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Reproduced with permission of 14 Temple International and Comparative Law Journal (2000) 237-262

Freedom of Contract with Chinese Legal Characteristics:
A Closer Look at China's New Contract Law

Mo Zhang [1]

  1. Introduction
  2. Freedom of Contract in China
  3. Limitations on Making a Contract in the Contract Law: Chinese Characteristics
    1. Legal Compliance
    2. State Plan Mandate
    3. Administrative Supervision
    4. Approval and Other Special Requirements
    5. Void and Voidable Contracts
  4. Remedies - Liability for Breach of Contracts
    1. Specific Performance
    2. Remedial Measures
    3. Damages
      1. Compensatory Damages
      2. Liquidated Damages
      3. Punitive Damages
      4. Earnest Money
  5. Other Matters Affecting the Parties' Rights and Obligations
    1. Mitigation Duty
    2. Fulfillment Plea
    3. Unrest Defense [Suspension of Performance]
    4. Pre-contractual Liability
    5. Rebus Sic Stantibus
  6. Conclusion

I. INTRODUCTION

The Contract Law of the People's Republic of China (Contract Law) was the most important piece of legislation in China in 1999. Passed by the Chinese national legislative body -- the National People's Congress (N PC) -- on March 15, 1999, the Contract Law took effect on October 1, 1999. After some six years of drafting, the Contract Law became the first uniform legislation governing contracts in China.[2] Its passage marked an end of China's "triarchy" period of contract law legislation.[3]

The Contract Law consists of 23 chapters and 428 articles, which are divided into three parts, namely, General Provisions, Specific Provisions, and Supplementary Provisions.[4] Historically, the Chinese Law has a civil law (continental law) base and most of the legal principles contained in the [page 237] Chinese legislation are rooted in Roman law. This scenario, however, seems to have changed. In recent years, China has shown increasing willingness to borrow rules and legal concepts from the common law system.[5] The Contract Law typically reflects this trend.

Several changes can be seen from the Contract Law. First, the Contract Law itself is a hybrid of civil and common law literature, although the civil law tradition still dominates. For example, the Contract Law adopts the concept of "anticipatory repudiation" which is borrowed from American contract law.[6] " Article 94 of the Contract Law provides that a contracting party may rescind the contract if ... (2) the other party to the contract expresses explicitly or indicates through its acts, before the performance period expires, that it will not perform its major contractual obligations."[7] Article 108 further provides that where one party to a contract expresses explicitly or indicates through its conduct that it will not perform the contract, the other party may hold it responsible for the breach of contract before the performance period expires.[8] Another example is the provision of offer and acceptance, which is, for the first time, provided in the Chinese contract legislation.[9] Under Article 13 of the Contract Law, parties shall enter into a contract in the form of an offer and acceptance.[10] It is also provided in Article 14 that an offer is a manifestation of intention to contract with others and its contents must be definite and certain with an indication that the offeror will be bound upon acceptance [11] Article 15 states that price quotation forms, auction notices, public notice for bids, prospectuses, and commercial advertisements are invitations for offer.[12] Acceptance is defined in Article 21 as the manifestation of the offeree's assent to an offer.[13]

Second, the Contract Law attempts to be more market-economy oriented than previous contract legislation. China used to be a centrally planned economy where the government plans played a decisive role in the nation's economy.[14] After its opening up to the outside world, China has [page 238] made dramatic efforts in transforming from a planned economy to a market economy.[15] Therefore, the Contract Law seems to diminish the idea that contracts are vehicles of carrying on the state economic plan and the contracting parties are mandated to implement the state economic plan through the contract.[16] On the other hand, however, the Contract Law continues to contain provisions of state plan-related contracts. An example is Article 38, which provides that relevant legal persons or other organizations shall enter into contracts between them in accordance with their rights and obligations as stipulated by relevant laws and administrative regulations when the State issues a mandatory task or a State purchasing order upon necessity.[17] Taken literally, however, application of Article 38 would have three limitations: (1) it only applies to legal persons or other organizations, not natural persons; (2) the legal persons or other organizations must be those who are affected by the State task or purchasing order; and (3) the State task must be mandatory and the purchasing order must be made by the State.

Third, the Contract Law adopts provisions from international treaties or conventions in an effort to comply with China's treaty obligations and align with internationally accepted practices. For instance, Articles 17 (Withdrawal of Offer), 18 (Revocation of Offer), and 31 (Acceptance with Additional or Modified Terms) of the Contract Law are correspondingly consistent with Articles 15(b), 16(a), and 19(a)(b) of 1980 UN Convention on Contracts for the International Sale of Goods (CCISG).[18] In addition, under Article 11 of the Contract Law, the written forms of contracts are referred to in the forms that can display the described contents visibly, such as written contractual agreements, letters and electronic data text (including telegram, telex, fax, EDI and e-mails.[19] This provision basically originated from the 1996 Model Law of Electronic Communication of the United Nations Commission on International Trade Law (UNCITRAL).[20] Moreover, Chapter 9 [page 239] (Contract for Sales) of the Contract Law primarily rests on CCISG as well as UNIDROIT Principles of International Commercial Contracts.[21]

The most noteworthy provision in the Contract Law is Article 4, which is widely acclaimed by the Chinese legislators to have adopted the principle of "party autonomy."[22] It is the first time in Chinese contract legislation that "party autonomy" is recognized as a general principle of contract. Under Article 4, the parties shall have the right to enter into a contract voluntarily according to law and nobody shall unlawfully interfere with the contract.[23] But, it is important to note that Article 4 does not explicitly use "freedom of contact" -- the term commonly accepted by western countries and international organizations.[24] Instead, Article 4 seems to impose two restrictions on the parties' freedom to make a contract: (1) a contract must be entered into according to law; and (2) only unlawful interference with contracting parties' freedom is prohibited.[25] Therefore, it is questionable as to which law the parties must comply with when making a contract and to what extent and under what circumstances the interference would be lawful. More importantly, since the Contract Law applies to both domestic and foreign contracts,[26] a better understanding of contractual rights and obligations, as well as the necessary elements for a valid contract under the Contract Law, is essential to a foreign contracting party.

This article will examine these issues by looking into the provisions of the Contract Law and actual practices. Part I of the article will discuss how the concept of the freedom of contract has evolved in China and what it suggests. Part II will analyze distinctions of the Contract Law that may, at least to some extent, limit the contract making power of contracting parties. Part III will deal with remedies in case of breach of contract and their adequacy. Part IV will review some related matters that may also affect the contracting parties' rights. And Part V will conclude that the Contract Law has left many issues unresolved, though it represents a new era of Chinese contract legislation. [page 240]

II. FREEDOM OF CONTRACT IN CHINA

For purposes of the Contract Law, a contract is defined as an agreement that establishes, modifies, or terminates relations of civil rights and obligations between a natural person, legal person, or other organization of equal status.[27] The Contract Law, however, does not apply to agreements involving relationships of personal status such as marriage, adoption, and guardianship (Article 2).[28] It is the second time in China's history that the concept of contract is defined in the legislation. The first time was in 1986 when the General Principles of Civil Law of China (GPCL) were adopted, where the contract is defined to mean an agreement in which the parties establish, modify and terminate their civil relations.[29]

It has been well held in western countries that it is in the public interest to accord individuals broad powers to determine their affairs through agreements reached by themselves.[30] This is the premise on which the freedom of contract stands. Derived from Roman law, the freedom of contract has become the cornerstone of modern contract law and the most important principle in the contract system since the French Civil Code was adopted in 1804. To be more precise, in an open market economy, it is essential that businessmen or entities have the right to decide freely to whom they will offer their goods or services and by whom they wish to be supplied, as well as to freely agree on the terms of individual transactions.[31]

The concept of freedom of contract was not accepted in China until recent years, although a great deal of the Chinese contract theory derives its intellectual parentage from continental law, especially French and German law. There are a number of factors that would contribute to China 's denial of freedom of contract. First, under the scheme of the centrally planned [page 241] economy, it was impossible for individuals or business entities to have free access to the market.[32] Every business sector was strictly tied to the State's economic plan, and development of the economy was not driven by market forces but by the central government through pre-determined mandatory or directive plans.[33] Second, because the State plan was the major player in China's economy, freedom of contract barely had any room as it would have had in a market economy. Therefore, it was inconceivable that anyone in China at that time would think of having the right to freely enter into a contract with others. Third, freedom of contract had long been criticized in China as a capitalist concept, of which the socialist system must rid itself.[34] As a result, all contracts were subject to the State economic plan and government surveillance. And fourth, although an opening-up policy was adopted in 1979, the planned economy structure did not change until 1984 when the economic reform was launched.[35] After that, China still tried to find an "economic mode" that would fit a "planned commodity economy."[36]

The first contract law legislation in China was the "Economic Contract Law" (ECL) that was adopted on December 13, 1981.[37] Effective on July 1, 1982, the ECL regulated contracts entered into for business purposes between legal persons, other organizations, individual businesses, or farm households.[38] Since the ECL was promulgated before the economic reform, it was typically a planned-economy oriented contract law. Article 4 of the ECL clearly provided that an economic contract should meet the requirements of the State policy or plan.[39] Article 7 of the ECL further provided that any contract inconsistent with the State policy or plan should be void.[40] These provisions were later deleted in 1993 when the ELC was amended to [page 242] reflect the significant changes in China's economic structure due to the reform.[41]

The ELC (as amended), together with the 1985 Foreign Economic Contract Law (FECL) and the 1987 Technology Contract Law (Technology Law), constituted the regulatory framework specifically governing contracts in China before the Contract Law took effect.[42] In addition, the GPCL also contains provisions dealing with contracts.[43] As far as the right of contracting parties to make a contract is concerned, none of these laws has a clear provision. What was emphasized, instead, was that a contract should be concluded in accordance with the principles of equality, mutual benefit, and mutual consent.[44] Under Article 4 of the GPCL, all civil activities shall observe the principles of voluntaries, fairness, equality of value, and good faith.[45]

The Contract Law expressly grants contracting parties the right to enter into a contract voluntarily and prohibits any unlawful interference.[46] This provision represents a change in favor of freedom of contract in China's contract legislation. It is interesting to note that when the drafting of the Contract Law started in 1993, there was a strong contention from legal scholars and some legislators that the freedom of contract should be incorporated as a general principle into the Contract Law.[47] As a matter of fact, in the first draft of the Contract Law in January 1995, the freedom of contract was provided as a general principle of the Contract Law. It stated that "the parties shall have the freedom of contract within the boundary of law and no unit, organization, or individual shall unlawfully interfere with."[48] However, this provision was completely rephrased in the 1997 draft that was released on May 14, 1997. The changed provision read: "the parties shall have the right equally and voluntarily to make contract according to law. None of the parties shall impose its own will on the other and no unit or individual shall unlawfully interfere with the parties' right."[49] One year later, this provision was changed again in the 1998 draft (August 20, 1998), which was adopted in [page 243] 1999 as the current provision of the Contract Law.[50] The history of drafting the Contract Law tells that the basic notion of the freedom of contract has been accepted in China, but there still exists resistance against using the terms of freedom of contract.[51] The resistance seems to come from a fear that the freedom of contract may mean something beyond what the Contract Law intended in terms of the parties' right of making a contract. In its official explanation to the 1998 draft contract, the Legal Affairs Committee (LAC) of the Standing Committee of N PC stated that the freedom of contract referred primarily to party autonomy, meaning that the parties have the right to freely enter into a contract and determine the contents of the contract.[52] The LAC further pointed out that since the freedom of contract was not absolute and in many countries such freedom was limited to the legally allowable extent, it might not be proper in China to simply adopt the freedom of contract.[53] In other words, the freedom of contract principle in the Contract Law would need to be addressed to embrace the Chinese characteristics. As a result, the term "freedom of contract" was replaced by "making contract voluntarily" in the Contract Law.[54]

Interestingly, however, in almost all published materials offering explanation of the Contract Law, the principle of "making contract voluntarily" is interpreted to mean that the parties have freedom to make contract in accordance with law.[55] The freedom is also further illustrated by the following six aspects.

The parties have freedom to decide whether or not to enter into a contract. This would mean that in general, nobody, including the administrative authority, should interfere with or impose undue influence on the parties' contracting power. What is important to note here is that the contracting parties' right may still be limited, e.g., by the State plan, though to a measured extent.[56] [page 244]

The parties have the freedom to determine with whom a contract is to be made. In other words, a contracting party may freely decide who will be its counterpart. This is practically important because what may happen in reality, as has happened quite often in the past, is that in many cases the contract would be made between the parties through a "marriage" prearranged by relevant authorities. This arranged marriage was also seen in a number of company merger and acquisition cases.[57]

The parties have freedom to determine the contents of the contract. Article 12 of the Contract Law provides that the parties shall agree upon the contents of a contract. Article 12 also provides a list of eight items as the general contents of a contract.[58] Note that under the Contract Law, these items are not required items for a contract to be valid. Therefore, the contents may vary from contract to contract. In addition, Article 12 also allows the parties to use the model text of each kind of contract.[59] Moreover, under Article 61, the parties may make a supplementary agreement if there is no agreement in the contract regarding quality, price or remuneration and place of performance, etc.[60] These items may also be determined from the context of relevant clauses of the contract or in accordance with transaction practices. Article 62 provides further clarification on how to decide issues and items that were not addressed under Article 61.[61]

The parties have freedom to choose the contract forms. The Contract Law seems to be flexible in the writing requirements. Under Article 10 of the Contract Law, a contract may be made in writing, orally, or in other forms.[62] Absent a writing requirement stipulated by laws or administrative regulations, the parties may enter into a contract orally unless the parties agree to otherwise. According to Article 36, a contract, which should be concluded in writing as required but is not made in writing, shall exist if one party has performed its principal obligations and the other party has received the performance.[63] This performance: doctrine also applies, under Article 37, to the contract that has been made in writing but not signed or stamped before the performance begins.[64]

The parties have the freedom to modify or terminate a contract. Article 77 of the Contract Law provides that the parties may modify a contract by consent through negotiation.[65] The parties may also terminate a contract the [page 245] same way in accordance with Article 93.[66]

The parties have the freedom to choose the methods of settlement for disputes. There are four alternatives available to the parties for settling contractual disputes under Article 128 of the Contract Law, namely, conciliation, mediation, arbitration and litigation.[67] The parties are encouraged, but not required, to seek conciliation or mediation as a first resort to the settlement of disputes. Litigation is available only if there is no arbitration agreement or the arbitration agreement is invalid. Once the parties agree to have arbitration, the arbitral award will bind them and no litigation is allowed concerning the same disputes.[68]

Nonetheless, many contract law scholars in China who advocate the freedom of contract still feel that the Contact Law only has a limited recognition of freedom of contract because there are differences between "making contract voluntarily" and "freedom of contract."[69] The Freedom of Contract principle focuses on maximum economic efficiency, promotes the parties' ability to exercise their full creative potential, and establishes appropriate business relationships that possess all the specific nuances required in such relationships.[70] The fact is that although the parties may enter into a contract voluntarily, some interventions by the government often occur and the parties are still subject to many restraints. Therefore, many believe that to successfully defend against the unfair government interference, freedom of contract must be emphasized.[71]

III. LIMITATIONS ON MAKING A CONTRACT IN THE CONTRACT LAW: CHINESE CHARACTERISTICS

The parties' right to enter into a contract voluntarily under the Contract Law is limited. The freedom of contract is not absolute in today's world and the parties' right to make a contract is subject to law and public policy. For example, a contract by the parties for an illegal purpose will not be enforceable. As far as the public policy is concerned, it generally has a twofold purpose. First, the public policy ground will serve as a proper means to assure [page 246] that bargaining between the parties has taken place in a manner compatible with the public interest in party autonomy, in order to prevent unfairness and protect the parties from overreaching.[72] This would require, among others, that the bargaining process not be abused by misleading or coercive conduct of any party. And second, the public policy consideration will be used as an appropriate sanction to discourage undesirable conduct, either by the parties or others, and to prevent an unsavory agreement.[73] In the Contract Law, however, the limits on the parties' contracting power bear distinctive Chinese characteristics.

A. Legal Compliance

Limitations on freedom of contract in China are enhanced by the fact that a contract must comply with law and regulations both substantively and procedurally. The substantive compliance requires that the contents of a contract conform to laws and regulations that are mandatory, any violation of which would render the contract invalid or unenforceable.[74] The procedural compliance imposes restrictions on the formality of a contract, which means that conclusion of a contract shall follow certain procedures stipulated by laws and regulations. In addition, for particular kinds of contracts, the State plan must be observed.[75]

The most important provision in the Contract Law that restricts the parties' freedom in making a contract is Article 7.[76] As a governing principle of legal compliance, Article 7 provides that in concluding and performing a contract, the parties shall abide by the laws and administrative regulations, and shall observe social ethics.[77] Neither party may disrupt social-economic order or damage the public interest. What is promoted in this provision appears to have two aspects: legal compliance and observance of social ethics. With regard to legal compliance, the Contract Law slightly differs from the GPCL in that the former does not require policy compliance absent applicable legal provisions.[78] Given the fact that government policies may have significant influence on contractual activities, it remains questionable whether [page 247] the parties may effectively protect themselves from policy interference. As to observance of social ethics, it is originally provided in the GPCL.[79] But neither the Contract Law nor the GPCL has defined social ethics.

B. State Plan Mandate

As noted, the parties' contract-making power may be affected by the State plan under Article 38 of the Contract Law.[80] This is the only provision in the Contract Law where the State plan is stressed.[81] Although the trend is that the State plan is playing less and less of an active role in China due to the development of a market economy, one should not underestimate the important impact of the State plan on contracts.

It is clear in the Contract Law that any contract in violation of the State mandatory plan or the State purchasing order will be deemed invalid, arid therefore unenforceable.[82] But, what seems problematic here is the extent to which the parties may seek judicial remedies when breach of contract concerning the State mandatory plan or the State purchasing order occurs.[83]

C. Administrative Supervision

The administrative supervision of contract is unique in China. Resting mainly with the administrations of industry and commerce (AIC), as well as other relevant government agencies (RGA),[84] supervision is essentially the administrative interference with the parties' contractual rights. Before the Contract Law was adopted, the AIC and RGA had broad administrative power to supervise contracts.[85] The Contract Law, however, seems to put [page 248] limits on the exercise of such power. According to Article 127 of the Contract Law, the contract supervision of the AIC and RGA is to deal with illegal conduct that is committed under color of contract to endanger and harm the State and public interests.[86]

But, the Contract Law contains no provisions with regard to how the administrative supervision shall be conducted and what the boundaries of the supervision are.[87] Therefore, many are concerned about the overreaching of the administrative supervision due to the lack of distinction between the supervision and interference.

In practice, the administrative supervision also includes issuance of model text of contracts, verification of contract, inspection of contract performance, administrative mediation of contractual disputes, as well as administrative sanction of illegal conduct involving contracts.[88] The model text of contracts is normally drafted and issued jointly by AIC and RGA for use in making a contract. Note that under Article 12 of the Contract Law, parties may conclude a contract by reference to the model text of each kind of contract.[89] Thus, the use of model text of contracts is not mandatory, although it is strongly encouraged in practice.

The contract verification is the means by which AIC or RGA, or both, review the truthfulness and legality of the contract based on the parties' application. Both AIC and RGA are in favor of the contract verification because from their point of view, the verification would help prevent contract fraud or sham contracts, and would also increase the evidentiary weight of the contract.[90] But what seems troublesome is the status of the verification. From the context of the Contract Law, the verification is not required in order for a contract to be valid, and it is not even an element in the contract making process.[91]

On the other hand, since the verification gives AIC and RGA the power to substantially review the contents of the contract, if the contract is found to be irregular it may cause uncertainty about the effectiveness of the contract. The question is whether the contract shall take effect upon the parties' signature or whether it will have any effect before it is verified. Moreover, it is unclear what the parties' remedies would be if AIC and RGA make mistakes in the verification. Similarly, both administrative mediation and sanction all need to be further clarified.[92] [page 249]

D. Approval and Other Special Requirements

For certain kinds of contracts, government approval is required or other special requirements must be met before the contracts take effect.[93] Approval is the mechanism through which contracts are screened by the government authorities, and it normally consists of both review (examination) and approval.[94] During the review, the reviewing authority will look into the contents and formality of the contract and see if it is in compliance with applicable laws and regulations.[95] Therefore, the review is actually the basis for approval. In other words, no approval will be granted if a contract fails to pass the review.

At present, there are several types of contracts for which governmental approval must be obtained. The most striking example is the contract involving foreign investments, such as joint venture contracts.[96] In accordance with Article 3 of Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures (as revised in 1990), the joint venture agreement, contract and articles of association shall be subject to review and approval by the state competent department in charge of foreign economic relations and trade.[97] Similarly, under the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Venture Law (1988), agreements and contracts reached by parties to the joint venture will not take effect until they are reviewed and approved by competent authorities.[98]

In addition, according to Regulations on Administration of Contract for Introduction of Technology (1985), contracts entered into by and between recipients and suppliers for introduction of technology shall be submitted for review and approval to the Ministry of Foreign Economic Relations and Trade (MOFTEC) or any other agency authorized by MOFTEC.[99] The requirements of government review and approval also apply to contracts concerning exploitation of offshore petroleum resources in cooperation with foreign enterprises, transfer of patent right by Chinese enterprise or individuals, first time import of pharmaceutics, as well as transfer of right of land use.[100] [page 250]

It is necessary to note that if the review and approval are required, a contract will not have effect unless and until the approval is obtained. Under Article 44 of the Contract Law, the contract subject to approval as provided by laws or regulations shall become effective upon approval [101] According to the Supreme People's Court, any contract that requires State approval shall be invalid without obtaining the approval.[102]

Moreover, as provided in Articles 77 and 87 of the Contract Law, if a contract is subject to approval, modification or assignment of the contract will also require such approval, in order for the modification or assignment to become valid and enforceable [103] For certain types of contracts, an approval is also needed for termination of the contract according to Article 96.[104]

Other special requirements for a contract to be valid include registration, filing, and recording.[105] Registration refers to the process of registering the contract or agreement with authorized government agencies before the contract or agreement takes effect. For example, under Article 10 of the Patent Law of China, transfer of patent application right or patent right shall be made through a written contract, and the contract shall take effect only after the contract is registered with, and announced to the public, by the competent patent bureau.[106] Registration also applies to contracts concerning Chinese-foreign joint exploration of China's mineral resources,[107] For any of these contracts, the Chinese contractual party must register it with the relevant registration authority after the contract is signed.[108]

Filing is required when the parties enter into a license agreement for trademark use under the trademark law and regulations.[109] A filing with approving authority is also needed when the parties terminate a foreign economic contract that has been approved by the government [110] Additionally, contracts related to private dwelling house rentals shall be filed with the local real estate administration authority, and contracts for hiring of temporary [page 251] workers need to be filed with the local labor department.[111]

Filing and recording apply to contracts that involve real estate.[112] According to the Law of Real Estate Administration, contracts for the sale of real property shall be filed with and recorded at the real estate administration department of county level or higher.[113]

E. Void and Voidable Contracts

The contract entered into by the parties may be deemed void or voidable under certain circumstances as provided by the Contract Law.[114] Under Article 52 of the Contract Law, a contract shall be null and void if (1) it is concluded by fraud or coercion of one party to harm the State interest; (2) malicious collusion is employed to damage the State, collective or third party interests; (3) an illegitimate purpose is concealed under the guise of legitimate means; (4) public interests are to be damaged; or (5) the mandatory provisions of laws and administrative regulations are violated.[115] Article 53 of the Contract Law further provides that the disclaimer clauses in the contract shall be null and void if they are aimed at avoiding liability by (1) causing personal injury to the other party; or (2) causing property damages to the other party as a result of deliberate intent or gross fault.[116]

Voidable contracts include those that are concluded as a result of material misunderstanding or are manifestly unfair at the time of contract formation. In these situations, a contracting party has the right to request a court or an arbitration body to modify or revoke the contract.[117] It is important to note that the Contract Law divides contract fraud or coercion into two different categories: fraud or coercion causing harm to the State interest and fraud or coercion affecting a contracting party [118] As noted above, in the former case, the contract shall be null and void. However, under Article 54 of the Contract Law, the contract is voidable if one party against the other party's true intentions concludes the contract through fraud or coercion.[119] [page 252] Under this circumstance, the fate of the contract is at the hands of the injured party who has the right to make a request of modification or revocation to the competent court or arbitration body.[120]

The revocation right of the injured party may be extinguished by lapse of time or waiver. In accordance with Article 55, the time period for exercising the revocation right is one year from the date when the injured party knows or ought to know the causes to revoke. The injured party may waive the revocation right either expressly or through its own conduct.[121] Under Article 56, a contract that is null and void or revoked shall have no binding effect from the very beginning.[122] If part of a contract is null and void without affecting the validity of the other parts, the rest of the contract shall still be valid. Article 57 provides that nullification, revocation, or termination of a contract shall not affect the validity of the dispute settlement clause that is independent from other clauses in the contract.[123]

IV. REMEDIES -- LIABILITY FOR BREACH OF CONTRACTS

Remedies as provided in the Contract Law take three forms: specific performance, remedial measures, or damages.[124] Under Article 107 of the Contract Law, where a contracting party fails to perform the contract obligations or the performance is not in conformity with the contract terms and conditions, the party shall bear such liabilities for breach of contract as to continue to perform the contract, to take remedial measures, or to compensate for losses.[125] Note that the Contract Law has made progress in dealing with contractual remedies in at least three aspects: (1) there is no preferential emphasis on any of the remedies and all remedies are optional to the aggrieved party;[126] (2) the extent to which the aggrieved party may seek remedies is broader than any previous contract legislation; and (3) much of the remedies provided for breach of contracts are compensatory rather than punitive in nature.[127] [page 253]

Generally speaking, the Contract Law characterizes the breach of contract as either non-performance of contract obligation or non-conforming performance. Under each case, the aggrieved party may choose from the above three liability forms for remedies. In addition, according to Article 112, if the aggrieved party suffers from other losses, the breaching party shall, after performing its obligations or taking remedial measures, compensate for the losses.[128]

Furthermore, under the Contract Law, the breach of contract could be an actual breach or in the form of anticipatory repudiation.[129] As stated, anticipatory repudiation is a borrowed concept from American law and it is new in China 's contract legislation. In case of anticipatory repudiation, the aggrieved party may rescind the contract may hold the other party liable for breach of contract or both before the expiration of the performance period.[130]

A. Specific Performance

For purposes of the Contract Law, the specific performance applies to monetary obligation.[131] Article 110 allows the aggrieved party to demand the other party to continue performing if the latter fails to perform or has performed improperly. However, under Article 110, specific performance may not be requested in any of the following situations: (1) if the contract cannot be legally or practically performed; (2) if the contract subject is not fit to mandatory performance or the performance cost is prohibitively high; or (3) if the aggrieved party (the creditor) does not make such request for performance within a reasonable period of time.[132]

What appears unclear in this context is under what circumstances a contract cannot be legally or practically performed. It is also uncertain as to how specific performance should be enforced upon the aggrieved party's request and whether the aggrieved party may sue in a competent court for specific performance regardless of the arbitration clause in the contract.[133] Additionally, it needs to be further addressed as to what would constitute "a reasonable period of time." [page 254]

B. Remedial Measures

Remedial measures may be employed when quality of performance does not conform to the standard as agreed upon.[134] According to Article 111, the aggrieved party may seek remedial measures from the other party when there is no agreement between the parties, on liability for non-conforming quality or if such agreement is unclear. The remedial measures include repair, replacement, reworking, returning the goods, or reducing the price or remuneration.[135]

C. Damages

There are four different kinds of damages available under the Contract Law: compensatory damages, liquidated damage, punitive damages, and earnest money.[136] As noted, because the Contract Law takes the position in favor of compensatory nature of remedies, punitive damages only apply in the special cases stipulated by laws and regulations.[137]

1. Compensatory Damages

According to Article 113, the breaching party shall be liable for damages caused to the aggrieved party by the breaching party's failure to perform its contractual obligations or by its non-conforming performance.[138] The amount of damages shall be equal to the losses caused by the breach of contract, including the interest that would be expected to be obtained if the contract is to be performed.[139] But Article 113 sets forth a ceiling that limits the compensatory damage to the amount not exceeding the probable losses, caused by the breach of contract, that had been foreseen or should have been foreseen when the contract was made.[140]

2. Liquidated Damages

Liquidated damages are the damages agreed upon by the contracting parties, and apply where the breach of the contract occurs. The actual amount paid off may be increased or reduced by the competent authority upon the request of the interested party. Article 114 of the Contract Law [page 255] allows the parties to a contract to decide the liquidated damages through an agreement in light of the breach.[141] The parties may also agree upon the calculating method of the damages resulting from the breach of contract. Under Article 114, if the agreed upon amount of damages turns out to be lower than the losses actually caused, the aggrieved party may request a court or arbitration body to increase it.[142]

On the other hand, the breaching party may ask a court or arbitration body to appropriately reduce the amount of liquidated damages if the amount is proved to be excessively higher than the actual losses.[143] Article 114 also provides that if the liquidated damages are agreed upon with respect to the delay in performance, the breaching party is still obligated to continue performing its obligations after the liquidated damages are paid.[144]

3. Punitive Damages

Punitive damages are provided in Article 113, and deal primarily with the fraudulent activities committed in business operations.[145] This provision is based on the Law of Protection of Consumers' Rights and Interest (Consumers Law), which was promulgated on October 31, 1993 and took effect on January 1, 1994.[146] In accordance with Article 49 of the Consumers Law, if the business operators are found to have acted fraudulently in providing goods or services, the damages for losses so caused to consumers shall be increased according to consumers' request.[147] The increased amount of damages shall be equal to the double amount of price of the goods purchased or the service received.[148]

4. Earnest Money

Earnest money is provided in the Guaranty Law of China (1995) as a security agreed in writing by the parties to guarantee the creditor's rights.[149] Under Article 115 of the Contract Law, the parties to a contract may agree that one party pays earnest money as a guaranty to the other as stipulated by [page 256] the Guaranty Law [150] The earnest money so paid shall be refunded or offset against the contract price after the contract obligations are performed. The payer of the earnest money shall have no right to reclaim the earnest money if it fails to perform agreed obligations. However, if the party who receives the earnest money fails to perform its obligations, it is required to double refund the earnest money.[151]

Article 116 prohibits a party from claiming both liquidated damages and earnest money.[152] Under this provision, if the parties to a contract have agreed on both liquidated damages and earnest money, the aggrieved party may only choose to take either liquidated damages or earnest money if the other party is in breach of the contract.[153]

V. OTHER MATTERS AFFECTING THE PARTIES' RIGHTS AND OBLIGATIONS

A. Mitigation Duty

Related to the remedies is the parties' duty of mitigation. It is required under Article 119 that the non-breaching party takes proper measures to prevent the aggravation of losses [154] If the non-breaching party fails to take proper measures so that the losses are aggravated, it may not claim any compensation as to aggravated parts of losses. It is also required that the breaching party be responsible for the reasonable expenses incurred to the other party for making efforts to prevent the loss aggravation [155] Similarly, Article 118 provides that a party who is unable to perform the contract on the ground of force majeure shall give the other party a prompt notice in order to reduce the probable losses to the other party, and provide evidence within a reasonable period of time.[156]

B. Fulfillment Plea

Fulfillment plea is a contractual right commonly recognized in continental law countries to be applied to bilateral contracts. The basic notion of the right, as such, is that since the contracting parties are mutually responsible to each other, each bears a duty of performing contractual obligations to the other. Therefore, any non-performance or non-conforming performance of [page 257] one party shall constitute the ground for the other party to refuse to perform.[157]

Under the Contract Law, the "fulfillment plea" is divided into "simultaneous fulfillment plea" and "orderly fulfillment plea." Under Article 66 of the Contract Law, if the parties have obligations toward each other and there is no order of priority in performance, the parties shall perform the obligations simultaneously.[158] A contracting party has the right to reject the other party's performance request before the other party performs, and to reject the other party's corresponding request for performance if the other party's performance does not meet the terms or conditions of the contract.[159]

In accordance with Article 67, where the parties have mutual obligations and the performance of the obligations takes an order of priority, the party who should perform subsequently has the right to reject the other party's performance request if the other party who performed first has not rendered the performance.[160] In addition, if the performance by the party who has the duty to perform first does not meet the contract requirements, the other party has the right to reject the corresponding performance request.[161]

However, the Contract Law does not define what bilateral or unilateral contracts are, nor does it specify what contracts the simultaneous or orderly fulfillment plea applies to.[162] Also, it is arguable whether a non-performance or non-conforming performance in this situation would constitute a breach of contract, and therefore gives the non-breaching party the right to sue for breach other than to reject performance.[163]

C. Unrest Defense

Unrest defense means that under certain circumstances, the party who should perform contract obligations first may suspend its performance until the other party's performance is ascertained. Article 68 grants the performing party the unrest defense right to suspend its performance if it has conclusive evidence of any of the followings: (1) the other party's business conditions are seriously deteriorating; (2) the other party moves away its property [page 258] or takes out its capital to evade debts; (3) the other party loses its business credibility; or (4) other circumstances showing that the other party loses or is likely to lose its capacity of performance.[164] If, however, it turns out that the performing party asserts unrest defense to suspend its performance without conclusive evidence, the party shall be liable for breach of contact.[165]

In the meantime, under Article 69, when suspending its performance, the performing party shall notify the other party of the suspension, and shall resume its performance if the other party provides an adequate guarantee.[166] If the other party, within a reasonable period of time after the performance is suspended, is unable to reinstate its capacity of performance and fails to provide an adequate guarantee, the party suspending the performance may rescind the contract.[167]

D. Pre-contractual Liability

What is also noteworthy is that the Contract Law imposes pre-contractual liability on the parties.[168] Imposition of this liability not only reflects the trend of contract legislation in expanding the parties' liability to the extent beyond contract period, but also provides a safeguard for the parties when making a contract.

There are two articles in the Contract Law that address the pre-contractual liability. According to Article 42, a party shall be liable for damages if during the process of contract formation it commits any of the following conduct causing loss to the other party: (1) negotiating in bad faith by disguising or pretending to conclude a contract; (2) concealing deliberately the material facts relating to the conclusion of the contract or intentionally providing false information; or (3) other activities in violation of the principle of good faith.[169]

Article 43 specially deals with non-disclosure and fair dealing.[170] It provides that the parties shall not disclose or improperly use the business know-how that they learn from each other during the contract negotiation. The party shall be held liable for damages if it causes the other party to suffer from losses due to disclosure or improper use of the business know-how.[171] [page 259]

E. Rebus Sic Stantibus

One of the most controversial issues in drafting the Contract Law is whether the doctrine of "rebus sic stantibus" should be incorporated into the Contract Law. Under this doctrine, one party may be excused from performance when a change in circumstances beyond the contracting parties' expectation and control frustrated the original basis of the contract so that the continuing performance would obviously render unfairness, and then the contract may be modified or rescinded.[172]

Although "rebus sic stantibus" was not provided in any previous contract legislation, it was accepted in judicial practice. In Wu Ban Gas Company v. Chongqin Testing Instruments Factory,[173] Plaintiff entered into a contract in 1988 with Defendant for purchasing 70,000 sets of J 2.5 gas meters at 57.30 RMB per set. The contract provided that Defendant should deliver 30,000 sets of the meters in 1988 and 40,000 sets in 1989 to Plaintiff. All meters were made of aluminum. Several months after the contract was concluded, the price of aluminum was adjusted by the States from 4400-4600 RMB per ton to 16,000 per ton.[174] Consequently, the cost for producing the meters was increased to 79.22 RMB per set.[175] When Defendant asked to modify the contract or rescind it in order to avoid heavy loss, Plaintiff refused. After Defendant stopped delivering the meters, Plaintiff sued for breach of contract.[176]

At trial, Wuhan Intermediate Court entered a judgment against Defendant. The Court held that the change of price did not constitute a valid ground for Defendant not to perform its contractual obligations, and Defendant was therefore fully liable for the breach.[177] On appeal, the High Court of Hubei Province reversed the judgment. In remanding the case for further proceedings, the High Court was of the opinion that if during the performance of the contract there was a material change which the parties could not have foreseen at the time when the contract was made, and if continuing performance would be manifestly unfair, the doctrine of "rebus sic stantibus" should be applied to preserve the notion of fairness.[178]

The Supreme People's Court also upheld this opinion. In its letter of judicial instruction issued on March 6, 1992,[179] the Supreme People's Court held that for purposes of the instant case, due to the change in circumstances [page 260] that could not be foreseen and prevented by the parties during the performance of the contract, it would be obviously unfair if Defendant was asked to continue performing its obligations according to the original contract.[180]

During the early stage of the Contract Law drafting, the "rebus sic stantibus" doctrine was included. It, however, was strongly criticized by opponents. They argued that the doctrine might be abused if provided in the Contract Law because (1) there is no commonly accepted definition for "rebus sic stantibus"; and (2) it is very difficult, if not impossible, to draw a line between "'rebus sic stantibus" and normal commercial risk. As a result, the doctrine was ultimately excluded from the final draft.[181]

Thus far, the lack of actual legislative endorsement casts serious doubt on the validity of the future use of "rebus sic stantibus." The dilemma will be whether the Supreme People's Court's previous opinion in favor of this doctrine would have any meaningful impact on the lower courts' future decision in the similar cases. In other words, until the Supreme People's Court says something different, will the doctrine of "rebus sic stantibus" be still recognized in judicial practice based on the Court's above holding even though the Contract Law does not provide so?

VI. CONCLUSION

The Contract Law represents a new era of contract legislation in China. As noted, the most important aspect of the Contract Law is that it applies to both domestic and foreign contracts. But, in a foreign contract, the contracting parties may choose to apply the contract law of a foreign country.

According to Article 126 of the Contract Law, the parties to a foreign contract may determine the law applicable to the settlement of their contractual disputes, unless provided otherwise where the application of Chinese law is mandatory.[182] The parties in their contract or in a separate agreement may make the choice of law. If the parties fail to choose the applicable law, the law of the country with which the contract has the closest relationship shall apply. A competent court or arbitration body will determine which country has the closest relationship with the contract in question.[183]

Meanwhile, the Contract Law leaves many issued unsolved. Not only does the Contract Law itself contain a number of terms as well as provisions that are ambiguous, but it also fails to deal with certain gray areas where the contracting parties' rights seem to be unprotected. A typical example is [page 261] about what terms a contract should have. As noted, under Article 12 of the Contract Law, all terms of a contract are optional.[184] This would pose a serious question concerning the validity of the contract if the quantity term is missing.

Another example deals with the status of contracting parties to the contract awaiting government approval. As required by the Contract Law, certain types of contracts will need to obtain a government approval before the contract takes effect.[185] The fact is that pending an application for approval, the contract has already been signed. Then the question would be what rights and obligations the parties will have to each other during the waiting period and what remedies a party will have if another party breaks its promise or agreement. A related question is what could the parties do if the application for approval is denied.

A similar problem concerns pre-contractual liability. Since the contract has not yet been signed, liability in this regard arises in the process of contract negotiation. Therefore, if a party sues another party for liability before the contract is concluded, what would be the cause of action? In addition, when should the pre-contractual liability begin? Should it begin when an offer is made, received, or accepted? Moreover, will the pre-contractual liability apply to the situation when a contract is void or revoked?

The third party interests are also unfinished business of the Contract Law. First of all, no distinction is made between intended and incidental beneficiaries.[186] Therefore, it seems unclear whether these two different beneficiaries shall have the same rights under the Contract Law. Secondly, in the case of assignment, it is uncertain as to what will constitute a valid and effective assignment. To be more specific, should an assignment be made in writing, or could it be made orally? Should the assignor's intent to transfer its rights be expressly stated and to what extent should the rights to be assigned be described? Could the right be assigned successively? And thirdly, the Contract Law is silent with regard to whether there are exceptions to the delegation of duty.[187]

What concerns contracting parties' rights most, and foreign contracting parties in particular, are the reaches of the state plan and administrative supervision of contract. This issue needs to be further addressed through law, regulation or the Supreme People's Court's interpretation to ensure that the administrative interference is strictly limited within the statutory boundaries. [page 262]


FOOTNOTES

1. Associate Professor of Law, Temple University Beasley School of Law, Director of Temple University Law Program in China, and a member of Maryland and New York Bars. Adjunct professor at China University of Political Science and Law.

2. The drafting of the Contract Law began in 1993. The first draft was submitted to the Legislative Affairs Commission, the Standing Committee of the National People's Congress in January 1995. After that, there were four drafts that were made in October 1995, June 1996, May 1997, and August 1998 respectively. The August 1998 draft was also published nationwide for comments from the public on September 7, 1998. The Standing Committee of the National People's Congress then reviewed the draft four times before the final draft was submitted to the National People's Congress for vote in March 1999. See Wei Luo, THE CONTRACT LAW OF THE PEOPLE'S REPUBLIC OF CHINA WITH ENGLISH TRANSLATION (W.S. Rein, Buffalo, NY) (1999). The Contract Law is also available via the Internet. See The Contract of the People's Republic of China [Contract Law] (visited Sept. 17, 2000), <http://www.cclaw.net/lawsandregulations/chinese_contract_law.txt>, in addition, a Chinese language version of the Contract Law is currently available at <http://www.law.washington.edu/clnet/feature.htm>.

3. Before the Contract Law was adopted, there existed three separate contract laws, namely "Economic Contract Law" (adopted on December 13, 1981), "Foreign Economic Contract Law" (promulgated on March 21, 1985), and "Technology Contract Law" (adopted on June 23, 1987). Provisions of these three contract laws were overlapping and inconsistent, which caused a lot of confusion. See The Economic Contract Law of the People's Republic of China [ECL] (visited Sept. 17, 2000) <http://www.qis.net/chinalaw/rclaw19.htm>; The Foreign Economic Contract Law of the People's Republic of China [FECL] (visited Sept. 17, 2000) <http://www.qis.net/chinalaw/prclaw20.htm>; and The Law of the People's Republic of China on Technology Contracts [Technology Law] (visited Sept. 17, 2000) <http://www.qis.net/chinalaw/prclaw21.htm>.

4. The General Provisions cover purposes, applications, and principles of the Contract Law, formation, effect, performance, or termination of the contract, and remedies for breach of the contract. The Specific Provisions deal with 15 different contracts such as sales, technology, and transportation. The Supplementary Provisions state residual matters such as effective day of the Contract Law as well as repeal of three existing contract laws. See Luo, supra note 2.

5. During the drafting of the Contract Law in 1998 and 1999, the Legislation Affairs Commission of the Standing Committee of the National People's Congress of China unprecedentedly invited a group of American attorneys in Beijing to discuss the draft contract law. It clearly signaled that taking foreign law as references has become a major part in the process of China's legislation. See Luo, supra note 2.

6. See Liming Wang, China's Proposed Uniform Contract Code, 31 St. Mary's L.J. 17 (1999).

7. See Luo, supra note 2, art. 95, at 54.

8. See id. art. 108 at 57.

9. Note that consideration is not required in making a contract in China. Therefore, a mutual assent through offer and acceptance need not be supported by consideration in order for a contract to be valid.

10. See Luo, supra note 2, art. 13, at 35.

11. See id. art. 14 at 35.

12. See id. art. 15 at 36.

13. See id. art. 21 at 37.

14. See generally 2 Chinese Law Series: The Contract Law of the People's Republic of China, art. 7, at 34 (Wei Luo trans., 1999) [hereinafter Contract Law].

15. See id.

16. For many decades in China, a contract was viewed as (1) a device for making the economic plan concrete; (2) the essential basis of the state economic plan; (3) a means for making the state economic plan accurate; and (4) an essential complement to the state economic plan. WILLIAM C. JONES, BASIC PRINCIPLES OF CIVIL LAW IN CHINA 201-02 (M.E. Sharpe Inc.) (1989). In addition, Article 11 of the 1985 Economic Contract Law of China provided that when the State issues mandatory plans to enterprises based on necessity, the relevant enterprises shall enter into contracts accordingly based on their rights and obligations as provided by laws and administrative regulations. See, ECL, supra note 3, art. 11.

17. See Luo, supra note 2, art. 38, at 40.

18. See generally id. arts. 17-18, 31, at 36, 39; UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS [UNCCISG], Vienna 1989, v. 89-53886-June 1989-2000. See also UNCITRAL's website (last visited Sept. 17, 2000) <http://www.uncitral.org/en-index.htm>.

19. See Luo, supra note 2, art. 11, at 35,

20. See generally, MODEL LAW OF ELECTRONIC COMMUNICATIONS (UNITED NATIONALS COMMISSION ON INTERNATIONAL TRADE LAW [UNCITRAL] (last visited Sept. 17, 2000) <http://www.uncitral.org/en-index.htm>.

21. See Luo, supra note 2, art. 9, at 34.

22. Sun Lihai, PRACTICAL EXPLANATION TO THE CONTRACT 22-24 (Industry and Commerce Press) (1999).

23. See Luo, supra note 2, art. 4, at 34.

24. Freedom of Contract is provided in UNIDROIT Principles as a basic principle in the context of international trade. Realizing the paramount importance of the principle of freedom of contract, Article 1.1 of UNIDROIT Principles (Freedom of Contract) stipulates that the parties are free to enter into a contract and to determine its content. See PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS art. 1.1. (INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW (UNIDROIT, Rome) (1994)) [hereafter UNIDROIT Principles].

25. See Luo, supra note 2.

26. A foreign contract is not defined in the Contract Law. Nonetheless, it is normally defined as a contract to which at least one party is a foreign legal person, other economic organization, or individual. But, it remains unclear whether a Chinese individual could be a party in a foreign contract. Based on the Foreign Economic Contract Law, a Chinese individual was excluded from foreign contracts. See FECL, supra note 3.

27. See Luo, supra note 2, art. 2, at 33.

28. There are three different contract definitions that are offered by Chinese legal scholars. The first one is that a contract is an agreement determining contents of rights and obligations. Under this definition, the contract would include all kinds of agreements, such as civil agreements, administrative agreements, labor agreements, and even agreements among nations. The second definition takes a narrower approach, under which contract is defined as an agreement that establishes, modifies and terminates civil relations between the parties. The third definition limits contract to an agreement whereby the parties establish, modify and terminate their obligatio rights and obligations, which would not include contracts involving transfer of property or personal status relationship. See id.; Wang Limin & Cui Jianyvan, NEW THOUGHTS ON CONTRACT LAW -- GENERAL PROVISIONS 1-7 (China University of Political Science & Law Publishing) (1996); Yang Lixing, IMPLEMENTATION AND APPLICATION OF THE CONTRACT LAW 1-3 (Jilin People's Publishing House) (1999). It seems that the Contract Law has made a compromise between the last two approaches above.

29. See generally General Principles of the Civil Law of the People's Republic of China [GPCL] art. 85 (visited Sept.17, 2000) <http://www.qis.net/chinalaw/prclaw27.htm>.

30. See E. Allen Farnsworth, CONTRACTS 321-22 (Aspen Law & Business 3d ed.) (1999).

31. See UNIDROIT PRINCIPLES, supra note 24, comments 1-3, at 7-8.

32. See generally Contract Law, supra note 14.

33. This type of economy was modeled after the former Soviet Union, and also described as "bird-cage economy," which was advocated by late Chinese vice premier Chen Yun. Mr. Chen was in charge of the nation's economy for decades except for the period of Cultural Revolution. Id.

34. Id.

35. During the late 1970's and early 1980's, China took the policy of "taking the planned economy as the mainstay with market readjustment as a supplementary measure." On October 20, 1984, the "Decision of the Central Committee of the Communist Party on Economic Reform" was issued. The decision characterized China's socialist economy as a "Planned Commodity Economy" (PCE). Although the PCE was not well defined and the term itself was also controversial, it indicated that China started moving toward a market economy with caution in order not to diminish China's socialist system.

36. In October 1987, the Central Committee of the Chinese Communist Party -- the only ruling party in China -- called for establishing a "planned commodity economy" (PCE) to differentiate the economy with Chinese characteristics from the market economy. Although the concept of PCE was never clearly defined, it served as an indicator that the state plan at that time was still positioned well above the market force.

37. See ECL, supra note 3.

38. See id.

39. See id. art. 4.

40. See id. art.7.

41. See id.

42. The FECL applied to contracts between the Chinese enterprises or other economic enterprises and foreign enterprises or other organizations or individuals, excluding international transportation contract (Article 2). See FECL, supra note 3, art. 2. The Technology Law dealt with contracts between Chinese legal person or citizens concerning development, transfer, consultation or service of technology (Article 2). See Technology Law, supra note 3, art. 2.

43. See GPCL, supra note 29.

44. See generally ECL, supra note 3; FECL, supra note 3; Technology Law, supra note 3.

45. See GPCL, supra note 29, art. 4.

46. See Luo, supra note 2, art. 4, at 34.

47. See THE INTRODUCTION TO THE CONTRACT LAW OF CHINA AND ITS MAJOR DRAFTS 8-18 (Civil Law Office, the Legal Affairs Committee of the Standing Committee of the National People's Congress ed., Law Publishing House) (2000).

48. See id.

49. See id. at 113.

50. See id. at 173.

51. See id.

52. See id.

53. See Sun Lihai, SELECTION OF LEGISLATIVE MATERIAL ON THE CONTRACT LAW OF THE PEOPLE'S REPUBLIC OF CHINA 8-12 (Legal Publishing House) (1999).

54. See id.

55. See generally Jian Ping, A PRECISE EXPLANATION OF THE CONTRACT LAW OF CHINA (China University of Political Science & Law Press) (1999); Yang Lixing, IMPLEMENTATION AND APPLICATION OF THE CONTRACT LAW OF CHINA (Jilin People's Publishing House) (1999); Liu Wenhua, DETAILED EXPLANATION AND TYPICAL CASES OF THE NEW CONTRACT LAW (World Book Press Co.) (1999); EXPLANATION AND PRACTICAL GUIDANCE OF THE CONTRACT LAW OF CHINA (Research and Economic Law Offices of the General Office of the Standing Committee of N PC ed., Law of China Democracy and Legality Press) (1999); A PRACTICAL GUIDANCE OF THE CONTRACT LAW OF CHINA (Research Office of the General Office of the Standing Committee of NPC ed., Huawen Publishing House) (1999); and Zhao Xudong, INTERPRETATION OF TERMS AND PHRASES RELATED TO THE CONTRACT LAW (The People's Court Publishing House) (1999).

56. See Luo, supra note 2, at 33-34.

57. See id. art. 12 at 35.

58. These 8 items are (a) title or name and domicile of the parties; (b) contract subject; (c) quantity; (d) quality; (e) price or remuneration; (f) time, place and method of performance; (g) liability for breach of contract; and (h) methods to solve disputes. Id.

59. Id.

60. See id. art. 61 at 96.

61. See id. art. 62 at 46-47.

62. See Luo, supra note 2, art. 10, at 35.

63. See id. art. 36 at 39-40.

64. See id. art. 37 at 40.

65. See id. art. 77 at 50.

66. See id. art. 93 at 53.

67. See id. art. 128 at 62.

68. Under the Arbitration Law of China, if the parties have concluded an arbitration agreement and one party initiates an action in a people's court, the people's court shall not take the case unless the arbitration agreement is void. In addition, if, after the arbitration award is made, one party institutes a judicial proceeding in a people's court concerning the same disputes, the people's court shall not hear the case. See Charles D. Paglee, Arbitration Law of the People's Republic of China (1994) art. 4, 9 (last modified Mar. 22, 1998) <http://www.qis.net/chinalaw/prc47.htm>.

69. See Ping, supra note 55, at 5; Lixing, supra note 28, at 14.

70. When invited to offer comments on the draft contract law, the legal committee of the American Chamber of Commerce (Beijing) stressed the importance of "freedom of contract" to be drafted into the general principles of the Contract Law.

71. See Wang, supra note 6, at 11.

72 See Farnsworth, supra note 30, at 321-323.

73. See id. at 223-225, 321-323.

74. See id.

75. See id.

76. See Contract Law, supra note 14.

77. For purposes of the Contract Law, laws refer to statutes or legal Codes adopted by the National People's Congress and its Standing Committee, and administrative regulations are regulations issued by the State Councilor approved to issue by the State Council. See Lihai, supra note 22, at 27, 28.

78. See Charles D. Paglee, General Principles of the Civil Law of the People's Republic of China (1987) art. 6 (last visited Feb. 10, 1998) <http://www.qis.net/chinalaw/prc27.htm>. [hereinafter GPCL]. Under Article 6 of GPCL, civil activities must comfort to the law and where there are no relevant provisions in the law, the State policies shall be observed. Id.

79. See GPCL, supra note 76, art. 7. Requiring that civil activities defer to social ethics.

80. See Contract Law, supra note 14, art. 38, at 40.

81. See id. The mandatory plan is the production and sales plan designated by the States to relevant enterprises. The plan is determined by the State Planning Committee in consultation with industries and trade ministries or agencies, and is carried by both manufacturing and using enterprises with the special funds allocated by the State. The State purchasing order is also based on the State plan, but is implemented by relevant enterprises through contracts. Generally, all enterprises within the territory of China are obligated to honor the State purchasing order, and the State has priority over any others in ordering products made by any enterprise. Id.

82. See id.

83. In the past, primarily administrative departments in charge other than a competent court adjudicated all contract disputes that involved the State mandatory plan.

84. Generally, the RGA contains planning departments, construction administrations, supervising authorities of enterprises, departments in charge of exclusive trades, and real estate administrations. See RESEARCH OFFICE OF THE GENERAL OFFICE OF THE STANDING COMMITTEE OF THE NPC, A PRACTICAL GUIDANCE OF THE CONTRACT LAW OF CHINA 126, 127 (1999).

85. Under 1981 Economic Contract Law, AIC and RGA at county or higher level had authority to supervise economic contracts.

86. The Contract Law further provides that if crime is committed, criminal responsibility shall be imposed. See Contract Law, supra note 14, art. 127, at 62.

87. See id.

88. See Lihai, supra note 22, at 201-213.

89. See Contract Law, supra note 14, art. 12, at 35.

90. See generally id.

91. See generally id.

92. In practice, the authorities of AIC conduct the administrative mediation, and the mediation process consists of four steps, namely application, acceptance, mediation and conclusion. Administrative sanctions generally include warning, fine, confiscation of illegal gains, expropriation of part or all of goods or deposits or both, as well as revocation of business license.

93. See generally Contract Law, supra note 14.

94. See id.

95. See id.

96. See Charles D. Paglee, Chinese-Foreign Joint Venture Law (1990) art. 3 (last visited Mar. 6,1998) <http://www.qis.net/chinalaw/prc10.htm>. [hereinafter CFVL].

97. Id.

98. See id. art. 3.

99. See Charles D. Paglee, Technology Contract Law (1987) art. 10 (last modified Mar. 6, 1998) <http://www.qis.net/chinalaw/prc21.htm>.

100. See generally Contract Law, supra note 14.

101. See id. art. 44 at 41.

102. See Answers to Several Questions Concerning Application of Foreign Economic Contract Law (Supreme People's Court, Oct. 19, 1987); Opinions on Questions Regarding Implementation of Economic Contract Law (Supreme People's Court Sept. 1984).

103. See Contract Law, supra note 14, art. 77-78, at 50.

104. See CFVL, supra note 96, art. 13. Which provides that in case of heavy losses, failure of a party to perform its obligation under the contract and the article of association, or force majeure etc., the parties to the joint venture may terminate the contract through consultation and agreement, subject to approval of the approving authorities.

105. See generally, Contract Law, supra note 14.

106. See id.

107. See Provisional Methods of Registration and Administration of Mineral Resources Exploration.

108. See id.

109. See id.

110. See id.

111. See id.

112. See id.

113. See Provisional Methods of Registration & Administration of Mineral Resources Exploration, supra note 107.

114. See Contract Law, supra note 14, art. 52, at 43.

115. See id.

116. See id. art. 53 at 44.

117. The Contract Law does not define what constitutes "material misunderstanding." Some contract law scholars argue that the material misunderstanding shall contain at least three elements: (a) the contractual intent is made by unilateral or mutual misunderstanding; (b) the subject of misunderstanding involves contents of the contract; and (c) the misunderstanding is caused by the parties' own fault. See Lixin Yang, supra note 28, at 91-92.

118. See generally, Contract Law, supra note 14, art. 52, at 43.

119. See id. art. 54 at 44.

120. A contract is voidable if it is concluded by one party's taking advantage of other party's unfavorable position. It is further provided that when a party requests for modification of the contract, the court or arbitration body may not revoke the contract. Id.

121. See id. art. 55 at 44.

122 See id. art. 56 at 45.

123. See id. art. 57 at 45.

124. See Contract Law, supra note 14, art. 112, at 58.

125. See id. art. 107 at 57.

126. Previously, the contract legislation in China placed much emphasis on equitable principle of specific performance. The contractual parties in general were obligated to perform their contractual obligation and were not permitted to breach and pay stipulated penalties or compensatory damages instead of performing. Because of the State's controlling role in the economy, the specific performance was deemed as a dogma of contract law. See Liming, supra note 6, at 15, 16. See also Lihai, supra note 22, at 172-173.

127. See Liming, supra note 6, at 15, 16. See also Lihai, supra note 22, at 172-173. See also Contract Law, supra note 14, art. 112-114, at 58, 59.

128. See Contract Law, supra note 14, art. 112-114, at 58, 59,

129. See generally id. art. 94 at 53.

130. Anticipatory repudiation has the following two elements: (1) the non-performance must be explicitly expressed by a party to the contract or be clearly inferred from the party's conduct: and (2) the performance period has not expired. See id. art. 108 at 57.

131. In regard to monetary obligation, if one party fails to pay the contract price or remuneration, the other party may request the breaching party to make the payment. See id. art. 109 at 57.

132. See id. art. 110 at 57.

133. See id.

134. See Contract Law, supra note 14, art. 111, at 58.

135. See id.

136. See id. art. 113 at 58.

137. See id.

138. See id.

139. See id.

140. See Contract Law, supra note 14, art. 111, at 59.

141. See id.

142. See id.

143. See id.

144. See id.

145. See id. art. 113 at 58

146. See Charles D. Paglee, Law of the People's Republic of China on Consumers' Rights and Interest (1994) art. 49 (last visited Feb. 10, 1998) <http://www.qis.net/chinalaw/lawtran1.htm>.

147. See id.

148. See id.

149. See id.

150. See Contract Law, supra note 14, art. 115, at 59.

151. See id.

152. See id. art. 116 at 59.

153. See id.

154. See id. art. 119 at 60.

155. See Contract Law, supra note 14, art. 119, at 60.

156. See id. art. 118 at 60.

157. See id. art. 66, 67 at 47.

158. See id. art. 66 at 47.

159. An advance or partial performance would also be treated as a non-conforming performance. One party may reject the other party's advance performance or partial performance unless such performance does not harm the interests of the former. See id. art. 71-72 at 49.

160. See id. art. 67 at 47.

161. See id.

162 See Contract Law, supra note 76, art. 67, at 47.

163. A practical importance of the "fulfillment plea" is that it may help a court or arbitration body to draw a line between breach and non-breach especially when a "contributory breach" defense is asserted. See id. art. 66 at 47.

164. See id. art. 68 at 48.

165. See id.

166. See id. art. 69 at 48.

167. See Contract Law, supra note 14, art. 69, at 48.

168. See generally id. art. 42, 43 at 41.

169. See id. art. 42 at 41.

170. See id. art. 43 at 41.

171. See generally Contract Law, supra note 14.

172. See id.

173. See id.

174. See id.

175. See id.

176. See Contract Law, supra note 14.

177. See id.

178. See id.

179. The letter of judiciary letter from the Supreme People's Court is normally used by the Court to answer legal questions raised by a High Court concerning interpretation and application of specific law or regulation in a particular case.

180. See generally Contract Law, supra note 14.

181. See id.

182. For contracts involving joint ventures (both equity and cooperative) and Sino-foreign cooperative exploration and development of natural resources within the territory of China, application of the Chinese law is required. See Contract Law, supra note 14, art. 126, at 61.

183. See id.

184. See id. art. 12 at 35.

185. See id.

186. See Contract Law, supra note 14.

187. See id.


Pace Law School Institute of International Commercial Law - Last updated May 2, 2006
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