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compensation, or may demand specific performance provided that such performance is permitted under the law.

●The freedom to choose the methods of settlement for disputes. There are 4 alternatives available to the parties for settling contractual disputes under Article 128 of the Contract Law, namely, conciliation, mediation, arbitration and litigation. 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, they will be bound by the arbitral award and no litigation is allowed concerning the same disputes.22

But there is the criticism 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”.23 Freedom of Contract focuses on maximum economic efficiency, and it promotes the parties’ ability to exercise their full creative potential and to establish appropriate business relationships that possess all the specific nuances required in such relationships.24 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 certain unpredictable restraints. Therefore, many believe that to successfully defend against the unfair government interference, the parties right to the freedom of contract must be constantly emphasized and further respected.25

3. Limitations on Party Autonomy – Bird in Cage

Even if the freedom of contract is recognized in the Contract Law, the parties’ right to freely enter into a contract is still limited. The language itself of Article 4 seems to impose at least two restrictions on the parties’ contract

22Under the Arbitration Law of China (1994), 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 (Article 4). 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 (Article 9).

23See Jiang Ping, supra note 10, at p. 5 and Yang Lixing, supra note 10, at p. 14.

24When 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.

25See Wang Liming, supra note 15 at p. 16.

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making power: (1) a contract must be entered into according to law; and

(2) only unlawful interference with contracting parties’ freedom is prohibited. It is true that 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. As professor John Calamari pointed, while the parties’ power to contract as they please for lawful purposes remains a basic principle of contract law today, it is hemmed in by increasing legislative restrictions.26 For example, a contract

in violation of mandatory legal requirements 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 that the 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. 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.27

Therefore, in today’s world, wherever the contract is made the party autonomy in making a contract is not unrestrictive. But in China, the limits on the right of the parties to make a contract clearly contain the “Chinese characteristics”. A popular metaphor that may be used to describe the freedom of contract in China is the term “bird in cage”.28 It implies that parties to a contact may enjoy their freedom but the freedom may not go beyond the boundary prescribed by the government. The bird in cage model of the freedom of contract also seems consistent with the notion that the freedom is a granted right not an inherent one.

Although the freedom of contract may have different variation in different country, the bird in cage model is the typical product of Chinese reality. There are at least four unique characters in this model: (a) public ownership dominance, (b) supremacy of State interest, (c) limited choices of private parties, and (d) over-reaching government role. More specifically, the limitations as implicated in Article 4 on the freedom of contract could further be seen from the following aspects.

26See John D. Calamari and Joseph M. Perillo, The Law of Contracts (4th ed), 5 (West Group 1998).

27See Farnsworth, supra note 1 at pp. 223–225, 321–323.

28As noted, ‘bird in cage’ is commonly used to describe the economy model promoted by the late Chinese leader Chen Yun who was famous as a primary designer of China’s state economic plans (or planned economy). Under his economy model, the state plans functioned as a cage that defined the dimension of the business activities of all enterprises (the birds).

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3.1. Legal Compliance

Limitations on freedom of contract are enhanced in China 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 comfort to laws and regulations that are mandatory, and any violation of which would render the contract invalid or unenforceable. 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.

The most important provision in the Contract Law that restricts the parties’ freedom in making a contract is Article 7. 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.29 According to the Supreme People’s Court, the law and administration regulations as referred in Article 7 not only mean those in contract areas but also include those in other areas that have the effect of limiting the parties’ contract making power.30 In addition, under Article 7, neither party may disrupt social-economic order or damage the public interest. Thus, Article 7 imposes limits on the party freedom of contract in two aspects: legal compliance and observance of social ethics.

The requirement of legal compliance was first provided in the 1986 Civil Code. But under the Civil Code, the parties to a contract are required not only to comply with the law but also to be bound by the State policy absent applicable law.31 The Contract Law does not contain the policy compliance requirement because of the vast concerns about the uncertainty and unpredictability of the policy, particularly the concerns from foreign investors.32 However, despite

29For 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 Council or approved to issue by the State Council. See Sun Lihai, supra note 14, at pp. 27–28.

30A typical example is the “Consumer Interest Protection Law”, which imposes upon the manufactures or business operator restrictions in their dealing with consumers.

31Under Article 6 of the Civil Code, civil activities must comfort to the law, and where there are no relevant provisions in the law, the State policies shall be observed.

32A significant issue concerning policy is transparency. Since the policies in many cases are addressed in the “internal documents” or “red letterhead documents” of the government and may be changed at any time without notice, with regard to the parties to a contract, the possible impacts of the policies on their business transactions or operations are totally unpredictable and unmanageable.

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the deletion of the policy requirement in the Contract Law, one should not underestimate potential influence of the government policies on contractual activities. Still, it remains questionable whether the parties may effectively protect themselves from the policy interference.

As to observance of social ethics, it was originated from the Civil Code.33 But neither the Contract Law nor the Civil Code has defined the social ethics. In many cases, the issues of social ethics are addressed together with the social public order. It basically aimed at giving the judges discretionary power to adjudicate cases in the way that would best help promote the good moral standard and fair practices.

3.2. State Plan Mandate

As noted, the parties’ contract-making power may be affected by the State mandatory task or State purchasing order under Article 38 of the Contract Law. Although China has been moving from planned economy to a marketoriented economy, the State still retains direct control over pillar industries or products essential to the nation’s economy. In contrast to the past when contracts were under the absolute control of the government, the control now is being carried out through the State mandatory task or State purchasing order.

Companies or enterprises that receive the State mandatory task or the State purchase order are required to make contracts to implement the task or order, and the contracts are made between those companies or enterprises are the contracts between the users and the suppliers. It is clear in the Contract Law that a contract may not be enforceable if it is in violation of the State mandatory task or the State purchasing order. But, what seems problematical here is the extent to which the parties may seek judicial remedies when breach of contract concerning the State mandatory task or the State purchasing order occurs.34

3.3. Administrative Supervision

The administrative supervision of contract is unique in China. Rested mainly with the administrations of industry and commerce (AIC) as well as other relevant government agencies (RGA),35 the administrative supervision is essentially the administrative interference with the parties’ contractual rights. Before the

33Article 7 of the Civil Code requires that civil activities defer to social ethics.

34In the past, all disputes involving the State mandatory plan related contracts were adjudicated primarily by administrative departments in charge other than a competent court.

35Generally, the RGA contains planning departments, construction administrations, supervising authorities of enterprises, departments in charge of exclusive trades, and real estate administrations. See A Practical Guidance of the Contract Law of China, pp. 126–127.

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Contract Law was adopted, the AIC and the RGA had a broad administrative power to supervise contracts.36 The Contract Law, however, seems to put limits on the exercise of such power. According to Article 127 of the Contract Law, the contract supervision of the AIC and the RGA is to deal with illegal conducts that are committed under color of contract to endanger and harm the State and public interests.37

Obviously, the primary purpose of Article 127 is to help protect the State interests in maintaining the economic order and social stability of the nation. The parties whose conducts are found to have caused harm to the state interest will face administrative penalty consisting of fine and/or revocation of business license. 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. 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 the model contracts, verification of contract, inspection of contract performance, administrative mediation of contractual disputes, as well as administrative sanction against illegal conduct involving contracts.38 The model contracts are normally drafted and issued jointly by the AIC and the RGA to be used as the guidance in helping the parties draft their contracts. As far as international contracts are concerned, the Ministry of Commerce (MOC – formerly MOFTEC) also provides a set of model contracts for the parties to choose.39 Under Article 12 of the Contract Law, parties may conclude a contract with reference to the model text of each kind of contract. Hence, the use of model contracts, though not mandatory, is strongly encouraged in practice.

The contract verification is the means by which the AIC and/or the RGA review the truthfulness and legality of the contract upon the application of the parties. Both the AIC and the RGA are in favor of the contract verification because from their point of view, the verification would help prevent contract fraud or sham contract, and would also increase evidential effect of existence of the contract. But what seems troublesome is the status of the verification. From the context of the Contract Law, the verification is not required in order

36Under 1981 Economic Contract Law, AIC and RGA at county or higher level had authority to supervise economic contracts.

37Article 127 of the Contract Law further provides that if crime is committed, criminal responsibility shall be imposed.

38See Sun Lihai, “Explanation”, supra note 6 at pp. 201–213.

39The MOFTEC was renamed as “MOC” (Ministry of Commerce) in March 2003 as a result of the restructuring of the central government.