#17056 - The Evolution Of Contract In Chinese Law - Chinese Law

The Evolution of Contract Law in China

Introduction:

• The central theme is that while the black letter contract law has indicated a trend of convergence moving toward some basic norms which appear in other countries’ contract laws and international conventions, the enforcement of contract law shows a visible trend of moving toward a hybrid regime combining features of both formal and informal enforcement mechanisms.

  • This paradigm of evolution reveals the intricacies and complexities in China’s contract law regime as well as the country’s rule of law movement in general.

Legislative History and Structure of Contract Law

1. Legislative History

• Before the initiation of the reform and opening-up era in PRC there had been only contractual practices but no legislative activity in relation to contracts

• It was not until the early 1980s that China started to enact laws on contracts, beginning with the promulgation of the Law on Economic Contracts of 1981

• As a significant development, the Contract Law of 1999 replaced the three earlier statutes to unify the nation’s contractual legislative framework which had been fragmented for almost two decades

  • The 1999 Contract Law achieved a degree of uniformity in China’s contract law regime

  • The fact that the Contract Law abolishes the differential treatment of domestic and foreign parties and applies equally to them conforms to the national treatment principle, the core pillar principle under the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO)

• As the Contract Law is the centrepiece of China’s legislative output in the field of commercial law, it is worthwhile recounting the historical background in which it was enacted, which offers a glimpse into the social and economic settings at earlier stages of China’s transition to the market economy which was the context for the legislative efforts.

  • As the fragmented structure of the contractual legislation at the time had increasingly been proven costly and outdated, there was a strong need for a unified contract law to remove discrepancies and inconsistencies among various contract codes.

  • In 1993, the building of a socialist market economy was formally endorsed by the China Communist Party with the goal of deepening economic reforms.

    • This heightened the agenda for legislative endeavours on contracts.

    • The draft statute was polished several times after heated discussion and debate in the circles of legislators and academics before being settled as a final text.

    • The NPC passed the law in 1999, which, signalling a high degree of legislative sophistication and foresight, has remained unchanged ever since

    • Importantly, there have been three subsequent judicial interpretations issued by the Supreme People’s Court (SPC) in 1999, 2009, and 2012, respectively, that have helped substantiate the implementation of the Contract Law.

• With regard to the enactment of the Contract Law, there were several important considerations underlining the meticulous drafting process (Hu 2010).

  • First, under the then fragmented framework of contractual legislation, domestic economic contracts, foreign-related economic contracts, and technology transfer contracts were governed by different sets of legal rules.

    • The stratification was prone to gaps in application and enforcement, reinforced by broad-brushed stipulations which lacked operative details.

  • Second, there was a need for additional rules to combat increasing contractual fraud in market transactions which had infringed upon the interests of the state, collective units, and citizens.

  • Third, previous legislation had left out multiple types of contracts, such as contracts on financial leasing, commission, and brokerage, calling for a significant expansion of the legislative coverage.

  • Finally, as contents in the previous three statutes corresponding to the characteristics of a planned economy had become obsolete when the country was moving toward a market economy, a unified new contract law was expected to remove those out-of-date provisions.

    • In particular, the legislative purpose was clarified as upholding the lawful rights and interests of parties, not ensuring the execution of economic plans.

    • This goal was enshrined in the principles of freedom of contract, fairness, as well as honesty and good faith which were incorporated in the text of the Contract Law, as opposed to emphasizing government oversight of contracting activity through administrative monitoring and sanctions under the previous statutes (Liang 1999a, pp. 26–27).

2. Legislative Style

• A widely shared consensus in academic circles is that China practices the fusion of civil law and commercial law (minshang heyi) in legislative activity, in the sense that there need not be a commercial code in addition to a civil code even though the enactment of a long-awaited Civil Code has been protracted for many years.

  • Instead, it is believed that the general principles and rules of civil law provide the foundation for commercial law, which builds on the basis of the more specialized principles and rules in the civil law applicable to the relationships and the activities among profitmaking business entities of equal legal status (Chen 2011, pp. 161, 316,318).

    • As a result, in PRC there is no Commercial Code but only a quasi-civil code titled the General Principles of Civil Law (GPCL), as mentioned above.

• The GPCL consists of three central elements – subjects of civil law (including individuals and legal persons), ownership and “obligations” (zhaiquan),and supplementary elements concerning “legal acts,” proprietary rights, agency, limitation periods, and compensation for loss (Chen 2011, pp. 161, 316, 318).

3. Type of Contracts

• In the Contract Law, 15 types of contracts are addressed separately, called “named contracts” (known as “typical contracts” in Taiwan; see Chapter 4), each occupying an individual chapter.

Influence of Foreign Law and International Conventions versus Local Characteristics

• The Contract Law displays traits of a strong influence of foreign law and international conventions as well as of local characteristics reflecting peculiar domestic needs.

1. Influence of Foreign Law and International Conventions

• Legislative techniques and particular legal mechanisms from both civil law and common law systems were incorporated in the drafting of the Contract Law.

  • For example, the law has instituted the mechanism of “unrest defense” traditionally used in the civil law system on the one hand (Articles 68 and 69), and the notion and practice of “anticipated repudiation” originating from the common law system on the other (Article94(2),Article108).

  • Another example is the deviation in the Contract Law from the principle of liability at (presumed) fault in attributing liability for breach of contract.

    • This principle has traditionally been used in civil codes across civil law jurisdictions, including France, Germany, Japan, and Switzerland.

    • China instead adopts the common law principle of strict liability to protect the interests of the innocent party via extended scope of liability for breaches, as emphasized below.

1. CISG

• Here, “international conventions” primarily refer to the United Nations Convention on Contracts for the International Sale of Goods (CISG), which has been in effect in China since 1988.

  • First, the law has incorporated key contents in the CISG in relation to the formation of contract, such as definition of offer, definition of invitation for offer, validity of offer upon arrival, revocation of offer and its restrictions, expiration of offer, definition of acceptance, validity of acceptance upon arrival, validity of late acceptance, revocation of acceptance, as well as validity of both written and oral contracts.

• It has generally been agreed that the CISG had a crucial influence on the development of Chinese contract law (Blase 2000,p.95).

  • However, it is not clear from the legislative documentation why the CISG was used as a template for drafting the Contract Law.

• The literature appears to suggest that the CISG was often viewed by Chinese scholars and government authorities, as a more advanced international convention on contract law rules (Ding 1999, p. 25) as it represents a great success to harmonize the differences in contract law norms and principles among various legal families.

  • Given the fact that China is one of the largest trading nations in the world, relying on a more harmonized contract law code helps generate lower transaction costs and reduce potential disputes.

  • Modelling its Contract Law on the CISG also means that the transplant would be easier and less costly for China compared to other options. In this sense, China’s borrowing of the CISG to unify and upgrade its Contract Law was an evolution toward efficiency.

• Second, as to the conditions triggering the termination of contract, the Contract Law has accepted the doctrine of “fundamental breach” prescribed in the CISG, although with minor variations in wording (Han 2011a, p. 11).

  • The law also follows the CISG in recognizing the validity of amendments to, or termination of, contract by consensual agreement.

  • There is also no difference in the prescriptions on consequences of termination of contract between the CISG and the Contract Law.

• Third, on liability for breach of contract and exemptions from liability, there are also signs of conjunction with the CISG.

  • For example, while the CISG incorporates both notions of “anticipatory repudiation” at common law and “unrest...