Many of the provisions of the Chinese Contract Law 1999 were inspired, if not modelled, on Western law. In Chinese contract law, one finds many doctrines familiar to the Western jurists. These include: force majeure and change of circumstances, the doctrine of good faith, and the nachfrist doctrine.
Many of the provisions of the Chinese Contract Law 1999 were inspired, if not modelled, on Western law. In Chinese contract law, one finds many doctrines familiar to the Western jurists. These include: force majeure[1] and change of circumstances,[2] the doctrine of good faith,[3] and the nachfrist doctrine.[4] Legal commentaries are replete with comparative references to European legal doctrines, European or European-inspired legal provisions, and the writings of European jurists.[5] In the adoption of Western legal norms, China has been selective; and in the process of transplantation, the source norms are often modified and adapted to create a unique set of legal provisions that China can call its own. Even as the final draft of the Chinese Civil Code will involve an exercise in comparative law, it will also bear distinct Chinese characteristics that testify to the value choices made.
The values held dear by a legal system are revealed in how it prioritizes conflicting norms. If contracting party commits a crime in the course of contractual performance, should the public policy against assisting the offender result in the defeat of his contractual claim against the counterparty, or should the law continue to uphold the contractual rights created? Where a contracting party in a stronger bargaining position is able to dictate the terms of the contract, should the courts adjust the imbalance of the bargain, or should they let the risks lie where they fall? An accurate understanding of how Chinese contract law operates requires an appreciation of the underlying values which animate the Chinese courts. The underlying values are revealed where a dispute implicates competing norms, and it is necessary to decide which norm should prevail.
A foundation axiom in Western contract jurisprudence is the freedom of contract. This phrase portends deference to the agreement that the parties have entered into and sees the law’s role as enforcing the contractual rights created. Under the liberal conception of contractual responsibility, the parties have the right - and the responsibility – to decide on whether the benefits promised and the benefits to be given constitute a fair exchange. In simple terms, the fairness of the bargain is a responsibility of the contracting parties. Tellingly, the text of the Chinese Contract Law 1999 does not employ the expression “freedom of contract”. Instead, article 4 provides that ‘parties have the right to lawfully enter into a contract of their own free will in accordance with the law.’ ‘Free will’ (自愿) does not carry the philosophical baggage associated with Western liberal notions of contract. Article 4 is followed by article 5, which stipulates that “[t]he parties shall adhere to the principle of fairness in deciding their respective rights and obligations.”
The Western liberal theory of contract law posits that if the parties have provided for the circumstances in which one party is entitled to terminate the contract, the contractual provision should be given effect to. In theory, it matters not whether the circumstance involves a trivial breach for which there are no serious consequences; if the circumstance is one for which the parties have clearly provided for the entitlement to terminate, the parties’ agreement should govern.
A classic case exemplifying the liberal theory of contract law is Maredelanto Compania Naviera SA v Bergbau-Handel GmbH, The Mihalis Angelos.[6] The dispute was between a shipowner and a charterer of a vessel. The cancellation clause of the charterparty provided that, “Should the vessel not be ready to load (whether in berth or not) on or before July 20, 1965, charterers have the option of cancelling this contract…” The charterer cancelled the contract on 17 July on the ground that the vessel was still in Hong Kong discharging cargo from a previous voyage, and that there was no possibility of the vessel being ready to load at the designated port (Haiphong) by 20 July. The issue was whether the charterer was entitled to terminate the contract in these circumstances. The English Court of Appeal held that the expected readiness to load clause was a legal condition for which the charterer was entitled to terminate upon a breach - notwithstanding that the charterer had suffered no damage. Indeed, the court agreed with the arbitrators that the shipowners had, on the facts, suffered no loss and were not entitled substantial damages.
Chinese law takes a rather different approach. This is strikingly observed in Cejing Company v Zhixin Company.[7] The subject matter of the contract was a construction agreement in which the employer engaged the builder to construct worker housing amounting to 38,310 square metres of built-up area. The contract laid out a progress payment schedule and specified that “if Cejing Company (the employer) fails to pay the amount according the payment schedule or in the specified manner, the builder has a right to cancel the contract.” The employer failed to make full payment of a particular progress payment. The builder purported to rescind the contract. The Intermediate Court held that as the contract provisions did not clearly provide what degree of shortfall in payment triggered the cancellation right, only a substantial failure was sufficient to trigger the cancellation right. On the facts, the shortfall (¥3 million) was about 30% of the agreed progress payment; the court found that this did not amount to a substantial failure. The official stance, published in the People’s Court Daily, was far stronger.[8] Yao Baohua, a judge of the Supreme People’s Court, made it clear that the matter was not merely one of interpretation, and that the law exercises superintendence over the parties’ express provision for cancellation of the contract. Even if it is clear that a breach falls within a contractual provision which entitles the obligee to terminate, the court is expected to discipline overly generous provisions, or provisions which confer too much advantage on one party and corollary to that, too great a burden on the counter party. The conferral of great advantage to one party or the imposition to massive loss on the counterparty contravenes the unfairness principle. Great stress was placed on the balance of the bargain. Especially notable is the explicit recognition that contractual equilibrium lays at the heart of the superintendence over cancellation rights. This stress on contractual equilibrium demonstrates the fundamentality of article 5 of the Chinese Contract Law. Although article 5 was not cited in the Judge Yao’s statement of the official position, the decision shows how the norm trumps the freedom to specify contractual rights and obligations.
[1] Chinese Contract Law 1999 (“CCL”) art. 117 and 118.
[2] Art. 26 of Judicial Interpretation II: Several Issues Concerning the Application of Contract Law of the People’s Republic of China (“Interpretation II”) 最高人民法院关于适用《中华人民共和国合同法》若干问题的解释（二） (issued by the Supreme People’s Court on 24 April 2009. Interpretation took effective on 13 May 2009).
[3] CCL art. 6.
[4] CCL art. 94(3).
[5] See, for example, Han Shiyuan, The Law of Contract, 4th ed (Beijing: Law Press. 2018)
[6] [1971] 1 QB 164.
[7] First Instance: (2009) 陕民一初字第1 号. Appeal: (2010) 民一终字第108 号. I am grateful to my colleague, Dr Zhao Liang, for bringing this case to my attention.
[8] Yao Baohua, “Scrutiny over cancellation rights in protect the security of transactions” People’s Court Daily 17 November 2011 (7th issue). 姚宝华，《应对约定解除予以限制以维护交易安全人民法院报》2011年11月17日，第7版。Although the article highlighted the security of transactions as the reason for judicial scrutiny over termination clauses, the thrust of the article was on unfairness and maintaining the equilibrium of benefits and burdens.