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a common characteristic and also a tradition in the Chinese legislation that each law contains certain stated principles, and the principles are treated as the fundamental guidelines or norms imbedded the law. It is believed in China that under the umbrella of the principles, every provision in the law is integrated with all other provisions in the law, by which the unity of the law will well be preserved. In this connection, the contract principles in China, though a bit abstract, are compulsory and must be followed by the parties.

As provided in the Contract Law, the principles that govern contract include “equality”, “voluntariness”, “fairness”, “good faith”, “legality”, and “observance of contract obligations”. In the context of the Contract Law, enforceability of the contract would depend on whether these principles have been observed. Thus, a contract will be invalid if it is found in violation of any of the principles stated in the Contract Law. Additionally, when hearing contract law cases, the people’s courts often base their decision on the contract principles. Simply put, the contract principles are the authoritative legal sources for the courts to make decisions.

1. Obligatio and Contract Obligations

As pointed out, contract in China is regarded as one of the causes for obligatio to arise. In fact, the law of obligatio and the law of property are the twins of civil legislation in the countries with the civil law tradition. A distinctive feature of obligatio is that it gives one party the right to make a claim against the other party. In essence, an obligatio creates both rights and obligations, under which one party (obligee) is entitled for its own benefit or a third party’s interest to ask the other party to do or not to do something, and the other party (obligor) is obligated to perform accordingly to satisfy the obligee’s request. Arising from the obligatio, the right of obligee consists of three parts: demand for performance including payment; right to receive performance including payment; and request for protection when obligor defaults in fulfillment of its obligations.

Because contract triggers obligatio, an obligee-obligor relationship between the contracting parties will be established when contract is made. The parties to a contract are obligee and obligor respectively to each other because during the course of performance of the contract the position of parties changes. For example, Party A entered into a contract with Party B where Party A agreed to provide computer software services to Party B for which Party B agreed to pay Party A. From services point of view, Party B is obligee and Party A is obligor. However, after the services are done, Party A becomes obligee to receive the payment and Party B changes to obligor to make payment. Under Article 84 of the Civil Code, the obligatio represents a special relationship of rights and obligations established between the parties concerned, either by the

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agreed terms of a contract or according to the provisions of law.5 The party entitled to the rights shall be the obligee and the party assuming the obligations shall be the obligor.

The law of obligatio is aimed at providing legal assurance that rights will be protected and obligations will be performed, and for this reason, the law of obligatio is also called the law of obligations. According to Article 84 of the Civil Code, the obligee shall have the right to demand obligor to fulfill his or her obligations as specified by the contract or under the provisions of law.6 Thus, fulfillment of obligatio is nothing but proper and complete performance of obligations arising from contract or other legal grounds for purposes of realizing the rights of obligee. In China, a very common proposition then is that to enforce a valid contract is to meet the requirements of obligatio.7 Article 106 of the Civil Code explicitly provides that citizens and legal persons who breach a contract or fail to fulfill other obligations shall bear civil liability.

Scholars in China focus much of their attention on the performance of obligations. They argue that in order to satisfy obligatio, performance of obligations shall follow three basic rules. The first rule is actual performance rule, which requires that parties fulfill their obligations for the agreed subject matter, and should not arbitrarily substitute the subject matter with liquidated damage or equivalent unless the actual performance is excused. In addition, under the actual performance rule, one party who fails to perform his obligations shall be obligated to continue actually performing, and the other party has the right to demand him to do the same.8

The second rule is proper performance rule. The thrust of the proper performance rule is that in addition to the agreed subject matter, the parties under mutual obligations are required to make performance under agreed terms and conditions. To the extent that obligations are satisfied, the proper performance rule serves as a safeguard to the performance so that it will be made as agreed with regard to essential aspects of the performance such as quantity, quality, time, place, as well as formality. Since it is often the case that a contract may not actually be performed properly, the proper performance is held as the standard to determine whether and to what extent there has been a breach of obligation.9

The third rule is described as cooperative performance rule. The rule is intended to encourage parties in an obligee-obligor relationship to perform

5 See 1986 Civil Code, art. 84.

6 See id.

7See Tong Rou, et al, Chinese Civil Law, 299–303 (Law Press, 1998); Zhang Guangxing,

General Introduction to the Law of Obligations, 15–17 (Law Press, 1997); Wang Jiafu,

Obligatio in Civil Law, 128–130 (Law Presss, 1998).

8 See Tong Rou, id, at p. 310.

9 See id, at p. 311.

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their mutual obligations in a cooperative way. Also, under the cooperative performance rule, the parties owe to each other the mitigation duty. Article 114 of the Civil Code is regarded to have underscored the cooperative performance rule as applied to contract. According to Article 114, if one party is suffering losses caused by the other party’s breach of contract, the grieved party shall take prompt measures to prevent the losses from aggregating; if the grieved party does not promptly take any measures, which cause the losses to increase, he shall not have the right to claim compensation for the increased losses.

2. Equality and Voluntariness

Equality deals with status of parties in any given civil relation. Under the civil law tradition, the law of obligatio is classified as private law where parties are in a horizontal relationship, as opposed to public law where the relation of parties involved is vertical and in most cases is between state and its citizens. This tradition is deeply implanted in Chinese civil law legislation and typically reflected in the Civil Code. Article 2 of the Civil Code unequivocally provides that the civil law of the People’s Republic of China regulates both property and personal relationships between citizens, between legal persons, and between citizens and legal persons. And Article 3 of the Civil Code sets forth as a principle that parties to a civil activity shall have equal status.

The Contract Law follows the Civil Code, emphasizing that contract is an agreement made between the parties having equal status. Article 3 of the Contract Law further stresses the principle of equality by providing that the parties to a contract are equal in legal status (which means that they are conducting civil activities on an equal footing). In the meantime, Article 3 of the Contract Law specifically prohibits any party from imposing its will on the other party. In the Contract Law, the principle of equality is premised on the notion that equality in the legal status is the prerequisite for parties to engage each other in a contract. This notion is also coherent to the doctrine of horizontal relationship as referred to civil activities.

In China, the equal legal status test that applies to all civil activities is described to embrace three principal requirements. The first one is that parties to a civil activity shall have equal capacity for civil rights. This would mean that each party in civil activities, regardless of his or her age, religion, position or physical or economic condition, shall have the same capacity for civil rights and such rights shall not be deprived of or restricted by anybody. Under Article 10 of the Civil Code, all citizens are equal as regards their capacity for civil rights.10

10 See the 1986 Civil Code, art. 10.

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Article 10 applies to non-Chinese citizen through Article 8 of the Civil Code, which provides that the stipulations of this Law as applied to citizens shall apply to foreigners and stateless person within the territory of the People’s Republic of China except as otherwise provided by law.11

The second requirement concerns equal treatment of the parties in civil activities. The key point is that different parties, when dealing with each other in civil areas, shall have equal legal status and be treated equally. Speaking literally, if the State or a state agency or state-owned enterprise is engaged in a civil activity, it shall be deemed as the same as a regular civil party, and shall have no any privilege over any other party. Interestingly, according to a quite number of Chinese contract law scholars, the equal treatment requirement is derived from the belief that all men are equal before the law.12 An important implication of the equal treatment is to promote fair dealing and to prevent administrative abuse of power.13

The third requirement embodied in the equal legal status aims at equality in negotiation, which means that parties in civil activities equally have the rights to determine their affairs by negotiation and the negotiation is conducted in the way that no party may overtake the will of the other. The equal negotiation requirement not only applies to the creation of civil relationship between relevant parties, but also governs modification and termination of such relationship. The whole idea is to try to ensure that the parties will deal with each other fairly and freely.

The most significant features of equality are mutual benefit and mutual assent. In contracts, mutual benefit requires that parties to a contract enjoy their contractual rights respectively corresponding to their contractual obligations. In other words, no party may be entitled to contractual rights disproportionately more than its contractual obligations by taking the advantage of the other party. And mutual assent is to guarantee that the contracting parties have every opportunity to express their will freely.

Therefore, for purposes of the Contract Law, the principle of equality is essentially to mean that the parties are equal in their legal status no matter what their backgrounds or positions are in regard to making a contract between them, performing the contract as agreed, bearing contractual obligations, and assuming liability for breach of the contract. From this point of view, it may conclude that the stress on the equal status of the parties to a contract helps

11See id., art. 8.

12See id., at p. 23.

13It is quite common in China that the State, a state agency, or state owned enterprise uses its position economically or politically to influence business activities, and in many cases such influence is excised through administrative means to downplay the role or status of other party involved.