235] Second, they should be enthusiastic about people's mediation.[236] They should base the mediation on the voluntariness of the parties, although they can initiate mediation even if the parties have not requested it.[237] Third, they should possess knowledge in law and policy.[238] Last, they should have the ability to work with the masses. Specifically, they should not accept bribes, should not breach the confidentiality of the parties, and should not insult or abuse the parties.[239]

If the parties either fail to reach an agreement through mediation or do not desire mediation, the next step is legal proceedings in the people's court. The Civil Procedure Act of 1991 requires that the mediated agreement must be voluntary and in compliance with the law.[240] One judge, or several, can mediate a dispute.[241] It is common for one judge and two lay people to mediate. Westerners may be uncomfortable with the fact that the mediating judge may also preside over the ensuing trial if the parties fail to agree.[242]

Mediation is often conducted prior to or during both arbitration and litigation.[243] The procedural rules for trials in the first instance provide that the court may initiate mediation at any time during the course of the proceedings. The court may also initiate mediation at the appellate level.[244] [page 502]

2. Arbitration

The most popular means of resolving commercial disputes in China is arbitration.[245] Usually the parties to a commercial dispute have incorporated an arbitration clause into their contract. For domestic disputes, the arbitration is handled by a local arbitration committee.[246] International arbitration is conducted by the China International Economic and Trade Arbitration Commission and the China Maritime Arbitration Commission.[247]

In 1994, the China Arbitration Association was established to supervise arbitration commissions and to formulate the rules to be used by the commissions.[248] The local arbitration commissions are independent of each other and of administrative agencies.[249]

3. Litigation

Although mediation remains the most prominent form of dispute resolution in China, during the past twenty years, the number of civil cases accepted by the courts has continued to rise dramatically.[250] For example, in 1978, only 300,787 cases were accepted, compared to 3,375,069 in 1998.[251]

The establishment and governance of the courts are dealt with in Articles 123 through 135 of the Constitution. The civil jurisdiction of the people's courts arises from both the Constitution (as amended in 1999) and from the Civil Procedure Law (CPL).[252] There is no purpose to be served in this paper in describing in detail the structure of the Chinese court system. The important point is that this system provides a mechanism to deliver the system's services throughout the country, and at all levels. It has served its purpose since its inception. [page 503] The problem is that the purpose it served was subject to change from time to time.

Supreme People's Courts are functionally specific to certain types of organizations, such as military, railway, transport, water transport, and forest courts. Courts at each level ordinarily handle cases of first instance from within their respective jurisdiction, as well as appeals made to them from immediately lower levels of courts of first instance. The Supreme People's Court may issue explanations of how certain laws and legal decrees should be interpreted or applied; but it has no power to determine the constitutionality of legislation or government policies.[253]

The most fundamental issue for both foreign businesspeople and Chinese citizens is the lack of judicial independence.[254] Article 126 of the amended Constitution provides, "The people's courts exercise judicial power independently, in accordance with the provisions of the law, and are not subject to interference by any administrative organ, public organization or individual."[255] But the problem is found in Article 128, which makes the Supreme People's Court responsible to the National People's Congress and its Standing Committee. The local people's courts are responsible to the organs of the state that created them. Separation of powers is not a concept recognized by the Constitution. The judges are not only selected by the people's congresses, they are also paid by them.[256] As pointed out by an admittedly critical review of what is going on inside China, "China's judiciary is well-known for its lack of independence. The key reason is that it upholds the leadership of the Communist Party."[257] "In practice, most tend to be Party members."[258] [page 504]

Recent reforms -- the Judges Law,[259] enacted in 1995, and the Lawyers Law,[260] enacted in 1996-require that legal professionals must meet professional standards. To ensure judicial independence, the Judges Law provides that judges cannot be dismissed without cause.[261] Disciplinary measures for lawyers are intended to limit corruption.[262] These reforms, in concert with Party measures to end protectionism and to improve the legal consciousness of the citizens, are cause to believe that litigation may become a more effective means to resolve civil lawsuits.[263]

The Chinese legal system, insofar as it is called upon to resolve disputes between or among citizens, or between companies and individuals, or between companies seems to be a fair and adequate one.[264] Its procedures are not as complex as ours, and their judges have much more latitude to weigh in, initially as mediators, and if mediation does not resolve the problem, then as judges.[265] Potential litigants do not necessarily believe they can get into court; there is considerable pressure, based upon both history and bureaucracy, to resolve the matter without going to court.

For the most part, with respect to civil matters, filing a complaint, service, appearances, answers, presentations of evidence, etc., are not remarkable, nor different from Western processes in ways which would cause objection.[266] Mechanisms that we take for granted, such as our adversarial system [267] and our jury system, have not found their way to China.

It is a staple of Chinese legal literature that the judgments of Chinese courts in civil and economic cases are plagued by a [page 505] worryingly low execution rate.[268] It will be difficult, for example, to execute against a large, locally important, but cash-poor state-owned enterprise, in a poor province.[269] Judge Xiao Yang, China's Chief Judge of the Supreme People's Court, recently admitted serious operation and system problems within the legal system.[270] According to the Chief Judge, problems of long delay of bringing cases to trial and lack of sufficient enforcement on court judgments are getting the attention of the nation's top-level leadership.

For many years legal scholars and practitioners warned that the courts needed to guard against local protectionism -- supporting local litigants and passing biased judgments -- as this seriously undermined the prestige of the courts.[271] Corruption, inaccessibility, and a weak infrastructure have combined to form an ineffective legal system.

E. The Legal Community

In traditional China, civil litigation was never a significant element in the legal system. The emphasis on social harmony and the fulfilment [sic] of moral obligations was accompanied by the discouragement of civil suits to pursue individuals' private monetary or proprietary interests.[272]

The Communist Revolution in 1949 dramatically changed whatever rule of law had existed in China. Law became only an instrument of politics. The Communist Party had absolute control over the creation of law and ruled more by decree than by law. In less than ten years after the Revolution, the number of lawyers in China had shrunk by seventy percent.[273] The Cultural Revolution, [page 506] beginning in 1966, eliminated all legal professionals [274] and closed the law schools.[275]

For over twenty years, an effort has been made to undo the damage of the revolutions, but today there are still serious problems in the legal community. First there is a grave shortage of legal professionals.[276] It is estimated that there are fewer than 200,000 lawyers now, with plans to increase the number to 300,000 by 2010.[277] Compare that with 926,000, the approximate number of employed lawyers and judges in the United States in 2000.[278] Then consider that their population is ten times larger. Second, the Chinese legal profession is not well trained; only about one-fifth have law degrees.[279] Third, the lawyers lack political independence.

China's Lawyers' Law (effective January 1, 1982) insists that lawyers are "state legal workers" who must "love socialism." Most Chinese lawyers work in Legal Advisory Offices controlled by the Ministry of Justice, although a few private law firms in large cities have been given permission to organize on an experimental basis.[280]

Because of this shortage, the people have learned to solve disputes without lawyers. In civil and economic cases, less than one fourth of the litigants are represented by legal counsel and fewer than four percent of businesses in China have regular legal advisors.[281]

If it is shocking to realize that only about one-fifth of the lawyers have legal training, it is even more appalling to realize that a lower percentage of judges have a formal university education in law.[282] Overall, only 19.1% have a bachelor's degree or higher; in the lower [page 507] courts approximately 15% have a college degree.[283] The Law of Judges requires that those who became judges after July 1, 1995, must have a college degree, but not a law degree.[284]

Chief Judge Xiao Yang reflected on the issue of poor quality of some judges and legal officers. He attributed the problems to the judge selection procedure under which "disqualified people could be put on the bench through various channels. Judges have been treated as civil servants and not regarded as the special professionals they are, so their quality is poor."[285] He claims that the Supreme People's Court has made progress in the legal system reform, including intensifying training and establishing a unified exam for judges.

V. CONCLUSION

One international law scholar, commenting on the role of contract in the social order, quoted Karl Llewellyn, "One turns from the contemplation of the work of contract as from the experience of Greek tragedy. Life struggling against form .... "[286] Llewellyn continued:

"To sum up, the major importance of a legal contract is to provide a frame-work for well-nigh every type of group organization and for well-nigh every type of passing or permanent relation between individual and groups, up to and including state -- a frame-work highly adjustable, a frame-work which almost never accurately indicates real working relations, but which afford a rough indication around which such relations vary, an occasional guide in cases of doubt, and a norm of final appeal when the relations cease in fact to work."[287]

These words, "life struggling against form," vividly describe the issues that arise when discussing sanctity of contract in China. In its long and rich history, contract law has not played a significant role in [page 508] the Chinese culture. Now, in its efforts to meet international business standards, China is under pressure to overcome thousands of years of tradition.

In recent years, due to the desire for participation in world trade, the Chinese have indeed made an enormous effort to adjust their legal system to Western standards. They have amended their Constitution, providing for freedom, democracy and rule of law. Attempting to satisfy both common law and civil law countries, they have radically changed their previously piecemeal and inconsistent economic laws. They are making significant progress in training their judges and lawyers.

Will this be enough? Can Westerners be assured of sanctity of contract in China? Not yet. There is more to do than just rewriting laws. The new laws will be met by resistance based on centuries of philosophical, political, and cultural traditions. Other problems may be encountered if there is not true separation of powers and creation of an independent judiciary. If law continues to be used as a tool for the State, then contractual enforcement is questionable. Although the Chinese have made progress in adapting to Western laws and practice, there are still many unresolved issues.

Many Westerners have not believed that sanctity of contract exists in China. They have used terms such as "unethical" and "corrupt" to describe their business interactions in China. Part III of this paper attempts to explain how certain aspects of the culture would lead Chinese business people to take actions that may have appeared corrupt, but actually were entirely consistent with their code of ethics.

Part IV clarifies some of the problems the Chinese have encountered in their legal environment. Many of their laws have been inconsistent due to political forces in power, their lack of a legal infrastructure, their few and inadequately trained legal professionals, and their philosophical disdain for a formal legal system.

Realizing that, in order to do business with the Chinese, it is also in Western parties' best interests to adapt, there are some suggestions to aid in successfully entering into, renegotiating and completing contacts.[288] [page 509]

  1.    Work to create a business relationship between the parties and recognize that a signed contract does not necessarily create an international business relationship.
  2. Building a relationship takes time, so don't rush negotiations and use negotiation preliminaries fully.
  3. Consider providing for renegotiation in appropriate transactions.[289]
  4. Consider a rule for mediation or conciliation in the deal.
  5. Don't become hostile, belligerent, or moralistic in response to demands for renegotiation.
  6. Understand that the other side may believe it has a legitimate basis for renegotiating the contract.
  7. Evaluate the worth of the claim for breach of contract against the value of a continuing relationship with the other side.
  8. Look for ways to create value in the renegotiation.
  9. Make sure the parties fully understand the alternatives to succeeding in the renegotiations -- especially their costs.
10. Make sure to involve, either directly or indirectly, all necessary parties in the renegotiation.

These suggestions are clearly stop-gap measures designed to facilitate commercial transactions in China and with Chinese companies and individuals. These stop-gap measures will be utilized for a long while as China feels its way into the world of the twenty-first century global economy. The rewards for Western commercial enterprises are great: access to the world's single-most largest market. However, the caution flags are still waving. Chinese resistance to strict contract enforcement, so common and almost taken-for-granted in Western economies, is not due to some Chinese ethical or moral failing; nor is it due to some Chinese attempt to cheat foreign business persons and companies. It has to do with centuries old traditions that laws and agreements are indeed difficult to enforce because the mountains are high and the emperor is far away. [page 510]


FOOTNOTES

* Professor of Business, University of Wyoming, Laramie, Wyoming

** Professor of Business Legal Studies, Miami University, Oxford, Ohio

1. Ming-Jer Chen, Inside Chinese Business 181 ( 2001).

2. Zhonghua Renmin Gongheguo Fagui Huibian [Contract Law of the People's Republic of China], adopted and promulgated by the Second Session of the Ninth National People's Congress [NPC], Mar 15, 1999. translated and compiled by John Jiang & Henry Liu at http://www.cclaw.net/Chinese Contract Law.txt (last visited Jan. 30, 2002) [hereinafter UCL].

3. See Zhonghua Renmin Gongheguo Xianfa Xiuzhen [Amendments to the Constitution of the People's Republic of China], passed by the NPC on Mar. 15, 1999.

4. Stanley V. Lubman, Bird in a Cage: Legal Reform in China After Mao 315 (1999) quoting Article X of GATT.

5. O. Lee Reed, Law, The Rule of Law, and Property: A Foundation for the Private Market and Business Study, 38 Am. Bus. L.J. 441, 466 (2001).

6. Eric W. Orts, The Rule of Law in China, 34 Vand. J. Transnat'l L. 43, 61 (2001).

7. Uniform Commercial Code (2001) [hereinafter UCC]. Copyright by the American Law Institute and National Conference of Commissioners on Uniform State Laws.

8. United Nations Convention on Contracts for the International Sale of Goods, Apr. 10, 1980, S. Treaty Doc. No. 98-9 (1983); 19 I.L.M. 668-99 (1980). See also Final Act of the United Nations Convention on Contracts for the International Sale of Goods, Annex I, U.N. Doc. A/Conf.97/18 (1980), in Official Records, Conference on Contracts for the International Sale of Goods 178, U.N. Doc. A/Conf.97/19 (entered into force on Jan. 1, 1988) [hereinafter CISG].

9. See John Gregory, Uniform Contract Law of the People's Republic of China: First Comparative Look, 12 Fla. J. Int'l L. 467, 470 (2000); James C. Hitchingham, Stepping up to the Needs of the International Marketplace: An Analysis of the 1999 "Uniform" Contract Law of the People's Republic of China, 8 Asian-Pac. L. & Pol'y J. 1 (2000).

10. Although "sanctity of contract" is not a phrase defined by Black's Law Dictionary (7th ed. 1999), it generally is used to indicate a sacred or inviolable agreement.

11. Chen, supra note 1, at xii.

12. Shuxun Chen, Discussion on John Despres' Chapter, in China, the United States, and the Global Economy 233, 233 (Shuxun Chen & Charles Wolf, Jr. eds., 2001).

13. Current information is derived from research materials and reference to primary sources, from interviews with Chinese lawyers and judges, and from information received and observations made when a group of Wyoming lawyers, judges and law professors were invited to China to participate in discussions of the rule of law. The delegation, consisting of a Political Science professor, a professor of Business Law, a law school Dean, a Director of International Programs, a private practicing lawyer, a trial judge, and an appellate judge, traveled to Beijing, Shanghai, Harbin, and Da Ching, China, in November, 1997. We were part of a Rule of Law Program sponsored by the USIA and hosted by Chinese judges. We participated in a series of presentations, seminars, and discussions with Chinese judges, law professors, and lawyers. Information gained from this visit will hereinafter be cited as Rule of Law Delegation.

14. Scott D. Seligman, Chinese Business Etiquette xix (1999).

15. UCL art. 7 (1999).

16. The civil law still dominates. See Mo Zhang, Freedom of Contract with Chinese Legal Characteristics: A Closer Look at China's New Contract Law, 14 Temp. Int'l & Comp. L.J. 237, 238 (2000).

17. The premier of China from 1978 to 1993.

18. See H.Y. Chen, An Introduction to the Legal System of the People's Republic of China 37 (1992).

19. The commercial laws adopted in 1999 superceded the Economic Contract Law, the Foreign Economic Contract Law, the Technology Contract Law and the Technology Import Contract Regulations. James M. Zimmerman et al., Foreign Law Year in Review: 1999 People's Republic of China, 34 Int'l Law. 883, 884 (2000). For an excellent history of the development of contract law in the People's Republic of China see Feng Chen, The New Era of Chinese Contract Law: History, Development and a Comparative Analysis, 27 Brook. J. Int'l L. 153 (2001).

20. UCL (1999); see also Orts, supra note 6, at 63.

21. Zimmerman, supra note 19, at 883. In addition to the Uniform Contract Law, there are two other key laws governing commercial contracts, the General Principles of Civil Law of the People's Republic of China and the Secured Interest Law of the People's Republic of China. Although they will not be discussed in this paper, persons intending to do business in China should consider them. There are also specialized laws and regulations that have not been formally superseded by the Uniform Contract Law and will take priority over it. Id.at 896.

22. Hitchingham, supra note 9, at 1.

23. Id.

24. Id.

25. Id.

26. CISG: Table of Contracting States, available at <http://cisgw3.law.pace.edu/cisg/countries/cntries.html> (last visited August 29, 2002) copyright by Pace Law School Institute of International Commercial Law.

27. CISG (1988), supra note 8, art. 1.

28. Monica Kilian, CISG and the Problems with Common Law Jurisdictions, 10 J. Transnat'l L. & Pol'y 217, 217 (2001).

29. CISG (1988), supra note 8, art. 4.

30. CISG (1988), supra note 8, art. 4(a).

31. CISG (1988), supra note 8, art. 5.

32. Virginia G. Maurer, The United Nations Convention on Contracts for the International Sale of Goods, 15 Syracuse J. Int'l L. & Com. 361, 366 (1989).

33. CISG (1988), supra note 8, art. 2(a).

34. The United States, Australia, and Canada have adopted it, but the United Kingdom has not.

35. Id.

36. Id.

37. Gregory, supra note 9, at 470 (2000).

38. UCL art. 2 (1999); see Hitchingham, supra note 9, at 6.

39. UCL art. 1 (1999); see Hitchingham, supra note 9, at 5.

40. UCL art. 4 (1999).

41. UCL art. 2 (1999).

42. Henry R. Zheng, China's Civil and Commercial Law 63 (1988); Daniel Rubenstein, Legal and Institutional Uncertainties in the Domestic Contract Law of the People's Republic of China, 42 McGill L.J. 495, 512 (1997).

43. UCL art. 2 (1999).

44. UCL art. 13 (1999).

45. See Chen, supra note 18, at 172.

46. UCC § 2-106 (2001) defines contract and agreement; § 2-606 defines acceptance.

47. CISG, supra note 8, art. 19.

48. UCL art. 14 (1999).

49. UCL art. 15 (1999).

50. CISG (1988), supra note 8, art. 14(2).

51. Maurer, supra note 32, at 368.

52. CISG (1988), supra note 8, art. 8.

53. UCL art. 12 (1999).

54. UCL art. 62 (1999).

55. UCC § § 2-305, 2-308, 2-310 (2001).

56. UCC § 2-201 (2001).

57. CISG (1988), supra note 8, art. 14(1).

58. CISG, supra note 8, art. 16.

59. UCL art. 17 (1999); CISG (1988), supra note 8, art. 15.

60. UCC § 2-205 (2001).

61. UCL art. 17 (1999); CISG (1988), supra note 8, art. 16(2)(a).

62. UCL art. 19(2) (1999); CISG, supra note 8, art. 16 (2) (b).

63. UCL art. 26 (1999).

64. See Chen, supra note 18, at 173.

65. UCC § 2-207 (2001).

66. UCL arts 30 (1999); CISG, supra note 8, art. 19.

67. UCL art. 30 (1999).

68. CISG, supra note 8, art. 19. The list of material alterations includes payment, quality, quantity, price, time and place of delivery, extent of one party's liability to the other, and settlement of dispute under the contract.

69. UCL art. 31 (1999); CISG, supra note 8, art. 19.

70. Charles D. Paglee, Contract Law in China : Drafting a Uniform Contract Law, http://www.qis.net/chinalaw/prccontracts.htm (last modified, May, 1998).

71. Rob Schultz, Rolling Contract Formation Under the UN Convention on Contracts for the International Sale of Goods, 35 Cornell Int'l L.J. 263, 278 (2002); Maria del Pilar Perales Viscasillas, The Formation of Contracts & the Principles of European Contract Law, 13 Pace Int'l L. Rev. 371, 374 (2001).

72. UCL art. 8 (1999); Zimmerman, supra note 19, at 885.

73. UCL art. 52 (1999).

74. UCL art. 52(1)-(2) (1999).

75. UCL art. 52 (1999).

76. UCL art. 7 (1999).

77. Restatement (Second) of Contracts§ § 178, 208; UCC § 2-302 (2001).

78. CISG, supra note 8, art. 11 provides that a contract may be proved by any means, including witnesses.

79. UCL art. 10 (1999).

80. UCL art. 10 (1999).

81. UCL art. 11 (1999).

82. See Chen, supra note 18, at 171.

83. UCC § 2-201 (2001).

84. UCL art. 60 (1999).

85. UCL art. 66 (1999).

86. UCL art. 68 (1999).

87. UCC § 2-509 (2001).

88. UCC § 2-509(3)

89. UCL art. 142 (1999).

90. UCC § 2-509 (2001).

91. See Chen, supra note 18, at 182.

92. UCL art. 142 (1999).

93. See Chen, supra note 18, at 182.

94. CISG, supra note 8, art. 67.

95. UCC § § 2-312, 2-313, 2-314, 2-315 (2001); CISG, supra note 8, art. 35.

96. UCL art. 153 (1999).

97. UCL art. 168 (1999).

98. UCC § 2-313 (1) (2001).

99. See Chen, supra note 18, at 180.

100. UCL art. 169 (1999).

101. UCL art. 62 (i) (1999).

102. UCL art. 62 (i) (1999).

103. UCC § 2-315 (2001).

104. CISG, supra note 8, art. 35 (2) (b).

105. UCL art. 62 (1) (1999).

106. See Chen, supra note 18, at 181.

107. UCC § 2-312 (2001).

108. UCL art. 130 (1999).

109. UCL art. 150 (1999).

110. UCC § 2-210 (2001).

111. UCL arts. 79-83 (1999).

112. UCL arts. 83, 84 (1999).

113. UCL art. 64 (1999).

114. See Hitchingham, supra note 9, at 14.

115. UCL arts. 79-86.

116. UCL art. 52 (1999).

117. UCL art. 94 (1999).

118. See Hitchingham, supra note 9, at 18.

119. Id.

120. Id.

121. Id .at 19.

122. UCL art. 117 (1999).

123. See Hitchingham, supra note 9, at 21.

124. UCL art. 110 (1999).

125. UCL art. 112 (1999).

126. UCL art. 116 (1999).

127. UCL art. 114 (1999).

128. UCL art. 113 (1999).

129. See Hitchingham, supra note 9, at 21.

130. Id. at 21.

131. Chen, supra note 1, at xiii.

132. Seligman, supra note 14, at 5.

133. See Shu-hsien Liu, Understanding Confucian Philosophy 3 (1998); Seligman, supra note 14, at 50.

134. Confucius, born in 551 B.C., was first a politician and then a teacher. He produced his most famous works during the time he was teaching, but many were not published until after his death. Chen, supra note 1, at 193.

135. Seligman, supra note 14, at 50.

136. See Yuan Wang et al, Business Culture in China 22 (1998); see also Chen, supra note 1; Seligman, supra note 14, at 50.

137. Id. at 22.

138 Confucianism delineates the responsibilities of individuals to each other based on five basic relationships: ruler and subject, husband and wife, father and son, brother and brother, and friend and friend. Seligman,supra note 14, at 50.

139. Wang, supra note 136, at 21

140. Chen, supra note 1, at 194.

141. Wang, supra note 136, at 20.

142. Id.

143. Id.

144. Id. at 21.

145. Orts, supra note 6, at 52.

146. Wang, supra, note 136, at 21.

147. Chen, supra note 1, at 194; see also Lao Tzu, Tao Te Ching (Victor H. Mair, trans., Bantam Books 1990).

148. It has been translated in a number of ways: Integrity and the Way, The Way and Its Power, and The Law of Virtue and the Way. Te could also mean self, character, personality, virtue, charisma or power. It signifies the holistic inner quality or character of a person. Lao Tzu, supra note 147, at xiii. Following only the Bible and the Bhagavad Gida, the Tao Te Ching is the most translated book in the world. Lao Tzu, supra note 147, at xi.

149. Id. at 119-20. Chen, supra note 1, at 194. Some speculate that a number of anonymous authors wrote it under the name of Lao Tzu

150. Lao Tzu, supra note 149, at xi. Those who coined the idea of the Tao Of Pooh may have captured a deep truth. Id. at 139.

151. Id. at xi.

152. Id.

153. Chen, supra note 1, at 195.

154. Lao Tzu, supra note 147, at 14.

155. Id. at 4.

156. Id. at 26.

157. Id. at 128.

158. Id. at 26.

159. Chen, supra note 1, at 195.

160. Id. at 19.

161. Margery Wolf, The House Of Lim: A Study Of A Chinese Farm Family 23 (1968).

162. Chen, supra note 1, at 21.

163. Id.at 43.

164. Id.at 45.

165. See Seligman, supra note 14, at 182.

166. Chen, supra note 1, at 46.

167. Seligman, supra note 14, at 180-81.

168. Chen, supra note 1, at 47. Singapore's Senior Minister Lee Kuan Yew cited in Fortune, Louis Kraar, "The Overseas Chinese: Lessons from the World's Most Dynamic Capitalists," Oct 31 1994, at 91; see also Seligman, supra note 14, at 185.

169. Seligman, supra note 14, at 185.

170. Chen, supra note 1, at 48.

171. Seligman, supra note 14, at 47. However, foreigners in China may receive hospitable treatment because they are perceived as honored guests.

172. Chen, supra note 1, at 50.

173. Id.at 68

174. Seligman, supra note 14, at 44.

175. Rene Descartes, Le Discours de la Methode IV (1637) as quoted in John Bartlett, Familiar Quotations 327 (14th ed. 1968).

176. Seligman, supra note 14, at 45.

177. Id. at 46.

178. Ambrose King quoted in Chang Hui-Chang & Richard Holt, A Chinese Perspective on Face as Inter-relational Concern, in The Challenge of Facework: Cross-Cultural and Interpersonal Issues 122 (Stella Ting-Toomey ed., 1994).

179. Seligman, supra note 14, at 53.

180. Yap Pheng Geck, quoted in Janet T. Landa, The Political Economy of the Ethnically Homogeneous Chinese Middlemen Group in Southeast Asia: Ethnicity and Entrepreneurship in a Plural Society, 1 The Chinese in Southeast Asia, Ethnicity and Economic Activity 93 (Linda Y. C. Lim and L.A. Peter Gosling eds., 1983).

181. Sita Karnkriangkai, quoted in Michael Vatikiotis & Prangtip Daorueng, Survival Tactics, 26 Far Eastern Econ. Rev. 44 (1998).

182. Chen, supra note 1, at 86.

183. Id. at 88.

184. Id. at 92.

185. Id. at 93.

186. Id. at 94-95.

187. Id.

188. Seligman, supra note 14, at 106.

189. Seligman, supra note 14, at 89.

190. Chen, supra note 1, at 94.

191. Id. at 111, quoting Mark McNeilly, Sun Tzu and the Art of Business: Six Strategic Principles for Managers 9-22 (1996).

192. Roger Fisher & William Ury, Getting to Yes (1981).

193. Edward Twitchell Hall & Mildred Reed Hall, Understanding Cultural Differences: Germans, French, and Americans 6 (1989).

194. Seligman, supra note 14, at 83.

195. See Phillip J. McConnaughay, Rethinking the Role of Law and Contracts in East-West Commercial Relationships, 41 Va. J. Int'l L. 427 (2001).

196. Id.

197. Chen, supra note 1, at 143.

198. Li Fugen, Democracy in an Ancient Land, China Today, Mar. 1998, at 16.

199. O. Edmund Clubb, Twentieth Century China 303 (1964).

200. Ronald C. Keith, China's Struggle For The Rule Of Law 210, 211 (1994)

201. Orts, supra note 6, at 44.

202. Daniel J. Herron & Patricia Pattison, Natural Law and Contracts: A Time for Redefinition? 34 Am. J. Juris. 199, 204 (1989).

203. Orts, supra note 6, at 51.

204. Id.at 49.

205. Willem Von Kamenade, China, Hong Kong, Taiwan, Inc. 262 (1997), quoting Mao.

206. Gary Hufbauer, Trends and Prospects in the Global Economy, in China, the United States, and the Global Economy 11, 13 (Shuxun Chen & Charles Wolf, Jr. eds., 2001).

207. Herron, supra note 202, at 212.

208. Franz Michael, Law: A Tool of Power, Human Rights In The People's Republic Of China 33 (1988), quoted in Keith, supra note 200, at 8.

209. Id. at 111.

210. See Orts, supra note 6.

211. References to the Chinese Constitution are from the Modern Legal Systems Cyclopedia, and refer to the Constitution adopted on December 4, 1982, by the Fifth National People's Congress of the People's Republic of China at its fifth session; additional amendments were adopted April 12, 1988; March 29, 1993; and March 15, 1999.

212. See Zhonghua Renmin Gongheguo Xianfa Xiuzhen, Amendments to the Constitution of The People's Republic of China, passed by the NPC on March 15, 1999. (emphasis added); see also Orts, supra note 6, at 25; Liu Junhai & Timothy L. Fort, Trusting E-Commerce in China: The Role of the Rule of Law and the Rule of Ethics (unpublished paper on file with the authors). This paper has a different translation, but indicates the same intent "The People's Republic of China should implement the principle of governing this country by law, and making it a socialist country with rule of law."

213. President Jiang Zemin, Enhance Mutual Understanding and Build Stronger Ties of Friendship and Cooperation, Address at Harvard University ( Nov. 1, 1997), in China Daily, Nov. 3, 1997, at 4.

214. Suzanne Ogden, China's Unresolved Issues: Politics, Development and Culture 144 (1989).

215. Deng Xiaoping, Selected Works Of Deng Xiaoping 58 (1984), quoted in Keith, supra note 200, at 9.

216. Von Kamenade, supra note 205 at 18.

217. Keith, supra note 200, at 209.

218. McConnaughay, supra note 195, at 479.

219. Zhonghua Renmin Gongheguo Xianfa. China has adopted four Constitutions, in 1954, 1975, 1978, and in 1982. The current Constitution, adopted in 1982, was amended in 1988, 1993, and 1999.

220. Xianfa art. 33 (1982).

221. Ogden, supra note 214, at 188.

222. Xianfa art. 57 (1982).

223. Xianfa art. 59 (1982).

224. Ogden, supra note 214, at 82 and 188.

225. Murray Scot Tanner, How a Bill Becomes a Law in China: Stages and Processes in Lawmaking, in Stanley B. Lubman, China's Legal Reforms 39 (1996)

226. Tanner, id. at 45 and citations therein.

227. Xiao Yang, Legal Aid and Services, China Today, Mar. 1998, at 14.

228. John C.H. Wu, Chinese Legal and Political Philosophy, in Charles A. Moore, The Chinese Mind, 227 (1977), quoting The I Ching [Book Of Changes] 29 (The Richard Wilhelm translation rendered into English by Carl F. Baynes 1950).

229. Von Kamenade, supra note 205, at 18.

230. Keith, supra note 200, at 219.

231. Vai Io Lo, Resolution of Civil Disputes in China, 18 UCLA Pac. Basin L.J. 117 (2001).

232. Id. at 133.

233. Id. (citations omitted).

234. See Editorial, China's Democratization Process, China Today, Mar. 1998.

235. Vai, supra note 231, at 132.

236. Id.

237. Id.

238. Id. at 131.

239. Id. at 132.

240. Id. at 136.

241. Id.

242. Rule of Law Delegation, supra note 13.

243. Vai, supra note 231, at 130.

244. Chin Kim, The Modern Chinese Legal System, in Modern Legal Systems Cyclopedia § 9.380.14 (1987).

245. Vai, supra note 231, at 127.

246. Id.

247. Id.

248. Id.at 129, citing Arbitration Law of the People's Republic of China, art. 15 reprinted in Changyong Falu Fagui Quanshu, at 1780.

249. Id. art. 14.

250. Vai, supra note 231, at 117.

251. Zhongguo Tongji Nianjian (China Stat. Y.B.) 757 (1999) quoting Vai, supra note 231, at 188.

252. Xianfa art.132 (1999); Zhonghua renmin gongheguo minshi susong fa [Law of Civil Procedures of the People's Republic of China] art. 237 (1991), available at http://www.qis.net/chinalaw.lawtran1.htm [hereinafter CPL].

253. Ogden, supra note 214, at 95; see also Mo Zhang, International Civil Litigation in China: A Practical Analysis of the Chinese Judicial System, 25 B.C. Int'l & Comp. L. Rev. 9 (2002).

254. Zhang, supra note 16, at 92.

255. Xianfa art. 126 (1999).

256. Zhang, supra note 16, at 94.

257. Editors, Why There Cannot be an Independent Judiciary, Inside China Mainland, Mar. 1998, at 3.

258. Ogden, supra note 214, at 195.

259. Zhonghua renmin gongheguo faguan Fa [Law of Judges of China] art 1 (1995), available at <http://www.law-lib.com/law/law-review.html> [hereinafter Law of Judges]; Vai, supra note 231, at 153.

260. Vai, supra note 231, at 153.

261. Id.

262. Id.

263. Id. at 154.

264. Rule of Law Delegation, supra note 13.

265. Id.

266. See Zhang, supra note 16.

267. Id. at 71. The Chinese judicial tradition is based on the inquisitorial model. The court conducts independent inquiry into each case.

268. Donald C. Clarke, The Execution of Civil Judgments in China, in Stanley B. Lubman, China's legal Reforms 65 (1996).

269. Zhang, supra note 16 at 11-13.

270. Chief Judge Speaks on Progress, Problems in Legal System, China News Digest, Mar 5, 2002, available at <http://www.cnd.org/Global/02/03/05/020305-1.html>. (last viewed on Mar 12, 2001).

271. Editors, Crackdown on Crime Stressed, Beijing Review, Aug. 8-14, 1988, at 6; see also Vai, supra note 231, at 152.

272. Albert HY Chen, An Introduction to the Legal System of The People's Republic Of China 168 (1992).

273. Orts, supra note 6, at 57.

274. Id.

275. Id.

276. Id. at 64.

277. Id.

278. U.S. Census Bureau, Employed Civilians by Occupation, Sex, Race, and Hispanic Origin: 1983 and 2000, Statistical Abstract of the United States: 2001 380 (2001).

279. Id at 64-65.

280. James V. Feinerman, Introduction to Asian Legal Systems, in Introduction To Foreign Legal Systems 101 (Richard A. Danner & Marie-Louise Bernal eds., 1994).

281. Orts, supra note 6, at 64.

282. Id. at 65.

283. Zhang, supra note 16, at 94, quoting Xiao Yang, President of the Supreme People's Court, Work Vigorously and Harder to Make the Improvement of the Local courts Into a New Stage, Speech (June 23, 2000), in 66 Zuigao Renmin Rayuan Gongbao 112, 113 (66 Gazette) (2000).

284. Law of Judges art. 8.

285. Chief Judge, supra note 270, at 1.

286. Jeswald W. Salacuse, Renegotiating International Project Agreements, 24 Fordham Int'l L.J. 1319, 1370 (2001), quoting Karl N. Llewellyn, What Price Contract? An Essay in Perspective, 40 Yale L.J. 704, 751 (1931).

287. Llewellyn, supra note 286, at 736-37.

288. Salacuse, supra note 286, at 1357-1368.

289. Id. at 1362.


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