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Chinese Contract Law and the Economic Reform

Abstract

China’s previous contract laws had many contradictions and failed to meet the needs of China’s developing market economy. Although some problems still need to be dealt with, the unified contract law is more advanced, systematic and plays an important role in fostering and encouraging transactions.

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Notes

  1. See Art. 428 of the new Unified Contract Law.

  2. This division that has inherent weakness will be discussed in the following part.

  3. See Art. 2 of the ECL. This definition, however, does not distinguish the so-called economic contracts from other types of contracts, because in entering a contract the parties almost always have some economic purpose in mind, and thus most contracts have an economic dimension.

  4. For example, although the economic-civil distinction was imprecise, the ECL governed economic contracts only, leaving so-called civil contracts to be governed by other common statute. What is more, because the FECL governs economic contracts involving foreign parties and the ECL only governs domestic contracts, there was no legal rule for deciding disputes concerning non-economic contracts involving foreign parties.

  5. For example, there were not any legal rules on pre-contractual liabilities, or on offer and acceptance. The rules on Compensation for loss in the former contract laws were quite different, too. As a result, some crucial issues were left to the discretion by individual judges. This created much discrepancy and many similar problems in practice.

  6. CcFr (1804), Art. 1101: Le contrat est une convention par laquelle une ou plusiers personnes s’obligent, envers une ou plusiers autres, à donner, à faire ou ne pas faire quelque chose. (The contract is an agreement according to which one or more persons should bear the obligations of giving, doing or not doing something to another one or more persons)

    CcIt (1865), Art. 1098: Il contratto è l’accordo di due o più persone per costituire, regolare o sciogliere fra loro un vincolo giuridico. The contract is an agreement of two or more parties establishing, modifying and terminating the juridical relationships of properties between them.

    CcIt (1942), Art. 1321 (Nozione) Il contratto è l’accordo di due o più parti per costituire, regolare o estinguere tra loro un rapporto giuridico patrimoniale. (Definition: The contract is an agreement of two or more parties establishing, modifying and terminating the juridical relationships of properties between them). See Schipani (2005), and Cardilli (2006).

  7. Only agreements involving personal status relationships such as marriage, adoption, guardianship, etc., are excluded.

  8. Such as contracts relating to financial lease, commission, brokerage and intermediation.

  9. See Yao (1997). In the main, it covers: freedom in choosing the other contracting party, forming a contract, determining the terms and contents of the contract, modifying or terminating the contract, stipulating the remedies for a breach and so on.

  10. Also, see Yao (1997). See Schipani (1999).

  11. By contrast, the previous contract laws provided a cover-all contract management power to executive agencies, which resulted in damage to the freedom of contract.

  12. See Art. 12 of the ECL.

  13. See Art. 12 of the new Contract Law.

  14. They are to be decided by the parties through agreement. Thus, the parties can enjoy more freedom in determining what to include in their contract.

  15. See Art. 27 of the Economic Contract Law; Art. 23 of the TCL; Art 31 of the FECL.

  16. See Art. 93 of the new Contract Law. After the contract takes effect, if the conditions for terminating the contract are materialized, a party that holds the right of termination shall be allowed to terminate the contract by exercising its agreed-upon termination right.

  17. See Art. 58 of the GPCL.

  18. But even under such circumstances, however, there are situations where the victim may want the contract to remain binding on herself as well as the other party, rather than voiding the contract entirely. If the contract is declared invalid, the victim's wish will be unfulfilled. Under the previous contract laws, because the state was given substantial authority to voluntarily declare such contracts as invalid, there occurred many instances where transactions were unnecessarily eliminated and the victims and well-intentioned third parties failed to be sufficiently protected. See Rescigno (1999).

  19. See Art. 54, 55 of the new Contract Law.

  20. See Wang and Xu (1999). Under the previous contract laws if contracts were concluded in the name of a principal by a person who has no authority as agent or who in concluding the contract exceeds her authority as agent, or formed by persons with no authority to dispose of the property specified in the contract, or concluded by persons with no capacity or with limited capacity for civil acts, all of them would be treated as invalid per se.

  21. According to the new Contract Law, a contract with pending validity means that although the contract has been formed, because it does not fully comply with the relevant provisions on validity, whether it is valid will hinge on the right-holder's manifest ratification. See Art. 47, 48, 49, 50, 51 of the new Contract Law.

  22. Before the contract is formed, the parties should observe some necessary ancillary duties in accordance with the principle of good faith, such as, any of them should not disguise and pretend to conclude a contract, or negotiate in bad faith, or conceal deliberately the important facts relating to the conclusion of the contract or provide deliberately false information, or perform other acts which violate the principle of good faith. Article 43 recognizes the duty of confidentiality. Whether or not the contract is actually formed or becomes effective, a business secret the parties learnt in concluding a contract shall not be disclosed or unfairly used. The party who causes the other party to suffer from losses due to disclosing or unfairly using the business secret shall be liable for damages. After the contract is terminated, the parties to a contract shall bear certain post-contractual duties, abiding by the principle of good faith. They should perform such obligations as making a notice, providing assistance and maintaining confidentiality according to transaction practices. See Cardilli (2004).

  23. See Art. 8 of the new Contract Law.

  24. In the development of economy, the State often issued a mandatory plan or a State purchasing order task based on necessity, the relevant legal persons or other organizations should conclude contracts between them in accordance with the rights and obligations as stipulated by the relevant laws and administrative regulations. In this circumstance, specific performance played an important role in the economic development and order, because contracts were used as a tool to facilitate economy-planning in a planned economy.

  25. In today’s China, some claimants in many cases have an incentive not to ask for specific performance. They will want to go out into the market-place and purchase alternative goods and sue for damages for the difference in value rather than wait for a court to make a judgment of specific performance. A further consideration which must be borne in mind is that the performance obtainable from an unwilling contracting party may well be inferior to that obtainable from another, willing performer.

  26. Specific Provisions assume the following functions: first, General Provisions of contract law are stipulated in a general way, but it is necessary to specify several typical types of transactions in the economic life; second, because some types of transactions has its own characteristics, we should make special rules that unlike General provisions. When there are conflicts between General Provisions and Specific Provisions, the latter ones are superior to be applicable. See Wang Yi (1999).

  27. Contracts without express legal provisions, such as contracts involving travel, training, medical care and telecommunications service, already exist in our daily life.

  28. See Art. 1703 of the Italian Civil Code.

  29. See Art. 12, 13, 14, 15 of Convention on Agency in the International Sale of Goods (Geneva, 1983).

  30. See Art. 1705 of the Italian Civil Code. It means that the contract is not directly binding the mandator and the third party, but only binding upon the mandatary and the third party. In this case, according to Italian law, the third party has no relationship with the principal. The Italian Civil Code makes it clear that effective agency always requires the agent to act ‘in the name’ of the principal. This means that if the “agent” acts in his own name and not in the name of a principal, then a legal relationship is only established between the “agent” and the third party. The third party can enforce the “agent’s” rights against the principal only after having obtained the rights by way of assignment and the principal can only claim against the “agent’s” counterpart on the basis of the 'agent's' contractual rights after assignment of these to the principal.

  31. But in accordance with the Chinese law, the mandatary shall disclose the third party to the principal, allowing it to exercise the agent’s rights against such third party, except where the third party will not enter into the contract with the mandatary if he knows the identity of the principal at the time of entering into the contract.

  32. See Wolff and Bing (2002). Under common law the principal can have contractual rights and obligations even though she never negotiated or signed the contract and the third party was unaware of the involvement of the principal. Indirect agency is a common law institution, but it is included in the new Contract Law which is mainly civil law-inspired.

  33. “Other organizations” may include certain educational institutions which are not legal persons, the representative office (of a legal person) which is not a legal person in its own right, local resident's committees, villager's committees, social or political organizations or groups, and government departments or offices.

  34. Article 38 appears to suggest that a government organization or any non governmental organization or legal person is not required to comply with the general rules of contract when making a contract under State instructions or on behalf of the State.

  35. Does this expression include any type of commercial contract signed by a government, or only a specified type known as a “mandatory State plan or a State purchase order”? If the expression is read, broadly, then government contracts will not be subject to the rules of the Code even though Article 2 appears to apply to a government contract. If Article 2 does apply to government contracts, then how do we draw a line between a contract made under the “mandatory State plan or a State purchase order” and one made for the purpose of satisfying the normal commercial needs of a government department or agency, such as an order to purchase foods or furniture? If the expression is to be read narrowly then the term “mandatory State plan or a State purchase order” must be specifically defined.

  36. See Zhang and Huang (2000), and Cardilli (2003).

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Correspondence to Zhai Yuanjian.

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Yuanjian, Z. Chinese Contract Law and the Economic Reform. Transit Stud Rev 16, 429–437 (2009). https://doi.org/10.1007/s11300-009-0074-1

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Keywords

  • Social Transition
  • Chinese Contract Law
  • Civilian Tradition

JEL Classification

  • K12
  • K 40
  • P20
  • P30