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further re-enforce the rule of “non-imposition of one party’s will on the other” stated in Article 3 of the Contract Law.

At issue, however, is the government interest that a contract might affect. For example, in a contract between a private company and a state-owned enterprise, the private company may have difficulty in being treated the same as the state owned enterprise. It is particularly true when a local government interest is involved, and when the government has a clear preference to protect the state owned enterprises in which it has interest. Take remedies for instance, the private company might not have the same access to the remedies as the State owned enterprise would have because the government generally has the tendency to protect the State owned enterprise in whatever means the government may see fit.

The voluntariness essentially talks about the free will of the parties in making a contract and it primarily involves the self-determination power or autonomy of the parties. As explained, because of the concerns about being tainted by western ideology, the Contact Law is shy away from the term “freedom of contract”, but instead sets forth as a principle the voluntariness in an attempt to safeguard the legitimate rights of the parties to a contract. Under Article 4 of the Contract Law, the principle of voluntariness basically contains two parts: the first part is about the rights of the parties to voluntarily enter into a contract within the limits of law, and the second part is to prohibit any unit or individual from unlawfully interfering with the contract.

3. Fairness and Good Faith

Article 5 of the Contact Law requires that parties to a contact abide by the principle of fairness in determining their respective rights and obligations. Article 4 of the Civil Code has a similar provision mandating that in civil activities the principle of fairness shall be observed. However, both the Civil Code and Contract Law do not define the fairness – perhaps for two reasons: first, it is difficult to square the meaning of the fairness, and second, it is better to let the courts to deal with this matter on a case by case basis.

But, in general, fairness is mainly concerned about the contents of the contract, and it is purposed to achieve a balance of rights and obligations between the parties. As advocated by Chinese scholars, the fairness has its root in the idea that the relation between the contractual parties shall be maintained to the extent that the rights and obligations are reasonably and justly allocated and shared. Specifically, the benefits a party has acquired shall proportionally match the obligations it has born.14 It seems that the principle of fairness

14See Jiang Ping, et al, A Detailed Explanation of the Contract Law of Law, 6–7 (China University of Political Science and Law Press, 1999).

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resemble the principle of equity although the concept of equity in China is not as popular as in western countries.

In judicial practices, the Chinese courts employ several tests in determining whether the fairness has been achieved. The first test is “obvious unfairness” rule. This rule is developed from Article 59 of the Civil Code. In accordance with Article 59, a party shall have the right to request a people’s court or an arbitration institution to alter or rescind a civil act that is obviously unfair.15 In general, unfairness would be obvious if it is found that a party has taken the advantage of the other party to cause the relation of rights and obligations clearly unbalanced in favor of the former.16

The second test is “reasonable allocation of risks” approach. Standing on the theory of market,17 this approach regards each business transaction as consisting of both predicable and unpredictable risks. Fairness would require that the parties to a contract share the risks fairly and justly, though not necessarily equally. Therefore, it would constitute unfairness if a party takes more risks on a involuntary basis than the other party in their contract dealings. Under this test, what the court would look at in order to determine whether there is a violation of fairness is whether the possible risks are reasonably allocated between the parties.18

The Third test is called “fair distribution of rights and obligations” standard. In accordance with this standard, a party to a contract is required to bear the obligations proportionate to the rights it has or claims to have. A typical example to illustrate this standard is the matter concerning the validity of the disclaimer clause in a contract. In dealing with the effect of the disclaimer, the court will make a determination on whether the distribution of the rights and obligations between the parties would be unfairly affected by the disclaimer. Another example is the standard contract. The court will normally look into the standard contract against the provider of the contract, particularly in the case where the standard contract is simple a “take it or leave it” deal.19

Because the fairness principle is fundamental to the contract-based business transactions, some scholars in China view the principle of fairness as the principle of justice. They believe that a distinctive feature of the contract is the “exchange for equal value” and for the value to be exchanged equally the justice

15See the 1986 Civil Code, art. 59.

16See Economic Trial Chamber of the Supreme People’s Court, Explanation and Application of Contract Law, 28–29 (Xinghua Publishing Press, 1999).

17Market is the place where the risks and opportunities co-exist, and they are shared by the players.

18See Li Guoguang, Explanation and Application of the Contract Law, 28–33 (Xinhua Press, 1999).

19See Wang Liming, Study in Contact Law, supra note 4 at 181–186.

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must be preserved in contracts. In its application, the principle of justice would require that the parties to a contract should treat, and deal with, each other fairly in both making and performing of the contract.20

Good Faith essentially embraces business ethics. Being a principle to govern civil act in China, good faith was first provided in the Civil Code in which it was termed as “honesty and credibility”. The Contract Law follows the Civil Code and makes good faith a contract principle. Under Article 6 of the Contract Law, the parties to a contract shall observe the principle of honesty and credibility in exercising their rights and fulfilling their obligations. It is claimed that rooted in Confucian tradition, good faith has long been a moral norm in the Chinese society, represented by the popular dogma of “faithful to promise”.

The Contract Law, however, makes no attempt to define the “good faith”. In the United States, the good faith in Section 1–201 (19) is defined as “honesty in fact in the conduct or transaction concerned”.21 Chinese scholars view the UCC definition as “honest conduct” doctrine and criticize it as the lack of consideration of the interests of the parties because they believe that a major function of good faith is to maintain balanced the interest of parties and the interests of the parties and society.22 Another American doctrine widely discussed in China is Professor Robert Summers’ notion of “excluder”. According to Professor Summers, the good faith is best left undefined and best understood as excluding activities that are deemed bad faith.23 But this notion is deemed unpersuasive because a “non bad faith” does not necessarily mean a “good faith”.

Under the tradition of Confucianism, good faith would implicate faithfulness, trustworthiness and honesty. Confucius had a strong belief that “people could not live without credibility” (Min Bu Xin Bu Li), which became a long lasting “gentleman rule” in Chinese history. Although scholars in China differ in how the good faith should be defined, it is generally interpreted to mean that in civil activities, people shall be honest to each other without abusing their rights and shall perform their obligations faithfully. In addition, in order to observe good faith principle, it is required to balance the interests between the parties and between the parties and society. In an effort to make the good faith more understandable, some Chinese scholars illustrate the good faith in the context of the Contract Law to contain the following aspects:

20See id.

21See UCC, § 1–201(19).

22See Xu Guodong, Concept and Historical Evolution of Good Faith Principle, 4 Legal Research (1989).

23See Robert S. Summers, the General Duty of Good Faith – Its Recognition and Conceptualization, 67 Cornell L. Rev. 810 (1982).

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(a)During negotiations for a contract, the parties have the obligations to deal with each other truthfully and shall cooperate in their efforts to make the contract;

(b)After the contract is concluded, the parties shall take all necessary steps to prepare for the performance of the contract;

(c)When performing the contract, the parties shall each faithfully perform their contractual obligations, including assistance and notice necessary to the contract performance;

(d)After the contract is performed, the parties may have the obligation not to disclose the business secrets they obtained from each other during the contract period; and

(e)When a dispute arises out of a contract provision, the parties shall fairly and reasonably interpret the provision so that the mutual benefits of parties would be respected.24

In addition to Article 6, the Contract Law has two more articles that are directly related to the good faith principle. One is Article 42 under which a party shall be liable for damages if during the process of making a contract it performs any act that violates the principle of good faith and causes losses to the other party. The other one is Article 60, which requires that the parties observe the principle of good faith and fulfill the obligations of notification, assistance and confidentiality in accordance with the nature and purposes of the contract as well as the trade practices. The following case would help illustrate how the good faith principle is being interpreted and applied in the people’s courts.

Wen Zaolun v. Guang Xi Movies Studio

and Guang Dong Full Stars Movie & TV Entertainment Inc.

Beijing High People’s Court25

On September 20, 1999, Defendant Guangxi Movies Studio (Guang Xi Movies) and Defendant Guang Dong Full Stars Movie & TV Entertainment Inc. (Full Stars) entered into a contract to jointly make a 30-episode TV series drama named “No Other Alternatives”. Under the contract, Full Stars would invest all funds for making the drama and would be responsible for setting up the production team. In addition, during the drama making process, Full Stars would be solely responsible for dealing with any disputes with a third party concerning copy rights and other economic interests without causing any liability to Guang Xi Movies. The responsibility of Guang Xi Movies mainly included the obtaining of government approval of the scripts of drama and related work. On this basis,

24See Jiang Ping, supra note 14, at p. 7.

25The case was reported in the First Civil Division of Beijing High People’s Court, “An In-depth Analysis of Beijing Civil Cases”, (Law Press, 2003) at pp. 203–210.

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the “ ‘No other Alternatives’ Production Group” (Production Group) was formed under Guang Xi Movies Studio / Full Stars Movie & TV Entertainment Inc.

On November 8, 1999, the Production Group and Plaintiff signed an agreement under which Plaintiff agreed to play the male leading role in the drama. The term of the agreement was from October 25, 1999 to February 29, 2000, and the Plaintiff would be paid RMB 50,000 per episode or RMB 1,500,000 in total. The payment would be made in three installments: RMB 500,000 up front at the time of agreement, RMB 500,000 to be made 60 days after the agreement was signed, and RMB 500,000 to be made 14 days before the production ended.

Plaintiff was actually paid RMB 500,000 on September 14, 1999 for the role he would play in the drama. However, after the first ten episodes were completed, on December 7 Plaintiff felt sick and asked for a day leave. On the next day, Plaintiff visited doctor and was diagnosed to have proteinuria, which was a suspect of kidney disease. As a result, Plaintiff was advised to take rest for two weeks. On the same day, Plaintiff asked his assistant to give the Doctor’s diagnosis to Li Baoguo, the director of production group. Li Baoguo then told Chen Zecheng, the drama director, that Plaintiff was sick and could not attend the drama filming. Under this circumstance, Chen Zecheng had to adjust the filming schedule.

Plaintiff then was absent from the drama filming for about two weeks. On December 21, 1999, the Production Group retained its lawyer to send a “lawyer’s letter” to Plaintiff, stating that due to Plaintiff’s uncooperative conduct, the Production Group had suffered heavy economic loss, and therefore, the Production Group had to terminate the agreement with Plaintiff and in the meantime reserved the right to hold Plaintiff liable for damages. Consequently, the Production Group did not make any further payment to Plaintiff.

In response, Plaintiff brought the lawsuit against both Guang Xi Movies and Full Stars. Plaintiff claimed that under the agreement, he was entitled to the payment of RMB 1,500,000, but was only paid RMB 500,000. To support his claim, Plaintiff argued that he played the first ten episodes and due to the overloaded filming work that caused him sick, he had to see the doctor, and that his sick leave from the drama filming was under the doctor’s advice and was approved by director Chen Zecheng. Plaintiff then alleged that the Production Group’s abrupt termination of the agreement without negotiating with him constituted a breach of contract, and therefore both Guang Xi Movies and Full Stars should be held liable for his economic damages of RMB 1,000,000, which would be his expected interest.

Guang Xi Movies moved to dismiss Plaintiff’s action on the ground of its contract with Full Stars. Guang Xi Movies argued that since Full Stars would be solely responsible for dealing with any disputes between the Production Group and a third party, there would be nothing to do with Guang Xi Movies concerning the disputes between the Production Group and Plaintiff.

Full Stars argued that it paid Plaintiff RMB 500,000 under the contract, but Plaintiff did not perform his duties during his 15 days absence on personal health excuse without approval by the Production Group. Full Stars further argued that Plaintiff’s notice of absence to the Production Group and his actual leave from the drama filming unequivocally demonstrated his inability to timely perform his obligations under the contract, and therefore the Production Group had the right to terminate the contract with him.

In addition, both Guang Xi Movies and Full Stars filed a joint counter claim against Plaintiff. They asserted that under the contract, Plaintiff would be with the Production Group daily for 4 months but his work would be no more than 12 hours a day, and therefore, he would not take any leave during the 4 months period. They argued that plaintiff’s

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absence from December 7 to December 21, 1999 constituted a breach of the contract, and the breach had caused great damages in the amount of RMB 1,471,030.22 to the Production Group, which included overhead expenses of RMB 283,175.22, Plaintiff substitute’s cost of RMB 2,405, additional actor’s cost of RMB 510,000, script revision cost of RMB 189,750, director’s time extension compensation fee of RMB 207,000, and actors’ time extension compensation fee of RMB 224,700.

The No. 2 Beijing Intermediate People’s Court (trial court) found that Plaintiff’s failure to perform the contract during December 8 to December 21, 1999 was caused by his illness, and he had informed the Production Group of his illness with doctor’s diagnosis and asked for leave, to which the Production Group expressed no objection, and that after receiving Plaintiff’s request for sick leave, the Production Group made adjustment to the drama filming schedule accordingly, and the schedule adjustment would serve as an indication of the Production Group’s acknowledgement of Plaintiff’s sick leave. The trial court then held that because of the Production Group’s “no objection” and “acknowledgement”, Plaintiff’s sick leave should not be regarded as a breach of the contract. On this ground, the trial court dismissed Guang Xi Movies and Full Stars claim for damages against Plaintiff.

The trial court, however, was of opinion that although Plaintiff’s sick leave did not constitute a breach of the contract, given that he was playing a leading role in the drama, whether he could continue playing his role was essential to the performance of the contract and to realizing the objective of the contract. The trial court therefore held that as a leading role, Plaintiff’s absence for 14 days as well as the possibility of his continuing to take sick leave because of his “kidney disease” had made it uncertain whether he could play his role any more, and under this circumstance, it would be permissible for the Production Group to terminate the contract with Plaintiff in order to protect the Production Group’s economic interest. For the reason that the Production Group’s termination of the contract was not in breach of the contract, the trial court rejected Plaintiff’s claims as well.

All parties involved in the case appealed to Beijing High People’s Court (appellate court). The appellate court agrees to trial court’s judgment on the ground that the trial court did not err in finding Plaintiff’s sick leave not a breach of the contract under the good faith standard, and it is also reasonable to uphold the Production Group’s termination of the contract for purposes of self-protection. The judgment below is then affirmed.

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The key issue in the Wen Zaolun case is whether Plaintiff’s sick leave or the Production Group’s termination of the contract would constitute a breach of the contract. According to the judge in the trial court, this case presented the following characteristics: (1) the circumstance on which the contract was based changed after the contract was made; (2) the change of the circumstance was unpredictable by the parties at the time the parties entered into the contract; (3) neither of the parties could be blamed for the change of the circumstance; and (4) it would be unfair to have the contract remain effective given the change of the circumstance.

If this case were tried before the Contract Law was adopted, the courts might base their judgment on Rebus Sic Stantibus, a contract doctrine that